As filed with the Securities and Exchange Commission on February 6, 2002
Registration No. 333-81244
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM F-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------
ALTOS HORNOS DE MEXICO, S.A. DE C.V.
(Exact Name of Registrant as Specified in Its Charter)
BLAST FURNACES OF MEXICO
(Translation of Registrant's Name into English)
UNITED MEXICAN STATES 3312 NOT APPLICABLE
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification Number)
Incorporation or Organization) Classification Code Number)
PROLONGACION JUAREZ S/N
MONCLOVA, COAHUILA
25770 MEXICO
TELEPHONE NUMBER: 52-866-649-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MEXICAN BLAST FURNACES (USA), INC. with a copy to:
1209 ORANGE STREET
/WILMINGTON, DE 19801/ Maurice M. Lefkort, Esq.
TELEPHONE NUMBER: (302) 658-7581 Willkie Farr & Gallagher
(Name, Address, Including Zip Code, and Telephone Number, 787 Seventh Avenue, New York, NY 10019
Including Area Code, of Agent for Service) (212) 728-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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TABLE OF ADDITIONAL REGISTRANTS
Jurisdiction I.R.S. Employer
Name of Registrant Principal Executive Office of Organization Identification Number
- ------------------ -------------------------- --------------------- ---------------------
The AHMSA Creditor Voting Trust...... P.O. Box 1109 GT, George Cayman Islands Not Applicable
Town, Grand Cayman,
Cayman Islands
Grupo Acerero del Norte, S.A. de C.V. Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Minera Carbonifera Rio Escondido,
S.A. de C.V........................ Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Cerro de Mercado, S.A. de C.V........ Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Servicios Corporativos Ahmsa, S.A.
de C.V............................. Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Hullera Mexicana, S.A. de C.V........ Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Nacional de Acero, S.A. de C.V....... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Stack, S.A. de C.V................... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Gan International Trading, S.A.
de C.V............................. Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Minera del Norte, S.A. de C.V........ Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
La Perla Minas de Fierro y Carbon,
S.A. de C.V........................ Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Recuperacion y Reciclaje de Productos
Industriales, S.A. de C.V.......... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Hojalata Mexicana, S.A. de C.V....... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Ediciones Vulcano, S.A. de C.V....... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Forjacero, S.A. de C.V............... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
Minerales Monclova, S.A. de C.V...... Prolongacion Juarez S/N
Monclova, Coahuila
25770 Mexico United Mexican States Not Applicable
* * * * *
EXPLANATORY NOTE:
This Registration Statement contains two forms of Prospectus and Consent
Solicitation that differ only in their Prospectus Cover Page.
The information in this prospectus and consent solicitation is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Prospectus and Consent Solicitation is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
Subject to Completion, Dated February 6, 2002
PROSPECTUS AND CONSENT SOLICITATION
[AHMSA Logo]
Altos Hornos de Mexico, S.A. de C.V.
(Blast Furnaces of Mexico)
up to U.S.$ million principal amount Floating Rate Series A Senior Secured
Notes due 2009
up to U.S.$ million principal amount 4% Series B Senior Secured Notes due
2009
up to shares of Common Stock
We are soliciting the consent to our restructuring plan from the holders of
claims against us in our suspension of payments proceeding pending before the
Civil Court of First Instance for the Judicial District of Monclova, Coahuila,
United Mexican States. All holders of claims, including the holders of our
outstanding 5 1/2% Senior Discount Convertible Notes due 2001, 11 3/8% Series A
Senior Notes due 2002 and 11 7/8% Series B Senior Notes due 2004, who consent
to our restructuring plan will, upon the lifting of our suspension of payments
proceeding, receive the consideration described in this Prospectus and Consent
Solicitation.
We are proposing the restructuring plan because we believe that it is the
best alternative available to us at this time and provides our creditors with
the opportunity for a greater recovery than they would receive if we remained
in suspension of payments. However, the restructuring plan is highly risky, and
we will not be able to meet our restructured obligations unless we experience a
substantial improvement in our financial condition, results of operations and
cash flow. If our creditors do not consent to the restructuring plan, we may be
forced to negotiate a new restructuring plan, our assets may be seized for
unpaid taxes, or we may be declared bankrupt and forced to liquidate our assets.
Under the restructuring plan, each holder of our existing Series A Notes and
our existing Series B Notes will be deemed to have a claim equal to the
original issue price of such notes, plus accrued original issue discount and
accrued and unpaid interest to May 25, 1999, and each holder of our existing
Discount Convertible Notes will be deemed to have a claim equal to the accreted
value of such Discount Convertible Notes to May 25, 1999. The claims per
U.S.$1,000 principal amount of old notes are as follows: Series A Notes:
U.S.$1,064.38; Series B Notes: U.S.$1,064.55; and Discount Convertible Notes:
U.S.$946.04. The consideration to be issued under the restructuring plan and
the estimated amount per U.S.$1,000 of note claims is as follows:
Aggregate Consideration Under the Restructuring Plan
An aggregate principal amount of new Series A Senior Secured Notes due 2009 and
new Class A Secured Loans of approximately U.S.$1,115.4 million, which is equal
to U.S.$1,140.0 million less the amount of claims which we believe are entitled
to a preference (currently estimated to be U.S.$24.6 million)
Net cash proceeds, if any, from the sale on or prior to closing of certain of
our non-core assets, or "Subject Assets" (currently estimated to be U.S.$0)
An aggregate principal amount of new Series B Senior Secured Notes due 2009 and
new Class B Secured Loans equal to U.S.$180.0 million less 1.5 times the
aggregate amount of net cash proceeds from the sale of Subject Assets paid to
our creditors at closing (to the extent the aggregate amount of such net cash
proceeds does not exceed U.S.$120.0 million)
302,000,000 shares of our common stock that is required to be deposited in the
AHMSA Creditor Voting Trust, representing 40% of our outstanding common stock on
a fully diluted basis, subject to a three-year purchase option and an additional
two-year right of first refusal in favor of a special purpose vehicle created by
our parent company A restructuring fee of U.S.$20.0 million in cash plus the
amount of certain documented expenses of the steering committees of our
creditors incurred after April 1, 2001 not to exceed U.S.$200,000 per month that
will be used first to pay certain expenses of the steering committees and to
fund an indemnification holdback of U.S.$2.0 million for the AHMSA Creditor
Voting Trust trustee, and then to pay a pro rata fee to all creditors over a
nine-month period, without interest (such net amount to be paid to the creditors
estimated to be U.S.$ million)
An additional fee in cash equal to a notional three months of interest on the
restructured debt (estimated to be approximately U.S.$18.5 million) payable over
an eighteen-month period, without interest
Estimated Amount
per U.S.$1,000 of Note Claims
U.S.$604 principal amount of new Series A
Senior Secured Notes due 2009
U.S.$0.0 in cash
U.S.$97 principal amount of new 4% Series B
Senior Secured Notes due 2009 (assuming net
cash proceeds of Subject Asset sales of
U.S.$0.0)
164 shares of common stock, subject to the
three-year purchase option and the two-year
right of first refusal
U.S.$ in cash, paid over a nine-month
period, without interest (net of estimated
expenses)
U.S.$10.02 in cash, paid over an
eighteen-month period, without interest
Based on discussions with members of the steering committee of our general
creditors, we believe that those members of the steering committee (other than
Wells Fargo Bank Minnesota, N.A. in its capacity as trustee for our existing
notes), which hold approximately U.S.$753.9 million in principal amount of our
existing indebtedness, representing approximately 40.8% of the outstanding
indebtedness, intend to consent to the restructuring plan, subject to
satisfactory final documentation, and subject to our and our affiliates'
promptly proceeding to implement the restructuring plan and lift our suspension
of payments.
The deadline for consenting to the restructuring plan is ,
5:00 p.m., New York City time, unless extended. Consummation of the
restructuring plan is subject to a number of conditions, several of which are
beyond our control.
-----------------
The AHMSA Creditor Voting Trust
up to Voting Trust Interests
In order to consent to the restructuring plan, you must also agree to
deposit the common stock that you receive pursuant to the restructuring plan
into the AHMSA Creditor Voting Trust. You will receive an equal number of
Voting Trust Interests in exchange for each share of our common stock that you
deposit.
-----------------
The securities offered by this Prospectus and Consent Solicitation will not
be listed on any national securities exchange or on the Nasdaq Stock Market.
Investing in the securities offered by this Prospectus and Consent
Solicitation involves certain risks. See "Risk Factors" beginning on page 41.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus and Consent Solicitation is truthful or complete. Any
representation to the contrary is a criminal offense.
The Solicitation Agent for our Existing Notes is
The Weston Group
The date of this Prospectus and Consent Solicitation is , 2002
The information in this prospectus and consent solicitation is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Prospectus and Consent Solicitation is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
[ALTERNATE COVER PAGE]
Subject to Completion, Dated February 6, 2002
PROSPECTUS AND CONSENT SOLICITATION
[AHMSA Logo]
Altos Hornos de Mexico, S.A. de C.V.
(Blast Furnaces of Mexico)
up to shares of Common Stock
and for holders of our indebtedness making certain elections
up to U.S.$ million principal amount Floating Rate Series A Senior Secured
Notes due 2009
up to U.S.$ million principal amount 4% Series B Senior Secured Notes due
2009
We are soliciting the consent to our restructuring plan from the holders of
claims against us in our suspension of payments proceeding pending before the
Civil Court of First Instance for the Judicial District of Monclova, Coahuila,
United Mexican States. All holders of claims who consent to our restructuring
plan will, upon the lifting of our suspension of payments proceeding, receive
the consideration described in this Prospectus and Consent Solicitation.
We are proposing the restructuring plan because we believe that it is the
best alternative available to us at this time and provides our creditors with
the opportunity for a greater recovery than they would receive if we remained
in suspension of payments. However, the restructuring plan is highly risky, and
we will not be able to meet our restructured obligations unless we experience a
substantial improvement in our financial condition, results of operations and
cash flow. If our creditors do not consent to the restructuring plan, we may be
forced to negotiate a new restructuring plan, our assets may be seized for
unpaid taxes or we may be declared bankrupt and forced to liquidate our assets.
Under the restructuring plan, each holder of our indebtedness for borrowed
money (excluding holders of our outstanding Senior Notes, Discount Convertible
Notes, certain suppliers and certain creditors whom we believe are legally
entitled to a preference) will receive the consideration described below,
including a promissory note evidencing indebtedness under a new secured credit
agreement, comprised of three tranches. Holders of indebtedness of our
subsidiary Minera Carbonifera Rio Escondido, S.A. de C.V, or "MICARE," will
receive a promissory note in a separate tranche with certain payment
preferences based on the economic performance of MICARE and certain additional
fees under a stock option agreement. Holders of indebtedness under our existing
secured export note facility will receive a promissory note in a separate
tranche with certain features similar to our existing secured export note
facility. All other creditors will receive a promissory note in a third
tranche. Holders of indebtedness for borrowed money with security interests in
specific collateral recognized in the suspension of payments proceeding will
have a right to a priority in the repayment of their new indebtedness from the
proceeds of the sale of the specified collateral. Alternatively, holders of our
indebtedness for borrowed money may elect to be treated the same as holders of
our Senior Notes and Discount Convertible Notes as described in this Prospectus
and Consent Solicitation by receiving new notes instead of promissory notes
under the new credit agreement.
Aggregate Consideration Under the Restructuring Plan
An aggregate principal amount of new Series A Senior Secured Notes due 2009 and
new Class A Secured Loans of approximately U.S.$1,115.4 million, which is equal
to U.S.$1,140.0 million less the amount of claims which we believe are entitled
to a preference (currently estimated to be U.S.$24.6 million)
Net cash proceeds, if any, from the sale on or prior to closing, of certain of
our non-core assets, or "Subject Assets" (currently estimated to be U.S.$0.0)
An aggregate principal amount of new Series B Senior Secured Notes due 2009 and
new Class B Secured Loans equal to U.S.$180.0 million less 1.5 times the
aggregate amount of net cash proceeds from the sale of Subject Assets paid to
our creditors at closing (to the extent the aggregate amount of such net cash
proceeds does not exceed U.S.$120.0 million)
302,000,000 shares of our common stock that is required to be deposited in the
AHMSA Creditor Voting Trust representing 40.0% of our outstanding common stock
on a fully diluted basis, subject to a three-year purchase option and an
additional two-year right of first refusal in favor of a special purpose vehicle
created by our parent company, and in the case of shares to be issued to the
creditors of our subsidiary MICARE, a nine-year purchase option in our favor
A restructuring fee of U.S.$20.0 million in cash plus the amount of certain
documented expenses of the steering committees of our creditors incurred after
April 1, 2001 not to exceed U.S.$200,000 per month that will be used first to
pay certain expenses of the steering committees and to fund an indemnification
holdback of U.S.$2.0 million for the AHMSA Creditor Voting Trust trustee, and
then to pay a pro rata fee to all creditors over a nine-month period, without
interest (such net amount to be paid to the creditors estimated to be U.S.$
million)
An additional fee in cash equal to a notional three months of interest on the
restructured debt (estimated to be approximately U.S.$18.5 million) payable over
an eighteen-month period, without interest
In addition, creditors of MICARE will receive U.S.$35.4 million aggregate
principal amount of our Subordinated Promissory Notes, Series D, and U.S.$27.7
million aggregate principal amount of our Subordinated Promissory Notes, Series
E
Estimated Amount per U.S.$1,000 of Principal
and Accrued Interest as of May 25, 1999
U.S.$604 principal amount of new Class A Loans,
in one of three tranches
U.S.$0.0 in cash
U.S.$97 principal amount of new Series B Loans in
one of three tranches (assuming net cash proceeds
of Subject Asset sales of U.S.$0.0 million);
provided, however, that MICARE creditors may
elect to receive Class A Loans instead of Class B
Loans, in which event the Class A Loans received
by other creditors will be decreased proportionally
and the Class B Loans received by other creditors
will be increased proportionally.
164 shares of common stock, subject to the three-
year purchase option, the two-year right of first
refusal and in the case of creditors of MICARE the
nine-year purchase option
U.S.$ in cash, paid over a nine-month period,
without interest (net of estimated expenses)
U.S.$10.02 in cash, paid over an eighteen-month
period, without interest
U.S.$__ principal amount of our Subordinated
Promissory Notes, Series D, and
U.S.$__ principal amount of our Subordinated
Promissory Notes, Series E
Based on discussions with members of the steering committee of our general
creditors, we believe that those members of the steering committee (other than
Wells Fargo Bank Minnesota, N.A. in its capacity as trustee for our existing
notes), which hold approximately U.S.$753.9 million in principal amount of our
existing indebtedness, representing approximately 40.8% of the outstanding
indebtedness, intend to consent to the restructuring plan, subject to
satisfactory final documentation, and subject to our and our affiliates'
promptly proceeding to implement the restructuring plan and lift our suspension
of payments.
The deadline for consenting to the restructuring plan is , 5:00 p.m.,
New York City time, unless extended. Consummation of the restructuring plan is
subject to a number of conditions, several of which are beyond our control.
-----------------
The AHMSA Creditor Voting Trust
up to Voting Trust Interests
In order to consent to the restructuring plan, you must also agree to
deposit the common stock that you receive pursuant to the restructuring plan
into the AHMSA Creditor Voting Trust. You will receive an equal number of
Voting Trust Interests in exchange for each share of our common stock that you
deposit.
-----------------
The securities offered by this Prospectus and Consent Solicitation will not
be listed on any national securities exchange or on the Nasdaq Stock Market.
Investing in the securities offered by this Prospectus and Consent
Solicitation involves certain risks. See "Risk Factors" beginning on page 41.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus and Consent Solicitation is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this Prospectus and Consent Solicitation is , 2002
In this Prospectus and Consent Solicitation, "AHMSA," "we," "our" or the
"Company" refers to Altos Hornos de Mexico, S.A. de C.V. and its subsidiaries
unless the context otherwise requires. "GAN" refers to Grupo Acerero del Norte,
S.A. de C.V., the parent of AHMSA. References herein to "pesos" or "Ps." are to
the lawful currency of Mexico. References herein to "U.S. dollars" or "U.S.$"
are to the lawful currency of the United States. In this Prospectus and Consent
Solicitation, the term "tonnes" refers to metric tons of 1,000 kilograms (equal
to 2,204.6 pounds and 1.1023 short tons).
AHMSA maintains its financial books and records in pesos and prepares its
financial statements to conform to generally accepted accounting principles in
Mexico. This Prospectus and Consent Solicitation refers to those accounting
principles as "Mexican GAAP". Mexican GAAP differs in some respects from
generally accepted accounting principles in the United States. See Note 21 to
our Audited Financial Statements which are included in the Prospectus and
Consent Solicitation.
Pursuant to Mexican GAAP, financial data, unless otherwise indicated,
throughout this Prospectus and Consent Solicitation have been restated in
constant pesos as of June 30, 2001. This Prospectus and Consent Solicitation
contains translations of certain peso amounts into U.S. dollars at specified
rates solely for the convenience of the reader. These translations should not
be construed as representations that the peso amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated. Unless otherwise indicated, U.S. dollar amounts have been translated
from Mexican pesos at the exchange rate published by the Banco de Mexico in the
Official Gazette of Mexico. On December 31, 2000 and June 30, 2001, the
exchange rate as published in the Official Gazette was Ps.9.599 and Ps.9.090 to
U.S.$1.00, respectively. When indicated, U.S. dollar amounts have been
translated from Mexican pesos at an exchange rate of Ps.9.060 to U.S.$1.00, the
noon buying rate for pesos on June 30, 2001, as published by the Federal
Reserve Bank of New York (the "Federal Reserve noon buying rate").
Unless indicated otherwise, references in this Prospectus and Consent
Solicitation to AHMSA's market share, a particular product's market share and
the market share of imports or exports refer to shares of apparent Mexican
domestic consumption of steel products (defined to be the sum of Mexican
domestic steel production of finished products and imports of finished products
less exports of finished products). Apparent Mexican domestic consumption and
certain market share data (other than underlying data relating to AHMSA, which
is based upon AHMSA's records) reported in this Prospectus and Consent
Solicitation are based upon information published by the Camara Nacional de la
Industria del Hierro y el Acero (the National Chamber for the Iron and Steel
Industry, or "CANACERO"). Such information for 2000 is based on preliminary
figures published by CANACERO. CANACERO publishes data based on information
supplied to it voluntarily by Mexican steel producers. Although AHMSA has no
reason to believe that the information provided to CANACERO by other Mexican
steel producers and compiled by CANACERO is inaccurate, there can be no
assurance that such information or its compilation is accurate.
i
TABLE OF CONTENTS
SUMMARY.......................... 1
RISK FACTORS..................... 41
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS..... 55
RATIO OF EARNINGS TO FIXED
CHARGES........................ 56
CAPITALIZATION................... 56
DESCRIPTION OF RESTRUCTURING
PLAN........................... 57
CONSENT PROCESS.................. 70
SELECTED FINANCIAL INFORMATION... 76
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 79
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.. 98
AHMSA'S BUSINESS................. 100
MANAGEMENT AND EMPLOYEES......... 132
CONTROL OF AHMSA................. 134
RELATED PARTY TRANSACTIONS....... 136
DESCRIPTION OF NEW CREDIT
AGREEMENT...................... 141
DESCRIPTION OF NEW NOTES......... 184
DESCRIPTION OF NEW SUBORDINATED
NOTES.......................... 219
DESCRIPTION OF COMMON STOCK.... 222
DESCRIPTION OF AHMSA CREDITOR
VOTING TRUST................. 229
PROPOSED AMENDMENTS TO THE OLD
NOTE INDENTURES.............. 239
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS.... 242
PLAN OF DISTRIBUTION........... 250
LEGAL MATTERS.................. 250
EXPERTS........................ 250
WHERE YOU CAN FIND MORE
INFORMATION.................. 251
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS................... F-1
ANNEX I--DESCRIPTION OF OLD
SENIOR NOTES................. I-1
ANNEX II--DESCRIPTION OF OLD
DISCOUNT CONVERTIBLE NOTES... II-1
ANNEX III--FORM OF SUPPLEMENTAL
INDENTURE FOR OLD SENIOR
NOTES........................ III-1
ANNEX IV--FORM OF SUPPLEMENTAL
INDENTURE FOR OLD DISCOUNT
CONVERTIBLE NOTES............ IV-1
You should rely only on the information contained in this Prospectus and
Consent Solicitation. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where the offer is not permitted. You should not assume that the
information contained in this Prospectus and Consent Solicitation is accurate
as of any date other than the date on the front of this Prospectus and Consent
Solicitation.
Until , all dealers that effect transactions in these securities,
even though not participating in this offering, may be required to deliver a
Prospectus and Consent Solicitation.
This Prospectus and Consent Solicitation is part of a registration statement
under the U.S. Securities Act of 1933, as amended, for our new Series A Senior
Secured Notes, new Series B Senior Secured Notes, Common Stock, old Series A
Notes, old Series B Notes and old Discount Convertible Notes, for the voting
interests in the AHMSA Creditor Voting Trust and for the guarantees of GAN and
our subsidiary guarantors. See "Description of Restructuring Plan."
ii
SUMMARY
This summary highlights information contained elsewhere in this Prospectus
and Consent Solicitation and does not contain all of the information that you
should consider before consenting to the restructuring plan. You should
carefully read the entire Prospectus and Consent Solicitation.
AHMSA
We are proposing the restructuring plan described in this Prospectus and
Consent Solicitation because we believe that it is the best alternative
available to us at this time and provides our creditors with the opportunity
for a greater recovery than they would receive if we remained in suspension of
payments. However, the restructuring plan is highly risky, and we will not be
able to meet our restructured obligations unless we experience a substantial
improvement in our financial condition, results of operations and cash flow. If
our creditors do not consent to the restructuring plan, we may be forced to
negotiate a new restructuring plan, our assets may be seized for unpaid taxes,
or we may be declared bankrupt and forced to liquidate our assets.
Overview of Our Operations
We are the largest integrated steel producer in Mexico, accounting for 23%
of the overall domestic steel market, 41% of the domestic market for flat
products and 6% of Mexican exports of finished steel products in 2000. In 2000,
we produced 3.4 million tonnes of liquid steel and 2.8 million tonnes of
finished steel products. As an integrated steel producer, we manufacture a
variety of flat steel products (such as plate, hot rolled coil, cold rolled
coil and tinplate) as well as heavy beams. In the domestic market, our products
serve primarily the manufacturing, construction, petroleum, packaging and home
appliance industries. Our export sales are accomplished directly, or through
steel traders, to a variety of end users.
We own our principal raw materials suppliers and state-of-the-art steel
production and finishing facilities and have an equity interest in a steel
products distributor and a company that transports raw materials. Being a
vertically integrated producer of steel enables us to be one of the lowest cost
producers in the Western Hemisphere. However, our inability to make needed
capital expenditures in recent years has reduced our ability to extract our own
raw materials, and is increasingly requiring us to purchase more costly raw
materials from third parties.
Our principal market historically has been the Mexican market, where we have
long held the leading market share position for flat products. Export sales in
1998, 1999 and 2000 were 274 thousand, 447 thousand and 288 thousand tonnes,
respectively, representing 10%, 15% and 10% of our sales volume of steel
products and 8%, 10% and 8% of our net sales of steel products for those years,
respectively. We continually evaluate the relative attractiveness of the export
and domestic markets and seek to maintain flexibility to access either market
as conditions change.
Through our subsidiary Minera Carbonifera Rio Escondido, S.A. de C.V., or
"MICARE," we are also engaged in the production and sale of steam coal, a raw
material for the electric utility industry. All of our steam coal sales are
made to the Mexican Electricity Commission (Comision Federal de Electricidad,
or "CFE"). In 2000, we produced 7.4 million tonnes of steam coal and sold 6.9
million tonnes to CFE, with 0.5 million tonnes remaining in inventory.
On a consolidated basis, as of December 31, 2000, our total assets were
Ps.35,177.2 million and for the year ended December 31, 2000, we generated
revenue of Ps.12,805.7 million and EBITDA of Ps.2,640.8 million. On a
consolidated basis, as of June 30, 2001, our total assets were Ps.33,108.0
million. For the first six months ended June 30, 2001, we generated revenue of
Ps.5,020.0 million and EBITDA of Ps.343.5 million. We hold substantially all
the equity of our principal direct and indirect subsidiaries.
Our main steel making facilities and corporate offices are located in
Monclova, Coahuila, Mexico, approximately 190 kilometers northwest of
Monterrey, Nuevo Leon, Mexico. The facilities are located close to
transportation lines, raw materials supplies, principal points of export and
our major domestic markets. We are incorporated under the laws of Mexico and
all of our steel production and mining facilities are in Mexico. Our principal
executive offices are located at Prolongacion Juarez s/n, Monclova, Coahuila,
Mexico, 25770, and our telephone number is 52-866-649-3000.
1
Suspension of Payments
In the second half of 1998, international steel prices fell sharply due to
the financial crisis in Asia. The decline deepened toward the end of 1998 and
into 1999. This decline in steel prices resulted in a reduction of the profit
margins and operating cash flows of most companies in the steel industry,
including us. In 1998, our management decided to implement a strategy to
respond to these events, including a cost reduction program and the sale of
certain assets in order to increase available cash flow.
In April 1999, in order to avoid preferring any one creditor over another,
to preserve our cash flow to ensure normal operations and to provide for time
to develop our restructuring plan, we did not make certain debt payments. As a
result of actions taken by certain of our creditors, on May 25, 1999 and May
28, 1999, we, along with our principal subsidiaries, obtained a judicial
declaration of suspension of payments.
Legal Effect of Suspension of Payments
Under applicable Mexican law, the suspension of payments procedure is a form
of legal protection afforded to companies like us which obtained a judicial
declaration before the law was changed in 2000. Suspension of payments allows
companies to (1) seek a debt restructuring agreement with their creditors in an
orderly fashion; (2) continue their operations; and (3) avoid declaration of
bankruptcy and liquidation of assets. As a result of the suspension of payments
declaration:
. all debts we had incurred up to the date of declaration of suspension of
payments were deemed due and payable;
. we were granted an automatic stay from collection of any indebtedness
arising out of transactions completed prior to the declaration of
suspension of payments;
. interest ceased to accrue on all of our outstanding indebtedness, other
than ordinary interest with respect to secured indebtedness (as defined
under applicable Mexican bankruptcy and suspension of payments laws) to
the extent of the security;
. all lawsuits filed for the collection of any monetary obligation against
us were suspended, except for tax obligations, proceedings for the
enforcement of labor liabilities or secured credits (as defined under
applicable Mexican law) and any enforcement of such secured credits;
. a trustee (sindico) was appointed by the court to supervise our
operations (our management retained administrative control and continued
our operations in the ordinary course of business under the trustee's
supervision); and
. for purposes of recognition and classification of our debt obligations
and in order to provide certainty and equal treatment to all creditors,
all credit obligations (other than obligations entitled to be paid
currently under suspension of payments law) stated in a foreign currency
were converted into pesos at the rate of exchange prevailing on the date
of the judicial declaration of suspension of payments. For AHMSA,
MICARE, MIMOSA and MINOSA, which obtained a judicial declaration of
suspension of payments on May 25, 1999, this rate of exchange is
Ps.9.359 per U.S.$1.00, and for CEMESA which obtained a judicial
declaration of suspension of payments on May 28, 1999, this rate of
exchange is Ps.9.672 per U.S.$1.00.
As a result of an order of the court supervising the suspension of payments
of our parent company, GAN, on May 26, 1999, the Bolsa Mexicana de Valores
suspended trading of our common stock on the Mexican Stock Exchange and the
Comision Nacional Bancaria y de Valores ("CNBV") ordered the suspension of the
effects of registration of our common stock at the National Registry of
Securities and Dealers (Registro Nacional de Valores, or "RNV"), thereby
preventing the trading of the common stock on the Mexican Stock Exchange. In
response, the
2
New York Stock Exchange halted the trading of our American Depositary Shares
and outstanding Discount Convertible Notes, and our securities were delisted
from the New York Stock Exchange on September 8, 2000. As a result, on October
16, 2000, we terminated our public reporting obligations in the United States.
Recent Developments Regarding Operations
Notwithstanding the relief from debt service and collection actions afforded
by the suspension of payments proceeding, our financial condition, results of
operations, and cash flow have continued to deteriorate since we obtained the
judicial declarations of suspension of payments on May 25 and May 28, 1999.
These adverse developments have been due, among other things, to general
economic and industry conditions, including a general decline in steel prices
and a general increase in energy prices, the effect of suspension of payments,
and other conditions both within and outside of our control, and include the
following:
. We have been unable to obtain financing for our operations and capital
expenditures, other than advance payments from customers, accelerated
payments of accounts receivable in exchange for discounted terms and
delayed payments to certain suppliers. These forms of financing are of
limited amounts and contain onerous terms.
. A number of our suppliers have for the most part required either cash on
delivery or advance deposit of the purchase price of goods and services
purchased, increasing our working capital requirements. As a result, we
have ceased to use these suppliers to the extent practicable.
. We have been unable to generate sufficient cash flow to adequately fund
our operations. As a result, as of September 30, 2001, we have not made
required withholding tax payments for 2001 in excess of Ps.260.0 million
to the Mexican government, and we have not made necessary capital
expenditures to permit the continued extraction of raw materials
necessary for the production of steel, requiring us to purchase more
costly raw materials from third-party suppliers. We are no longer able
to pay amounts due to such suppliers in a timely manner and do not
anticipate being able to do so in the foreseeable future.
. We have either been unable to obtain necessary performance bonds
required by our customers, or have been able to obtain such bonds at
costs far in excess of historical levels.
. Arrest warrants have been issued for our Chairman and our Chief
Financial Officer, related to alleged fraud at an affiliated company.
The individuals have obtained a stay of execution of the warrants, and
we believe that the allegations are unfounded and are being used as a
collection tactic by a creditor of the affiliated company.
. Due to layoffs and resignations, our white-collar work force has been
reduced by 26.0% and our blue-collar work force has been reduced by 5.6%.
Steps Taken to Improve Operations
During the suspension of payments proceeding, we have taken the steps
outlined below in an effort to improve our business, financial condition,
results of operations, and cash flow. While we believe that these steps have in
the aggregate reduced the adverse effect on our business, financial condition,
results of operations and cash flow, they nonetheless continue to deteriorate.
Unless either we obtain additional financing and experience an improvement in
our results of operations or there is a general increase in steel prices, we
believe that remaining in suspension of payments will eventually result in
either a shut-down of our operations and a distress sale of our assets not as a
going concern or seizure of our assets by the Mexican government for nonpayment
of taxes.
. We have terminated both union and non-union employees, and have extended
the time period for the payment of severance.
3
. Since July, 2001, we have been deferring ten percent of the salaries of
substantially all employees with the rank of manager or higher
(approximately 189 employees).
. We have sold and continue to market for sale assets not directly related
to our steel and coal mining businesses to fund operations, even though
we had a non-binding agreement-in-principle to use the proceeds from the
sale of certain of those assets to make payments to our creditors upon
our emergence from suspension of payments.
. We have explored merger, sale, and joint venture transactions with
potential strategic partners.
. We have sought governmental permission to exploit the methane gas assets
contained in our coal mines.
Restructuring Plan
Current Situation of Our Creditors
We are currently under suspension of payments. As a result:
. we have not made any payments on our outstanding indebtedness since we
obtained the declaration of suspension of payments, except for payments on
indebtedness entitled to preference under applicable law and on capital
leases approved by the suspension of payments court;
. interest on our outstanding indebtedness has ceased to accrue, except in
the case of creditors that are overcollateralized, to the extent of such
overcollateralization; and
. because indebtedness denominated in U.S. dollars was converted into pesos
for purposes of the suspension of payments, if the peso were to devalue
against the U.S. dollar while we remain under suspension of payments, the
U.S. dollar value of our creditors' claims would decrease as a result.
Given the nature of the suspension of payments proceedings, in general, and the
size and complexity of our suspension of payments, including the large number
of filed claims, there is no prospect for a court-approved reorganization
agreement in the foreseeable future.
Purpose of the Restructuring Plan
The purpose of the restructuring plan is to provide for a restructuring of
our liabilities in a manner designed to give us the opportunity to continue as
a going concern. As a result of the restructuring plan, our indebtedness will
be restructured into a combination of a lower principal amount of indebtedness
and new equity. See "Description of Restructuring Plan." We believe that by
lifting the suspension of payments, we will be able to reduce the uncertainty
regarding our continued viability and, as a result, obtain new financing and
improved payment terms from suppliers and other parties with whom we deal.
Alternatives to the Restructuring Plan
We are proposing the restructuring plan described in this Prospectus and
Consent Solicitation because we believe that it is the best alternative
available to us at this time and provides our creditors with the opportunity
for a greater recovery than they would receive if we remained in suspension of
payments. In our opinion we have only three alternatives to the restructuring
plan at this time.
. First, we could remain in suspension of payments, which unless either we
obtain additional financing and experience an improvement in our
operations or there is a general increase in steel prices, we believe
will eventually result in either a shut-down of our operations and a
distress sale of our assets not as a going concern or seizure of our
assets by the Mexican government for nonpayment of taxes.
4
. Second, we could seek to negotiate a different restructuring proposal
with the steering committee of our creditors; however the steering
committee has informed us that it is unwilling to accept any further
economic changes to the restructuring plan unless the creditors receive
additional concessions regarding equity interests, governance rights and
changes in management that are unacceptable to our controlling
stockholder.
. Third, we could seek a sale of the company, which has been done without
the receipt of an offer that was acceptable to our controlling
stockholder.
Payment of the Restructured Indebtedness Requires Substantial Improvement in
Our Business
The restructuring plan is highly risky, and we will not be able to meet our
restructured obligations unless we experience a substantial improvement in our
financial condition, results of operations and cash flow. If the restructuring
plan had been implemented on January 1, 2000, the beginning of our last full
fiscal year, we believe that we would already have been in payment default
under the new obligations. See "Risk Factors." Such an improvement is possible
if all of the following occur:
. a 25% increase in steel prices in 2002, with additional increases
throughout the term of the restructured obligations;
. the sale of coal from a mine for which we have not obtained the
necessary mining concessions;
. commencing in 2004 the sale of approximately U.S.$12.5 million of coal
to an energy plant that is not yet permitted, constructed or financed;
. the availability of up to U.S.$130.0 million of customer advances and
the ability to incur U.S.$45.0 million of additional indebtedness in
2003;
. no material increase in interest rates over the term of the restructured
obligations; and
. continued accelerated collection of accounts receivable without the
continuation of historically high prepayment discounts to customers.
If one or more of the preceding events do not occur, then it is likely that
we will not be able to meet our restructured obligations. In that event, we
could be forced to seek protection under, or our creditors could involuntarily
force us into insolvency proceedings under, the recently adopted Law of
Mercantile Insolvency Proceedings, which is substantially less favorable to
debtor companies than the current suspension of payments law under which we are
operating. We would then have to either negotiate a new restructuring plan or
be declared bankrupt, thereby forcing us to liquidate our assets. See
"Description of Restructuring Plan--The Suspension of Payments Proceeding."
Consequences of Payment Default Under the Restructured Debt
If we are unable to make payments when due on the new loans and the new
notes (including upon acceleration following other types of events of default),
holders of the new loans and new notes will be entitled to enforce all remedies
available under applicable law, including:
. Foreclosing upon the collateral for the new loans and new notes;
. In the case of the shares in the Supplemental Share Trust, selling such
shares, distributing them to the holders of the new loans and new notes,
and/or exercising any other rights of ownership; and
. Forcing us into insolvency proceedings under the newly adopted Law of
Mercantile Insolvency Proceedings, which is substantially less favorable
to debtor companies than the current suspension of payments law under
which we are operating.
5
In addition the following changes will be made to our equity arrangements:
. All shares used to pay interest on the new loans and new notes will be
transferred to the AHMSA Creditor Voting Trust;
. The AHMSA Creditor Voting Trust will (a) have the right to designate a
majority of our Board of Directors, and (b) direct the trustee for the
Supplemental Share Trust in the voting of any shares remaining in the
Supplemental Share Trust.
There can be no assurance that holders of new loans and new notes will be
successful in asserting such remedies. In addition, we believe that it is
likely that upon a payment default holders of the new loans and new notes would
receive less than the outstanding principal and interest due to them.
Terms of the Restructuring Plan
General..................... The restructuring plan is a voluntary agreement
between us and our creditors that is independent
of the suspension of payments proceeding. If the
conditions to the closing of the restructuring
plan are satisfied, we will petition the court to
voluntarily lift our suspension of payments. Once
our suspension of payments is lifted:
. We will no longer be subject to court
supervision and we will not be entitled to the
benefit of the suspension of payments law.
. All creditors who consent to the restructuring
plan will have their claims recognized in the
suspension of payments proceeding, will receive
the consideration set forth in this Prospectus
and Consent Solicitation regardless of what
they might have been entitled to in the
suspension of payments proceeding and will
waive all claims against us relating to our
pre-existing debt and all conduct prior to the
closing of the restructuring plan.
. All creditors who do not consent to the
restructuring plan, whether by formally
rejecting the restructuring plan or by failing
to consent to the restructuring plan, will not
have their claims recognized by us, but will
retain the full rights that they had prior to
our entering into suspension of payments. We
intend to vigorously defend against any such
claims. See "Risk Factors--Additional Risks to
Holders of Our Indebtedness Who Do Not Consent
to the Restructuring Plan."
See "Description of Restructuring Plan--Terms of
the Restructuring Plan."
Conditions to Consummation
of the Restructuring
Agreement................. Consummation and implementation of the
restructuring plan is subject to a number of
conditions, including:
. all of the holders of preferred claims against
us recognized in the suspension of payments
proceeding must have consented to the
restructuring plan;
. all other holders of claims against us
(including supplier claims), other than holders
of claims with an aggregate principal amount of
less than U.S.$25.0 million, must have
consented to the restructuring plan;
6
. the Securities and Exchange Commission must
have declared the registration statement
containing this Prospectus and Consent
Solicitation effective and must not have
instituted any stop order with respect to the
registration statement;
. the Civil Court of First Instance for the
Judicial District of Monclova, Coahuila, United
Mexican States must have lifted our suspension
of payments and the suspension of payments of
each of our subsidiaries;
. we must have delivered disclosure schedules to
the new credit agreement entered into pursuant
to the restructuring plan that have not been
objected to by the holders of 40% or more of
claims who are entitled to receive promissory
notes under the new credit agreement;
. the aggregate amount of indebtedness that we
have incurred since December 31, 2000 (net of
repayments of indebtedness made during such
period) must not exceed U.S.$40.0 million;
. a material adverse change to our business,
operations or financial condition must not have
occurred since December 31, 2000;
. we have U.S.$50.0 million of cash to pay
restructuring fees and expenses associated with
the restructuring plan;
. the creditors of GAN must have approved the
restructuring plan to the extent required under
the terms of the GAN suspension of payments and
GAN must have emerged from suspension of
payments on terms satisfactory to GAN, us and a
majority of the outstanding claims against us;
. all necessary Mexican governmental approvals
must have been obtained for the restructuring
plan (including necessary approvals from the
Mexican National Commission of Foreign
Investment);
. the creditors shall have received favorable
legal opinions of United States and internal
and external Mexican counsel to AHMSA and GAN;
. each of the parties approving the restructuring
agreement must have granted a general release
to each other party for any actions or failures
to act in connection with the old notes and old
loans occurring on or prior to the closing date;
. our suppliers must have agreed to a payment
schedule for outstanding obligations reasonably
acceptable to us and our creditors;
. Bancomext must have agreed that no principal
payments in respect of its preferred claims
against us are due prior to 2003; and
. holders of no more than U.S.$35.5 million of
aggregate principal amount of old loans elect
to receive new notes under the new indenture
pursuant to the restructuring plan.
Certain of these conditions may be waived by us
and the holders of a majority of the outstanding
claims against us. See "Description of
Restructuring Plan--Conditions to the
Restructuring Plan."
7
Regulatory Approvals........ We are in the process of obtaining the necessary
Mexican regulatory approvals for the
restructuring plan.
Classification of Claims
Against Us and Payments
with Respect to those
Claims.................... Under the restructuring plan, claims against us
are classified into five general categories:
a. Capital Leases..... Those capital leases that have been approved by
the court overseeing our suspension of payments
case will continue in full force and effect under
the restructuring plan.
b. Preferred Claims... In general, the holders of claims which we
believe would be entitled to a preference under
Mexican law will be paid in full, pursuant to
their existing agreements, or pursuant to
separately negotiated agreements. Holders of
preferred claims are Bancomext, Banca Cremi,
S.N.C. and Banco Santander S.A. There are
approximately U.S.$24.6 million of these claims.
See "Description of Restructuring Plan--Terms of
the Restructuring Plan."
c. Claims for
Indebtedness for
borrowed money...... There are approximately U.S.$1,846.6 million of
claims for indebtedness for borrowed money
comprised of holders of our old Senior Notes and
old Discount Convertible Notes, claims against
our subsidiary MICARE and against our other
subsidiaries, claims under our secured export
note facility, and other claims for indebtedness
for borrowed money. Under the restructuring plan,
holders of these claims will receive their pro
rata share (based on the outstanding principal
and accrued interest due as of May 25, 1999,
without deduction, in the case of claims under
our secured export note facility, for any cash
collateral held or applied by JPMorgan Chase Bank
as the agent under such facility) of the
consideration set forth below, regardless of what
they might have been entitled to in the
suspension of payments proceeding; provided that
(a) holders of old notes will only be entitled to
receive their pro rata share of the consideration
in the form of new notes and our other creditors
will be entitled to receive their pro rata share
of the consideration in the form of either new
notes or new loans, and (b) MICARE creditors may
elect to receive Class A Loans instead of Class B
Loans, in which event the Class A Loans received
by other creditors will be decreased
proportionally and the Class B Loan received by
other creditors will be increased proportionally.
(1) An aggregate principal amount of New
Series A Senior Secured Notes and New Class A
Secured Loans denominated in U.S. dollars of
approximately U.S.$1,115.4 million, which is
equal to U.S.$1,140.0 million less the amount
of claims which we believe are entitled to a
preference (currently estimated to be
U.S.$24.6 million);
(2) Net cash proceeds, if any, from the sale
(or sale-leaseback) of the following non-core
assets, or "Subject Assets," on or prior to
closing, which are estimated to be
approximately U.S.$0.0 million:
. our oxygen plant;
. certain of our railroad cars;
. our electric plant;
. certain of our real estate;
. our joint venture rights (including stock
in joint ventures); and
. certain other of our non-core assets;
8
(3) An aggregate principal amount of New
Series B Senior Secured Notes and New Class B
Secured Loans denominated in U.S. dollars
equal to U.S.$180.0 million less 1.5 times
the aggregate amount of net cash proceeds
from the sale of Subject Assets paid to our
creditors at closing (to the extent the
aggregate amount of such net cash proceeds
does not exceed U.S.$120.0 million);
(4) 302,000,000 shares of our common stock
that are required to be deposited in the
AHMSA Creditor Voting Trust representing 40%
of our outstanding common stock on a fully
diluted basis, subject to a three-year
purchase option and additional two-year right
of first refusal in favor of a special
purpose vehicle created by our parent
company, and in the case of shares to be
issued to the creditors of our subsidiary
MICARE, a nine-year purchase option in our
favor;
(5) A restructuring fee of U.S.$20.0 million
in cash plus the amount of certain documented
expenses of the steering committees of our
creditors incurred after April 1, 2001 not to
exceed U.S.$200,000 per month that will be
used first to pay certain expenses of the
steering committee of our creditors with
claims relating to our secured export note
facility and certain expenses of the general
steering committee of our creditors, and then
to pay a pro rata fee to all creditors,
U.S.$7.0 million of which will be paid at
closing, and the balance of which will be
paid to our creditors quarterly over a
nine-month period, in each case without
interest (such net amount to be paid to the
creditors estimated to be U.S.$ ); the
steering committee has informed us that
U.S.$2.0 million will be set aside in escrow
for indemnification, if any, of the trustee
for the AHMSA Creditor Voting Trust;
(6) An additional fee in cash equal to a
notional three months of interest on the
restructured debt (estimated to be
approximately U.S.$18.5 million) payable over
an eighteen-month period, without interest;
and
(7) In addition, creditors of MICARE will
receive U.S.$35.4 million aggregate principal
amount of our Subordinated Promissory Notes,
Series D, and U.S.$27.7 million aggregate
principal amount of our Subordinated
Promissory Notes, Series E.
d. Claims of Suppliers Suppliers with a claim for pre-May 25, 1999
obligations of less than Ps.2.0 million will
receive non-interest bearing promissory notes
denominated in pesos with monthly payments over a
nine-month period in satisfaction of their
claims. Suppliers with a claim for pre-May 25,
1999 obligations of Ps.2.0 million or more (a)
will receive promissory notes denominated in
dollars bearing interest at the LIBO rate plus 2%
per annum with maturities of twenty-four months
and quarterly principal and interest payments in
satisfaction of their claims, and (b) will be
obligated to sell a pro rata portion of
9
U.S.$40.0 million of claims to certain of our
individual shareholders (who are also our
affiliates) in exchange for a pro rata portion of
22,108,346 shares of our common stock, which will
represent approximately 2.9% of our common stock
outstanding following consummation of the
restructuring plan. Those claims will then be
exchanged for non-interest bearing,
non-amortizing promissory notes denominated in
dollars with a maturity of , in favor of
those individual shareholders.
e. Claims of Equity
Holders............. Our current shareholders will maintain their
existing equity interests in us subject to
dilution by the new common stock being issued
pursuant to the terms of the restructuring plan.
Mandatory Deposit of Common
Stock in the AHMSA
Creditor Voting Trust..... Under the restructuring plan, all persons
receiving our common stock in the restructuring
plan (other than our suppliers) must, as a
condition to receiving such common stock, agree
to deposit the common stock into the AHMSA
Creditor Voting Trust. The steering committee of
our general creditors has informed us that the
purpose of the AHMSA Creditor Voting Trust is to
concentrate voting power and to secure certain
governance rights for our creditors.
Amendment of Existing
Indentures................ Holders of old Senior Notes and old Discount
Convertible Notes who consent to the
restructuring plan will be deemed to have
consented to amendments to the existing
indentures governing those securities that on the
date of the lifting of suspension of payments
will have the effect of removing substantially
all of the negative covenants and events of
default (other than defaults for non-payment) in
such indentures.
Releases.................... The terms of the new credit agreement and the new
indenture include provisions pursuant to which
we, on our own behalf and on behalf of our
subsidiaries, and the creditors, on their own
behalf and on behalf of their respective
affiliates, will release and discharge all
claims, known or unknown, relating to the
indebtedness to be restructured pursuant to the
restructuring plan.
Supplemental Share Trust.... GAN will transfer title to 20% of our outstanding
common stock (determined after the issuance of
the new common stock pursuant to the
restructuring plan) to secure our obligations
under the new credit agreement and new indenture.
The transferred shares will be held in a trust,
the "Supplemental Share Trust," for the benefit
of the holders of loans under the new credit
agreement and new notes under the new indenture.
The creditors of GAN will have a security
interest in the shares of our common stock held
in the Supplemental Share Trust, but the security
interest will be subordinate to the interest of
the Supplemental Share Trust.
Upon a payment default on the new loans or the
new notes, the trustee of the Supplemental Shares
Trust will have the right to exercise any and all
remedies available with respect to the shares of
our common stock held in the Supplemental Share
Trust, including selling such shares,
distributing such shares to our creditors at the
time, and retaining the shares and exercising all
rights of ownership, subject to the direction of
the trustee of the AHMSA Creditor Voting Trust in
the case of voting.
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The New Credit Agreement
Loan Classification......... The loans under the new credit agreement are
classified in two ways, as tranches and as
classes.
The primary differences between the Tranches are
as follows:
Tranche Essential Terms
------- ---------------
Tranche MICARE Tranche MICARE will be held by
existing MICARE creditors and,
with respect to Class A Tranche
MICARE Loans, will be entitled to
priority repayment upon a sale of
MICARE, and to certain fees based
on MICARE's excess cash flow and
proceeds from the sale of MICARE
in excess of U.S.$330.0 million.
Tranche SEN Tranche SEN will be held by
existing creditors relating to our
secured export note facility and will
be entitled to a priority claim to
receivables under certain supply
contracts to be entered into with
specified steel buyers. There will be
Tranche SEN Loans only if one or
more of the steel buyers agree to
enter into new steel supply contracts.
Tranche AHMSA Tranche AHMSA will be held by
creditors holding existing
indebtedness for borrowed money
(other than existing MICARE
creditors, creditors that receive
Tranche SEN Loans and holders of
old Senior Notes and old Discount
Convertible Notes). Tranche
AHMSA is the largest tranche under
the new credit agreement.
Within each Tranche, the loans will be classified
in two classes. The primary differences between
the classes are as follows:
Class Essential Terms
----- ---------------
Class A The largest class under the Credit
Agreement.
Class B Entitled to priority repayment upon a
sale of the Subject Assets in the first
six months; each U.S.$1.00 of
Subject Asset sale proceeds will be
deemed to repay U.S.$1.50 of
Class B Loans during that period, up
to U.S.$180.0 million (to the extent
Subject Asset sale proceeds both
prior to and after the closing of the
restructuring plan are less than or
equal to U.S.$120.0 million).
11
The A and B classifications will exist only for
six months after the closing date for the
restructuring plan. Thereafter, the loans will be
AHMSA Loans, MICARE Loans and SEN Loans without
any distinction between Class A and B. Each
Lender's loans will be evidenced by one or more
promissory notes.
Interest.................... Interest is paid quarterly on the last business
day of March, June, September and December. Each
Class A Loan will bear interest at a rate per
annum equal to the three-month LIBO rate plus an
applicable margin as follows:
Period Applicable Margin
------ -----------------
From the closing date to the first anniversary of
the closing date................................. 3.00%
From the first anniversary of the closing date to
the second anniversary of the closing date....... 4.00%
From the second anniversary of the closing date
to the fourth anniversary of the closing date.... 4.50%
From the fourth anniversary of the closing date
to the seventh anniversary of the closing date... 5.00%
From the seventh anniversary of the closing date
and at all times thereafter...................... 5.50%
Each Class B Loan will bear interest on the
outstanding principal amount quarterly at the
following rates per annum: during the period
commencing on the closing date and ending on the
six-month anniversary of the closing date, a rate
per annum equal to 4% and, thereafter, a rate per
annum equal to the rate on the Class A Loans.
After the occurrence and during the continuance
of any event of default, interest will accrue at
a rate of 2% in excess of the otherwise
applicable rate and will be payable on demand.
See "Description of the Credit Agreement--Payment
of Principal and Interest."
Instead of paying interest due in cash on any of
the first three quarterly payment dates following
the closing date, so long as
. no event of default has occurred and is
continuing,
. we have not made any payments of management
fees, guarantee fees or similar fees to GAN or
any of our other affiliates, and
. we have not made any voluntary prepayments of
the new loans or any voluntary redemptions of
the new notes,
we may satisfy our obligation to pay interest, in
whole or in part, by causing GAN to transfer its
rights to a portion of the shares held in the
Supplemental Share Trust to the trustee of the
Supplemental Share Trust for the benefit of the
Lenders. The number of shares to be transferred
will be based on an equity valuation of AHMSA of
U.S.$673.0 million.
12
In connection with each such transfer, we will
issue a subordinated promissory note to GAN in
the principal amount equal to the amount of the
interest payment made by GAN. GAN will have the
right to repurchase such shares for a four-year
period following the transfer of the shares to
the trustee of the Supplemental Share Trust. So
long as the GAN repurchase option is in place, we
will be obligated to repay the subordinated
promissory note to GAN out of our "excess cash
flow" as defined, and GAN will be obligated to
exercise its option to repurchase the transferred
shares with the proceeds of the repayment. The
shares used to pay converted interest on the new
loans will be transferred to the AHMSA Creditor
Voting Trust (which will in turn issue Converted
Interest Series trust interests to the holders of
new loans and new notes at such time representing
such shares) upon the earlier of (a) a payment
default on the new loans or the new notes or (b)
the expiration of GAN's option to repurchase such
shares used to pay converted interest. If we
elect to pay all or any part of the interest due
on any of the first three quarterly payment dates
in this manner, we also must pay interest due on
the new notes in this manner on a pro rata basis.
See "--Comparison of Terms of New Notes and Old
Notes" and "Description of New Notes--General."
Repayment of Principal...... The loans under the new credit agreement mature
on September 30, 2009. We will repay the loans in
13 installments on the last business day of March
and September of each year, beginning on
September 30, 2003. Each of the first 12
installments will be in an amount equal to 5.42%
of the original principal amount of the loans and
the thirteenth installment will be in the amount
of the remaining unpaid principal of the loans.
Prepayments................. We will prepay the loans under the new credit
agreement on a pro rata basis with the new notes,
without premium, out of the net proceeds from the
sale of MICARE, the sale of the Subject Assets,
the sale of certain other assets and insurance
proceeds (unless reinvested), permitted
refinancing indebtedness, issuances of our
equity, and out of specified percentages of
excess cash flow. However:
. net proceeds from the sale of MICARE will be
applied first to prepay the Class A MICARE
Loans before being applied to prepay the other
loans under the new credit agreement or to
redeem new notes. To the extent the net
proceeds from the sale of MICARE are at least
U.S.$300.0 million, but less than U.S.$330.0
million, then we will be deemed to have repaid
U.S.$330.0 million of New Notes and New Loans;
. net proceeds from the sale of the Subject
Assets will be applied first to prepay the
Class B Loans and redeem new Series B Notes
(and if the proceeds from the sale of Subject
Assets received by creditors both before and
after the closing of the restructuring plan are
less than or equal to U.S.$120.0 million at a
redemption price equal to 66 2/3% of the
principal amount thereof for the first six
months after closing up to U.S.$120.0 million
of proceeds) and, thereafter, the Class A Loans
and new Series A Notes; and
13
. net proceeds from the sale of assets subject to
a lien recognized by the court overseeing our
suspension of payments case will be applied
first to the Class A Loans of the lienholder to
the extent of the lien.
All other net proceeds that are required to be
used for mandatory prepayment will be applied
first to the Class A Loans and Series A Notes
and, thereafter, to the Class B Loans and Series
B Notes.
Covenants................... The new credit agreement contains affirmative
covenants requiring us to: submit financial
reporting on a monthly, quarterly and yearly
basis, give notice of the occurrence of a
default, an event of default, and certain other
events, maintain our properties and insurance,
keep accurate books and records and comply with
environmental laws and other applicable laws,
cause new restricted subsidiaries to guarantee
the restructured debt, subject to certain
conditions, accept an offer to buy MICARE
approved by the directors nominated by the AHMSA
Creditor Voting Trust, give the Administrative
Agent further assurances and documents as
requested to create, preserve, perfect or
validate the liens securing the loans, upstream
cash from MICARE, and take certain actions to
defend the AHMSA Creditor Voting Trust. We also
agree to make payments in respect of the
principal of our restructured obligations to
Bancomext.
Additionally, we have certain obligations under
the new credit agreement in respect of the
Tranche SEN Loans including shipping steel
products in accordance with the terms (which
include quality specifications, quantity and
shipping terms) of the steel supply contracts
with specified steel buyers, and making payments
into a collection account and/or opening letters
of credit for the benefit of the collateral agent
on behalf of the Tranche SEN lenders.
The new credit agreement contains negative
covenants which provide for: limitations on
business activities, limitations on incurrence of
indebtedness, limitations on liens, limitations
on investments (including acquisitions),
limitations on certain dividends, other
distribution payments and management and
guarantee fees,
limitations on capital expenditures, limitations
on rental obligations, limitations on
consolidations and mergers, limitations on asset
dispositions, limitations on transactions with
affiliates, limitations on payment restrictions
affecting subsidiaries, and limitations on take
or pay agreements. The new credit agreement also
contains financial covenants and a covenant not
to interfere with our chief financial officer's
performance of his duties under the new credit
agreement.
Additionally, we agree to limitations on amending
or modifying certain supply contracts to be
entered into with specified steel buyers and the
amount of steel produced by us to secure the
Tranche SEN Loans.
Events of Default........... The new credit agreement provides that the
occurrence of any of the following events will
constitute an event of default (subject to
applicable grace periods): non-payment of
principal or non-payment
14
of interest on the loans, breach of warranty,
non-performance of covenants and obligations
under the new credit agreement, the related
agreements or the documents governing the equity
arrangements, default on other indebtedness (in
an aggregate principal amount exceeding U.S.$20.0
million), judgments, bankruptcy, insolvency,
impairment of security, breach of the new
Estatutos, a moratorium declared on our debt or
government seizure of a material portion of our
assets, and a change of control.
Additionally, with respect to the Tranche SEN
Loans, the following are events of default under
the new credit agreement:
. a default by us in the observance or
performance of any material covenant or
agreement in any steel supply contract entered
into in connection with the Tranche SEN Loans
if not cured within the applicable grace period;
. any authorization, approval or license required
by the laws of Mexico or Germany to enable us
to enter into any steel supply contract or any
collateral document relating to the Tranche SEN
Loans ceases to be in full force and effect for
thirty days or more; and
. certain other events with respect to specified
German steel buyers, if not cured within six
months, unless we either find a reasonably
acceptable substitute buyer, or pay a 2% fee on
the amount committed to be bought by the
applicable steel buyer under the subject steel
contract during a certain six-month time period.
Subsidiary Guarantees....... Each of our significant subsidiaries will
irrevocably and unconditionally guarantee all of
our obligations under the new credit agreement.
The guarantee of each of our significant
subsidiaries will be released upon the sale or
other disposition of such significant subsidiary
to an entity other than AHMSA or a restricted
subsidiary of AHMSA in accordance with the new
credit agreement.
Security.................... The new loans will be secured ratably with the
new notes by substantially all of our assets
located in the United States (if any) and
substantially all of the following assets located
in Mexico: (i) all real estate and equipment
owned by us; (ii) all shares directly owned by
us; (iii) subject to the consent of CFE and
certain U.S. dollar limitations, all accounts
receivable from CFE; (iv) all Mexican trademarks;
(v) the Subject Assets; (vi) all rights,
including rights to minerals and certain other
natural resources, arising out of or derived from
exploitation concessions and/or rights, and
certain exploration concessions and/or rights;
and (vii) all insurance policies related to the
above; provided, however, (w) the Tranche SEN
Loans will have a first priority claim to the
German Contract Receivables, (x) the Tranche
MICARE Loans will have a first priority claim to
the equity in and assets of MICARE, (y) the
Series B Loans and Series B Notes will have a
first priority claim to the Subject Assets, and
(z) holders of liens recognized by the court
overseeing our suspension of payments case will
have a first priority claim to the assets subject
to such liens to the extent recognized by the
court.
15
Comparison of Terms of the New Notes and Old Notes
The following descriptions of the old notes and the new notes are summaries
and are subject to the detailed provisions of the indentures pursuant to which
these notes are issued. For a more detailed summary of the terms of the old
notes, see "Annex I--Description of Old Senior Notes" and "Annex
II--Description of Old Discount Convertible Notes." For a more detailed summary
of the terms of the New Notes, see "Description of New Notes."
Old Series A Notes Old Discount New Series A Notes
and Series B Notes Convertible Notes and Series B Notes
--------------------------------- --------------------------- -------------------------------------------
Designation 11 3/8% Series A Senior Notes due 5 1/2% Senior Discount Floating Rate Series A Senior Secured
2002 and 11 7/8% Series B Senior Convertible Notes due 2001. Notes and 4% Series B Senior Secured
Notes due 2004. Notes.
Principal Amount Series A: U.S.$200,000,000. U.S.$85,000,000 aggregate Series A: U.S.$1,140.0 million, less the
Series B: U.S.$225,000,000. principal amount at stated amount of claims which we believe are
maturity. entitled to a preference (currently
estimated to be U.S.$24.6 million), less
the principal amount of the Class A
Loans.
Series B: U.S.$180.0 million, less 1.5
times the aggregate amount of net cash
proceeds from the sale of Subject Assets
paid to our creditors at closing (to the
extent the aggregate amount of such net
cash proceeds does not exceed
U.S.$120.0 million), less the principal
amount of the Class B Loans.
Maturity Series A: April 30, 2002. December 15, 2001. September 30, 2009; provided that on the
Series B: April 30, 2004. date immediately following the six month
anniversary of the closing date (the
"Consolidation Date"), the new Series B
Notes will be converted into new Series A
Notes without further action by us.
Sinking Fund None. None. On each of the last business day of March
and September, commencing
September 30, 2003 (each, a "Sinking
Fund Redemption Date"), AHMSA will
be required to make mandatory sinking
fund redemptions of the new notes (a)
with respect to the first twelve Sinking
Fund Redemption Dates, in an amount
equal to (i) 5.42% of the principal
amount of the new Series A Notes
outstanding on the closing date, plus (ii)
5.42% of the principal amount of the new
Series B Notes outstanding on the
Consolidation Date, minus (iii) amounts
credited against the sinking fund on such
Sinking Fund Redemption Date pursuant
to mandatory redemptions and (b) with
respect to the thirteenth Sinking Fund
Redemption Date, in an amount equal to
the unpaid principal of the new notes. We
have the right to satisfy up to one-half of
each sinking fund obligation by
surrendering to the trustee under the new
indenture new notes with a principal
amount equal to one-half of such sinking
fund obligation.
Interest Series A: 11 3/8% semiannually 5 1/2% payable semiannually Series A: Three-month LIBO rate plus
on each April 30 and October 30. on each June 15 and an applicable margin payable quarterly
December 15. on the last business day of March, June,
Series B: 11 7/8% semiannually on September and December as follows:
each April 30 and October 30. From the closing date to the first
anniversary of the closing date.......3.00%
From the first anniversary to
the second anniversary of the
closing date......................... 4.00%
From the second anniversary to
the fourth anniversary of the
closing date......................... 4.50%
From the fourth anniversary to
the seventh anniversary of the
closing date......................... 5.00%
16
Old Series A Notes Old Discount New Series A Notes
and Series B Notes Convertible Notes and Series B Notes
------------------ ----------------- ---------------------------------------
From the seventh anniversary
of the closing date and at all
times thereafter................. 5.50%
Series B: 4% per annum through the
Consolidation Date
After the occurrence and during the
continuance of any event of default,
interest will accrue at a rate of 2% in
excess of the otherwise applicable rate
and will be payable on demand.
Converted Interest None. None. Instead of paying interest in cash on any
of the first three quarterly interest
payment dates following the closing date,
so long as no event of default has
occurred and is continuing, we have not
made any payments in respect of
management fees, guarantee fees or
similar fees to GAN or any of our other
affiliates, and we have not made any
voluntary prepayments of the new loans
or any voluntary redemptions of the new
notes, we may satisfy our obligation to
pay interest, in whole or in part, by
causing GAN to transfer its rights to
shares held in the Supplemental Share
Trust to the trustee of the Supplemental
Share Trust for the benefit of the holders
of the New Notes and the New Loans.
The number of shares to be transferred
will be based on an equity valuation of
AHMSA of U.S.$673.0 million. In
connection with each such transfer, we
will issue a subordinated promissory note
to GAN in the principal amount equal to
the amount of the interest payment made
by GAN. GAN will have the right to
repurchase such shares for a four-year
period following the transfer of the shares
to the trustee of the Supplemental Share
Trust. So long as the GAN repurchase
option is in place, we will be obligated to
repay the subordinated promissory note
to GAN out of our "excess cash flow" as
defined, and GAN will be obligated to
exercise its option to repurchase the
transferred shares with the proceeds of
the repayment. The shares used to pay
converted interest on the new notes will
be transferred to the AHMSA Creditor
Voting Trust (which will in turn issue
Converted Interest Series trust interests to
the holders of new loans and new notes at
such time representing such shares) upon
the earlier of (a) a payment default on the
new loans or the new notes or (b) the
expiration of GAN's option to repurchase
such shares used to pay converted
interest. If we elect to pay all or any part
of the interest due on any of the first
three quarterly payment dates in this
manner, we also must pay interest due on
the loans under the new credit agreement
in this manner on a pro rata basis. See
"--The Credit Agreement" and
"Description of Credit Agreement--
Payment of Principal and Interest."
17
Old Series A Notes Old Discount
and Series B Notes Convertible Notes
---------------------------------- ---------------------------------
Optional Redemption Not redeemable at the option of Not redeemable at the option
AHMSA except in the event of of AHMSA except in the
certain changes in Mexican tax event of certain changes in
law or certain issuances and sales Mexican tax law.
of Common Stock by AHMSA.
Mandatory Redemption Upon a change of control, Upon a change of control and
AHMSA must offer to purchase in the event the American
the old Senior Notes at a price Depositary Shares
equal to 100% of the principal representing the equity
amount, plus accrued interest and securities into which the old
any additional amounts to the date Discount Convertible Notes
of repurchase. AHMSA must are convertible, "ADSs," are
offer to purchase the old Senior not listed for trading on the
Notes and certain pari passu New York Stock Exchange,
indebtedness with proceeds of each holder has the right, at its
certain asset sales at a purchase option, to require AHMSA to
price in cash equal to 100% of the repurchase all or any part of
principal amount thereof, plus such Discount Convertible
accrued interest and any Notes.
additional amounts to the date of
repurchase.
Conversion Feature None. Optional conversion at any
time on or prior to maturity
(unless previously redeemed
or repurchased) into ADSs at
a conversion rate of 71.794
ADSs per U.S.$1,000
principal amount at stated
maturity of Discount
Convertible Notes (equivalent
to a conversion price of
U.S.$12.00 per ADS at the
time of issuance, increasing to
U.S.$13.93 per ADS at stated
maturity of the Discount
Convertible Notes), subject to
adjustment in certain
circumstances.
Security None. None.
New Series A Notes
and Series B Notes
------------------------------------------
Optional Redemption We may redeem, in whole or in part, the
outstanding principal amount of the new
notes; provided that (i) any such
redemption will be made ratably among
the new notes and the new loans and (ii)
each such voluntary redemption will be
applied, to the extent of such redemption,
to the outstanding mandatory sinking
fund redemptions of the new notes in the
inverse order.
Mandatory Redemption We will be required to redeem the new
notes on a pro rata basis with the new
loans, without premium, out of the net
proceeds from the sale of MICARE (after
payment in full of the Class A Tranche
MICARE Loans), the sale of the Subject
Assets, the sale of certain other assets,
permitted refinancing indebtedness,
issuances of our equity and insurance
recoveries, and out of excess cash flow.
Conversion Feature None.
Security Secured ratably with the new loans by
substantially all of our assets located in
the United States (if any) and
substantially all of the following assets
located in Mexico: (i) all real estate and
equipment owned by us; (ii) all shares
directly owned by us; (iii) subject to the
consent of CFE and certain U.S. dollar
limitations, all accounts receivable from
CFE; (iv) all Mexican trademarks; (v) the
Subject Assets; (vi) all rights, including
rights to minerals and certain other
natural resources, arising out of or
derived from exploitation concessions
and/or rights, and certain exploration
concessions and/or rights; (vii) all
insurance policies related to the above;
provided, however (w) the Tranche SEN
Loans will have a first priority claim to
the German Contract Receivables, (x) the
Tranche MICARE Loans will have a first
priority claim to the equity in and assets
of MICARE, (y) the Series B Loans and
Series B Notes will have a first priority
claim to the Subject Assets, and
18
Old Series A Notes Old Discount New Series A Notes
and Series B Notes Convertible Notes and Series B Notes
------------------------------------ -------------------------------- --------------------------------------------
(z) holders of liens recognized by the
court overseeing our suspension of
payments case will have a first priority
claim to the assets subject to such liens to
the extent recognized by the court.
Guarantees None. None. Irrevocably and unconditionally
guaranteed by our significant
subsidiaries. The guarantee of each of our
significant subsidiaries will be released
upon the sale or other disposition of such
significant subsidiary to an entity other
than AHMSA or a restricted subsidiary of
AHMSA in accordance with the new
indenture.
Covenants The indenture for the old Senior The indenture for the In the new indenture, we will covenant
Notes contains certain covenants, Discount Convertible Notes to, among other things, punctually pay all
including covenants relating to contains certain covenants, amounts due on the new notes, maintain
payment of principal and current including covenants relating an office or agency in New York City,
interest, maintenance of office or to payment of principal and maintain all properties useful in our
agency, holding of money for current interest, maintenance business in good condition, pay taxes,
Senior Notes payments in trust, of office or agency, holding of maintain insurance in accordance with
statements by officers as to money for Discount good business practices for Mexican
default, currency indemnity, Convertible Note payments in corporations, maintain books and records
existence, maintenance of trust, statements by officers as in accordance with Mexican GAAP,
properties, payment of taxes and to default, currency provide financial statements and other
other claims, maintenance of indemnity, listing of Discount records to the trustee for the new notes,
insurance, and certain further Convertible Notes and ADS's, upstream cash from MICARE, take
assurances. The indenture for the existence, maintenance of certain actions to defend the AHMSA
old Senior Notes also includes properties, payment of taxes Creditor Voting Trust and indemnify
certain covenants that will restrict and other claims, maintenance holders of new notes from losses
the ability of AHMSA and its of insurance, and certain resulting from currency risk. In addition,
subsidiaries to incur additional further assurances. covenants in the new indenture will limit
indebtedness and, in the case of our and our subsidiaries' ability to incur
its subsidiaries, issue capital indebtedness, pay dividends and make
stock, pay dividends or make other distributions, make investments,
distributions in respect of the incur liens, dispose of assets and enter
capital stock of AHMSA or into transactions with our affiliates.
prepay subordinated obligations
or make certain other restricted
payments, create liens, dispose of
assets, issue subsidiary
guarantees, enter into sale and
leaseback transactions, enter into
transactions with affiliates and
create limitations on subsidiaries'
ability to make payments to
AHMSA.
Events of Default The following events of default The following events of
apply separately to the old Series default apply separately to old
A Notes and the old Series B Discount Convertible Notes:
Notes: (a) a payment default with (a) a payment default with
respect to the principal, respect to the principal,
redemption price or repurchase redemption price or
price on any note of such series; repurchase price on any old
(b) a payment default for 30 days Discount Convertible Note;
with respect to the interest on any (b) a payment default for 30
note of such series; (c) a failure of days with respect to the
AHMSA to observe or perform interest on any old Discount
any other covenant with respect to Convertible Note; (c) a failure
such series of notes for a period of AHMSA to observe or
of 30 days after receipt of written perform any other covenant
notice of such failure; (d) certain with respect to the old
events of bankruptcy, insolvency, Discount Convertible Notes
receivership or reorganization; (e) for a period of 30 days after
certain cross defaults; (f) the receipt of written notice of
rendering of a final judgment (not such failure; (d) certain events
subject to appeal) against of bankruptcy, insolvency,
New Series A Notes
and Series B Notes
--------------------------------------------
Events of Default The following are events of default
(subject to applicable grace periods)
under the indenture for the new notes:
(a) a default in payment of interest or
principal on the new notes, (b) a default
in the payment of any redemption or
repurchase price on the new notes, (c) a
breach of any covenant or warranty under
the Indenture, (d) cross defaults with
respect to indebtedness equal to or
exceeding U.S.$30.0 million,
(e) bankruptcy or insolvency of us or any
restricted subsidiary, (f) the
nationalization or expropriation of all or a
substantial part of our property or assets
or shares of us and our subsidiaries taken
as a whole, or of any of our material
subsidiaries and our other subsidiaries
taken as a whole, (g) the rendering of a
final judgment in excess of
19
Old Series A Notes Old Discount
and Series B Notes Convertible Notes
----------------------------------- ---------------------------------
AHMSA or any of its subsidiaries receivership or reorganization;
in excess of U.S.$10.0 million (e) certain cross defaults;
which remains undischarged or (f) the rendering of a final
unstayed for a period of 60 days judgment (not subject to
after the right to appeal expires; appeal) against AHMSA or
(g) all or substantially all of the any of its subsidiaries in
property and assets or shares of excess of U.S.$10.0 million
AHMSA and its subsidiaries, or which remains undischarged
of any material subsidiary and its or unstayed for a period of 60
subsidiaries, are nationalized or days after the right to appeal
expropriated by any governmental expires; (g) all or substantially
authority, or any license material all of the property and assets
to the business of AHMSA and its or shares of AHMSA and its
subsidiaries is revoked, and such subsidiaries, or of any
revocation has not been stayed, material subsidiary and its
vacated or suspended within a subsidiaries, are nationalized
period of 60 days; and (h) it has or expropriated by any
become unlawful for AHMSA to governmental authority, or
perform or comply with its any license material to the
obligations under the indenture or business of AHMSA and its
the old Senior Notes. subsidiaries is revoked, and
such revocation has not been
stayed, vacated or suspended
within a period of 60 days;
(h) it has become unlawful for
AHMSA to perform or
comply with its obligations
under the indenture or the old
Discount Convertible Notes;
and (i) failure of AHMSA to
convert any outstanding
Discount Convertible Notes
upon the exercise by any
holder of its conversion right
and continuance of failure for
7 business days.
Modification of Indenture The indenture for the old Senior The indenture for the old
Notes may be amended by the Discount Convertible Notes
trustee and AHMSA to cure any may be amended by the
ambiguity or cure, correct or trustee and AHMSA to cure
supplement any defective any ambiguity or cure, correct
provision, or in any other manner or supplement any defective
which will not adversely affect provision, or in any other
the interests of the holders of the manner which will not
old Senior Notes of any series. adversely affect the interests
With the consent of the holders of of the holders of the old
at least a majority in aggregate Discount Convertible Notes.
principal amount of the old Senior With the consent of the
Notes of any series then holders of at least a majority
outstanding, the trustee and in aggregate principal amount
AHMSA may execute a of the old Discount
supplemental indenture to add Convertible Notes then
provisions to, or change in any outstanding, the trustee and
manner or eliminate any AHMSA may execute a
provisions of the indenture or supplemental indenture to add
modify in any manner the rights provisions to, or change in
of the holders of the old Senior any manner or eliminate any
Notes of such series, provided, provisions of the indenture or
however, that no such amendment modify in any manner the
may, without the consent of the rights of the holders of the
holders of at least 66 2/3% in Notes, provided, however,
aggregate principal amount of the that without the consent of the
Old Senior Notes of such series, holder of each old Discount
change in any material respect the Convertible Note, no such
obligation of AHMSA to make supplemental indenture shall
"excess proceeds offer" with (i) extend the maturity of the
respect to any asset disposition; old Discount Convertible
and provided, further, that Notes or reduce the rate or
New Series A Notes
and Series B Notes
---------------------------------------------
U.S.$10.0 million, (h) the revocation of
material licenses and permits, (i) our
compliance with the indenture for the
new notes becomes unlawful, (j) the
transaction documents under the
restructuring plan cease to be
enforceable, the liens cease to be
perfected first priority liens, or if we, our
subsidiaries, any controlling shareholder
of GAN or GAN (but only if the current
controlling shareholders of GAN
continue to control GAN) challenges the
validity or enforceability of any
transaction documents.
Modification of Indenture We and the trustee may, without the
consent of the holders of the new notes,
amend the indenture for the new notes to
evidence the succession of another
person to our obligations, to add to our
covenants for the benefit of the holders of
the new notes or to surrender any of our
rights or powers, to secure further the
new notes, to make provision with
respect to our repurchase obligations in
connection with a change of control, to
cure any ambiguity, to correct or
supplement any provision which may be
inconsistent with any other provision
provided that such amendment does not
adversely affect the new noteholders, to
correct any mistake, to add the subsidiary
guaranty of a significant subsidiary
created or acquired after the date of the
indenture for the new notes, or to make
any other change that does not adversely
affect the rights of any holder of new
notes in any material respect. With the
consent of the holders of at least 51% of
the outstanding principal amount of the
new notes, we and the trustee for the new
notes may amend the indenture for the
purpose of adding any provisions to or
changing in any manner or eliminating
any of the provisions of the new
indenture; provided, however, that no
such amendment may, without the
20
Old Series A Notes Old Discount New Series A Notes
and Series B Notes Convertible Notes and Series B Notes
----------------------------------- -------------------------------- --------------------------------------------
without the consent of the holder extend the time of payment of consent of the holders of at least 66 2/3 of
of each old Senior Note of such interest thereon, or (ii) reduce the outstanding principal amount of the
series, no such supplemental the principal amount thereof new notes, change or modify our
indenture shall (i) extend the or the amount payable thereon obligation to make a mandatory
maturity of the old Senior Notes in the event of acceleration or redemption or mandatory sinking fund
or reduce the rate or extend the the amount thereof payable in payment or release any collateral security
time of payment of interest bankruptcy, or (iii) make any for the new notes (except as provided in
thereon, or (ii) reduce the change that adversely affects the security agreements), release any
principal amount thereof or the the right to convert or the subsidiary guarantor from its obligations
amount payable thereon in the conversion rate, or (iv) change to guarantee the new notes or limit or
event of acceleration or the in any material respect reduce the obligation of any subsidiary
amount thereof payable in AHMSA's obligation to guarantor under the new indenture or any
bankruptcy, or (iii) change in any repurchase the old Discount other transaction documents (except as
material respect AHMSA's Convertible Notes upon a provided in the new indenture or the
obligation to repurchase the Notes change of control, or (v) other transaction documents), and
of such series upon a change of change the currency thereof or provided, further, that no such
control, or (iv) change the place of any payment thereon, supplemental indenture shall, without
currency thereof or place of any or (vi) reduce the percentage consent of the holder of each outstanding
payment thereon, or (v) reduce of old Discount Convertible new note affected thereby, (1) change the
the percentage of old Senior Notes the holders of which are stated maturity of the principal of, or any
Notes of such series the holders of required to consent to any premium or installment of interest on,
which are required to consent to such supplemental indenture. any new note, or reduce the principal
any such supplemental indenture. amount or the rate of interest or the
amount payable upon the redemption,
repurchase or acceleration or the amount
payable in bankruptcy, or change the
place of payment where, or the coin or
currency in which, any new note or any
premium or interest is payable, or impair
the right to institute suit for the
enforcement of any such payment on or
after the stated maturity or (2) reduce the
percentage of new notes of such series
the holders of which are required to
consent to any such amendment.
Withholding Tax AHMSA is obligated, as a result AHMSA is obligated, as a We are obligated, as a result of the
of the Mexican withholding tax of result of the Mexican Mexican withholding tax of 4.9%
4.9% (subject to the satisfaction withholding tax of 4.9% (subject to the satisfaction of certain
of certain requirements), to pay (subject to the satisfaction of requirements), to pay additional amounts
additional amounts to holders of certain requirements), to pay to holders of the new notes with respect
the old Senior Notes with respect additional amounts to holders to all interest payments made on the new
to all interest payments made on of the old Discount notes.
the old Senior Notes. Convertible Notes with
respect to all interest
payments made on the old
Discount Convertible Notes.
Governing Law State of New York. State of New York. State of New York.
21
Description of Subordinated Promissory Notes
Classification.............. The Subordinated Promissory Notes are classified
into Series D and Series E which are identical in
all respects other than (a) the original stated
principal amount (U.S.$35.4 million for Series D
and U.S.$27.7 million for Series E, and (b) the
discharge of the Series E Notes upon the exercise
by GAN of the Purchase Option. We can only
exercise the MICARE Share Repurchase Option to
the extent that we have repaid amounts payable on
the Subordinated Promissory Notes, Series E prior
to the time of exercise of the MICARE Share
Repurchase Option.
Interest.................... From the closing of the restructuring plan
through the third anniversary of the closing of
the restructuring plan, the Subordinated
Promissory Notes will not bear interest.
From the third anniversary of the closing of the
restructuring plan until eight and one-half years
from the closing of the restructuring plan, the
Subordinated Promissory Notes will accrue simple
interest, which will be added to principal at the
three-month LIBO rate plus 1% per annum.
From eight and one-half years from the closing of
the restructuring plan and thereafter, the
Subordinated Promissory Notes will bear interest,
payable in cash, quarterly in arrears at the
three-month LIBO rate plus 2 % per annum.
Maturity.................... Eleven and one-half years from the closing of the
restructuring plan.
Mandatory Prepayment........ We will be required to prepay the Subordinated
Promissory Notes from the following:
. one half of the amount by which the net
proceeds from a sale of MICARE exceed
U.S.$330.0 million; and
. from and after January 1, 2005 until MICARE is
sold, 65% of the amount by which the operating
cash flow of MICARE exceeds the projected
operating cash flow of MICARE.
Optional Prepayment......... At any time after payment in full of all amounts
due with respect to the new loans and the new
notes.
Allocation of Payments...... Payments with respect to the Subordinated
Promissory Notes will be applied one-half to the
Series D Notes and one half to the Series E
Notes, until the Series E Notes are paid in full.
Discharge of the
Subordinated Promissory
Notes, Series E........... Upon the exercise by GAN of the Purchase Option,
the Subordinated Promissory Notes, Series E shall
be deemed to be paid in full and discharged
without any further payment thereon required by
us, and regardless of the price obtained by the
AHMSA Creditor Voting Trust for the underlying
shares of common stock.
22
Subordination............... Subordinated to all of our present and future
senior debt. See "Description of New Subordinated
Notes--Subordination."
Subsidiary Guarantees....... Each of our significant subsidiaries will
guarantee, on a subordinated basis, our
obligations under the Subordinated Promissory
Notes. The guarantee of each of our significant
subsidiaries will be released upon the sale or
other disposition of such significant subsidiary
of AHMSA in accordance with the terms of the
Subordinated Promissory Notes.
23
Description of Common Stock and Certain Governance Provisions
Upon consummation of the restructuring plan:
. GAN will form, NewCo, S.A. de C.V., a new wholly-owned subsidiary, which
will assume U.S.$551.2 million of our indebtedness in exchange for an
equal U.S. dollar amount claim against us,
. NewCo will then capitalize its claim against us in exchange for
397,127,498 new shares of our common stock, representing 52.6% of our
outstanding capital stock on a fully diluted basis,
. The holders of our old notes and old loans will then contribute
U.S.$551.2 million of indebtedness to NewCo in exchange for the issuance
of 302,000,000 shares of NewCo's common stock representing 76.0% of
NewCo's outstanding capital stock on a fully diluted basis,
. NewCo will then merge into us, so that we will be the surviving entity.
Each share of NewCo common stock will be converted into a share of our
common stock. As a result of the merger, GAN, the holders of the old
notes and old loans and our other shareholders will own 50.1%, 40.0% and
9.9%, respectively, of our outstanding capital stock on a fully diluted
basis.
Following the merger, we will adopt and implement new by-laws or Estatutos,
which will provide for among other things:
Shares of Common Stock
outstanding immediately
after consummation of the
restructuring plan........ 755,000,000 shares of which:
227,395,068 shares will be held by GAN.
302,000,000 shares will be held by the AHMSA
Creditor Voting Trust; and
151,000,000 shares will be held by the
Supplemental Share Trust (although GAN will have
the right to vote these shares unless there is a
payment default on the new loans or new notes).
74,604,932 shares will be held by our current
shareholders other than GAN.
Board of Directors
Composition of the Board
of Directors.............. Under the terms of the new Estatutos, so long as
the debt issued under the restructuring plan is
outstanding or the right of first refusal over
our common stock in favor of the special purpose
vehicle created by GAN has not expired or been
waived, our board of directors will be comprised
of 12 individuals, at least three of whom must be
independent directors. Of our directors:
. six (or after a payment default under the new
loans or the new notes, three) will be
nominated by GAN, one of whom must be an
independent director, and
. four (or after a payment default under the new
loans or the new notes, seven) will be
nominated by the trustee of the AHMSA Creditor
Voting Trust, one of whom must be an
independent director.
GAN and the trustee of the AHMSA Creditor Voting
Trust have agreed to vote all of the shares owned
by them to elect such nominees.
24
Supermajority Board Vote.... Under the terms of the new Estatutos, so long as
the debt issued under the restructuring plan is
outstanding or the right of first refusal over
our common stock in favor of the special purpose
vehicle created by GAN has not expired or been
waived, the vote of a majority of the board of
directors, including at least three of the
directors nominated by the AHMSA Creditor Voting
Trust, is required to approve certain actions,
including:
. the acquisition of new subsidiaries not
permitted by the documents governing our
indebtedness;
. the issuance of guarantees or granting of
liens in excess of amounts provided for in the
annual budget;
. extension of loans by us, other than loans to
any of our executives, directors or employees
after July 31, 2000 as set forth below,
whether or not guaranteed or secured;
. the appointment and removal of our external
auditors;
. the approval of the annual business plan and
budget, including specific limitations on
investments, expenditures, liens, indebtedness
and guarantees, and any action resulting in a
greater than 10% variation from the annual
business plan;
. the incurrence of indebtedness equal to or in
excess of 110% of the amount set forth in the
annual business plan;
. the issuance of any guarantee or bond or
granting of any lien equal to or in excess of
110% of the amount set forth in the annual
business plan;
. transactions with GAN, its successors or
shareholders or our affiliates, except for
certain specified exceptions;
. annual compensation to any employee in excess
of U.S.$400,000 or the hiring of employees on
terms contrary to our General Hiring Policies
as approved by a majority of our board of
directors;
. loans to any of our executives, directors or
employees after July 31, 2000 which total more
than U.S.$100,000 per person or U.S.$1.5
million in the aggregate;
. the voting of shares of stock in a subsidiary
at extraordinary shareholder meetings;
. the purchase, sale or transfer of assets
contrary to the terms of the documents
governing our indebtedness;
. entering into operating leases, as lessee,
contrary to the terms of the documents
governing our indebtedness;
. extending advances to suppliers, not included
in our annual business plan;
. repurchases of our own shares and the
conversion of our shares to treasury shares;
. the appointment and dismissal of our internal
auditor and the determination of his authority
and compensation;
25
. the opening and closing of bank and investment
accounts, as well as appointment of people
with signing authority;
. the appointment of the secretary and alternate
secretary of our board of directors;
. the appointment and dismissal of our chief
financial officer, his compensation, and the
scope of his duties;
. the creation, composition and granting of
functions to committees of our board of
directors, including the audit committee;
. any change in the line of business permitted
by the new Estatutos; and
. the granting and revocation of powers of
attorney relating to any matter that requires
a supermajority board vote.
Shareholder Vote............ Under the terms of the new Estatutos, so long as
the debt issued under the restructuring plan is
outstanding or the right of first refusal over
our common stock in favor of the special purpose
vehicle created by GAN has not expired or been
waived, the following items will require a
favorable 61% shareholder vote:
. declaration of dividends not authorized by the
terms of the documents governing our
indebtedness;
. creation of an audit committee;
. issuance of equity or securities convertible
into or exercisable for equity securities,
other than certain permitted issuances to our
employees;
. repurchases of our common stock or their
conversion to treasury shares;
. filing for protection under applicable
insolvency law or the sale of the majority of
our assets (unless as a result of such
transaction, all of our financial obligations
will be paid concurrently therewith);
. capital increase or reduction, as well as the
merger, spin-off, dissolution or liquidation
of us;
. approval of any matter requiring a
supermajority vote of our board of directors
that is submitted to the stockholders for
their approval;
. granting and revocation of power of attorney
for any matter requiring a supermajority
shareholder vote or supermajority vote of our
board of directors;
. approval of compensation, fees and
reimbursement of expenses for the board of
directors, secretaries of the board of
directors, examiners and their respective
alternates in excess of certain specified
limits;
. any amendment to the new Estatutos; and
. the adoption of certain anti-takeover
provisions.
26
Governance Rights of AHMSA
Creditor Voting Trust..... The AHMSA Creditor Voting Trust will be entitled
to certain veto rights as described above over
our actions, and our directors nominated by the
AHMSA Creditor Voting Trust will have the right
to control the selection and retention of the
chief financial officer of AHMSA and all officers
reporting to the chief financial officer (other
than the tax planning officer), our internal and
external auditors and the secretary of our board
of directors. See "Description of AHMSA Creditor
Voting Trust--Governance and Ownership Structure"
and "Description of AHMSA Creditor Voting
Trust--Special Equity Rights."
27
Summary of the Terms of the AHMSA Creditor Voting Trust
Upon the consummation of the restructuring plan, all creditors receiving our
common stock (other than our suppliers) will be required to deposit the common
stock in the AHMSA Creditor Voting Trust in exchange for interests in the AHMSA
Creditor Voting Trust. The terms of the AHMSA Creditor Voting Trust will
provide for, among other things:
Trust Interests
AHMSA Creditor Voting
Trust Interests
outstanding immediately
after consummation of the
restructuring plan........ Each person who deposits shares of our common
stock into the AHMSA Creditor Voting Trust will
receive an equal number of interests in the AHMSA
Creditor Voting Trust in one of three series:
. MICARE Series--to be issued to depositors with
respect to indebtedness they held of MICARE on
the closing date of the restructuring plan.
. Closing Date Series--to be issued to depositors
with respect to indebtedness they held other
than of MICARE on the closing date of the
restructuring plan.
. Converted Interest Series--upon the transfer to
the AHMSA Creditor Voting Trust of our common
stock held in the Supplemental Share Trust that
was used by GAN to pay Converted Interest on
our behalf under the new loans and new notes,
the holders of the new loans and new notes at
such time will be issued Converted Interest
Series trust interests.
Voting and Non-Voting Trust
Interests................. Trust interests will consist of both voting and
non-voting classes of beneficial interests. All
creditors receiving trust interests upon closing
of the restructuring plan or initial issuance of
the Converted Interest Series will receive voting
interests. In the event of any transfer of any
voting interest to a person other than
. an affiliate of the transferor or
. another person holding voting interests at such
time or an affiliate thereof or
. a transferee who acquires a proportional amount
of our new loans or new notes
then such voting interest will automatically
convert into a nonvoting interest of the same
series as the corresponding voting interest.
Non-voting interests may be converted into voting
interests in the event that nonvoting interests
are transferred to a holder of voting interests,
up to the maximum allowable voting interests for
such holder. All trust interest held by a
creditor with a voting interest in excess of two
times the voting interest held on the closing of
the restructuring plan or the date the creditor
first acquired trust interests will be
automatically converted into non-voting interests.
28
Restrictions on Transfer.... We, GAN, shareholders of GAN and their affiliates
are ineligible to be a transferee of beneficial
interests of the AHMSA Creditor Voting Trust,
(and any purported transfers to any of us will be
null and void) except only if and where both (a)
the AHMSA Creditor Voting Trust were deemed to be
an unregistered investment company so that the
purchase option and/or the MICARE share
repurchase option are not enforceable against the
AHMSA Creditor Voting Trust and (b) the
applicable option holder desires to exercise the
option (in which case the holders of the trust
interests will transfer the applicable number of
underlying trust shares or its trust certificate
representing the applicable number of underlying
trust shares in order to permit the applicable
option holder to exercise its option).
Governance of the AHMSA Creditor Voting Trust
Co-Trustees................. Initially, we and HSBC Financial Services
(Cayman) Limited will serve as co-trustees of the
AHMSA Creditor Voting Trust. After the
registration statement of which this Prospectus
and Consent Solicitation is a part is declared
effective by the SEC and prior to the closing of
the restructuring plan, we will resign as
co-trustee and HSBC Financial Services (Cayman)
Limited will be the sole trustee. The AHMSA
Creditor Voting Trust's business and affairs will
be conducted by its trustee pursuant to the terms
of the declaration of trust and the related
agreements.
Recommendations to Trustee
of the AHMSA Creditor
Voting Trust.............. Any two holders or more of at least 25% of the
voting interests in the AHMSA Creditor Voting
Trust will be entitled to recommend to the
trustee:
. a course of action or inaction by the trustee;
and
. candidates for our directors and an examiner
of us to be nominated by the trustee.
Following any such recommendation, holders of
voting trust interests will vote whether to
approve or disapprove such recommendation. A
plurality of the votes cast will be determinative.
Transfer of Shares held by and Termination of, the AHMSA Creditor Voting Trust
Converted Interest Series. There are no restrictions on the AHMSA Creditor
Voting Trust's transfer of our shares
corresponding to the Converted Interest Series.
MICARE Series............. Other than pursuant to the exercise of the
three-year purchase option in favor of the
special purpose vehicle created by GAN, the AHMSA
Creditor Voting Trust is prohibited from
transferring our shares corresponding to the
MICARE Series of trust interests prior to the
expiration of the MICARE Share Repurchase Option
described below under "--Stock Option Agreement."
Prior to the Third
Anniversary of the Closing
of the Restructuring Plan. The AHMSA Creditor Voting Trust is prohibited
from transferring our common stock prior to the
third anniversary of the closing of the
restructuring plan.
29
Prior to the Expiration of
the Right of First Refusal After the expiration of the three-year purchase
option in favor of a special purpose vehicle
created by GAN, but prior to the expiration of
the additional two-year right of first refusal
period, the AHMSA Creditor Voting Trust may sell
to a third party all of the shares of our common
stock held by it corresponding to the Closing
Date Series upon the affirmative vote of the
holders of a majority of the voting interests of
such Series and a majority of the voting and
non-voting interests of such Series combined. Any
such transfer shall be subject to the right of
first refusal described below.
After the Termination or
the Expiration of the
Right of First Refusal
until termination of the
Special Equity Rights
Period.................... After the termination or the expiration of the
right of first refusal period, but before the
expiration of the Special Equity Rights Period
(described below), the AHMSA Creditor Voting
Trust may sell or release all, or any portion of
the shares of our common stock held by it
corresponding to a particular Series (other than
those shares corresponding to the MICARE Series
of trust interests) upon the affirmative vote of
the holders of a majority of the voting interests
of such Series and a majority of the voting and
non-voting interests of such Series combined.
The "Special Equity Rights Period" will end on
the later of (a) the date when all of the
indebtedness issued on the closing of the
restructuring plan and all other amounts owing
under the transaction documents are paid in full
and (b) the earliest of
. expiration or termination of the right of first
refusal;
. sale of all of our shares subject to the AHMSA
Creditor Voting Trust (other than those shares
corresponding to the MICARE Series of trust
interests);
. waiver by the holder of the right of first
refusal of the right of first refusal; and
. consummation of an exercise of the three-year
purchase option.
After the Expiration of
the Special Equity Rights
Period.................... After the expiration of the Special Equity Rights
Period, the AHMSA Creditor Voting Trust must
release all of the shares of our common stock
held by it (other than those shares corresponding
to the MICARE Series of trust interests) to the
holders of the corresponding series of trust
interests in full satisfaction of such interests.
Duration of the Voting
Trust..................... The AHMSA Creditor Voting Trust will terminate
and the shares of AHMSA common stock held by it
will be released upon the earliest of
. consummation of a sale or release of all shares
held in the AHMSA Creditor Voting Trust,
30
. both (1) termination or expiration of (a) the
three-year purchase option in favor of the
special purpose vehicle created by GAN, (b) the
right of first refusal and (c) the nine-year
purchase option in our favor in respect of the
shares issued to the creditors of MICARE and
(2) after repayment in full of the new loans
and the new notes and all other amounts owing
under the other transaction documents, or
. after termination or expiration of (a) the
three-year purchase option in favor of the
special purpose vehicle created by GAN, (b) the
right of first refusal and (c) the nine-year
purchase option in our favor in respect of the
shares issued to the creditors of MICARE, (and
prior to repayment in full of the new loans and
the new notes and all other amounts owing under
the other transaction documents) upon the
approval of the holders of the majority of
voting interests and a majority of the voting
and non-voting trust interests combined.
Voting of Our Common
Stock; Voting Trust
Interest holder vote...... The AHMSA Creditor Voting Trust will vote all
shares of our common stock held by it as a block
at the direction of the majority of the
outstanding voting trust interests. Material
decisions, such as any permitted release of
shares, amendments to the agreements governing
the voting trust, and changes to the term of the
voting trust, must be approved by a vote of the
majority of holders of voting interests and the
majority of holders of voting interests and
non-voting interests combined.
Covenants With Respect to
the Voting Trust.......... We will remain a reporting entity under the U.S.
Securities Exchange Act of 1934, as amended, and
will not deregister, even if we are permitted to
do so under such United States securities laws,
so long as the AHMSA Creditor Voting Trust is
required to remain a reporting entity under the
U.S. Securities Exchange Act of 1934, as amended,
or could exercise registration rights under the
U.S. Securities Act of 1933, as amended.
We will reimburse HSBC Financial Services
(Cayman) Limited, as trustee, for any expenses of
professionals incurred in preparing or reviewing
reports of the AHMSA Creditor Voting Trust under
the U.S. Securities Exchange Act of 1934, as
amended.
HSBC Financial Services (Cayman) Limited, as
trustee, will not be required to execute on
behalf of the AHMSA Creditor Voting Trust any
registration statements under the U.S. Securities
Act of 1933, as amended, subsequent to the
closing of the restructuring plan unless HSBC is
satisfied that it will not have liability under
Section 11 of the U.S. Securities Act of 1933, as
amended, with respect to such registration
statements.
Obligations of Holders of
Trust Interests........... Each holder of a trust interest must provide to
the trustee of the AHMSA Creditor Voting Trust
information (including telephone number, fax
number, e-mail and address) for an individual to
act as its representative in dealing with the
trustee. Such representative shall have the
exclusive right to vote all the trust interests
of such holder. Each holder may from time to time
change such representative.
31
Stock Option Agreement
Upon the consummation of the restructuring plan, we, the AHMSA Creditor
Voting Trust and each creditor who consents to the restructuring plan will
enter into a Stock Option Agreement which will provide for, among other things:
Grant of Two Purchase Options The AHMSA Creditor Voting Trust will grant an
option on our shares of common stock:
. to us to purchase our shares corresponding to
the MICARE Series of trust interests (which is
referred to as the MICARE Share Repurchase
Option); and
. to a special purpose vehicle created by GAN to
purchase all of the shares of our common stock
held by it, including the shares subject to
the MICARE Share Repurchase Option (which is
referred to as the Purchase Option).
MICARE Share Repurchase Option
Exercise Period....... From and after (i) payment in full of all
indebtedness issued under the terms of the
restructuring plan and (ii) payment of all other
amounts in respect of fees, expenses and
indemnities by us under certain of the
transaction documents until the earlier of (a)
the ninth anniversary of the closing of the
restructuring plan or (b) the exercise of the
three-year Purchase Option in favor of the
special purpose vehicle created by GAN to
purchase all of the shares of Common Stock held
by the AHMSA Creditor Voting Trust.
Shares Subject to
MICARE Share
Repurchase Option..... A pro rata portion of our shares corresponding to
the MICARE Series of trust interests based on the
portion of the principal amount of the
Subordinated Promissory Notes, Series E that has
been repaid.
Exercise Price for
MICARE Share
Repurchase Option..... U.S.$1 per 10,000 shares.
Purchase Option
Exercise Period......... From and after payment in full of all
indebtedness issued under the terms of the
restructuring plan until the third anniversary of
the closing of the restructuring plan.
Shares Subject to
Purchase Option....... All shares subject to the AHMSA Creditor Voting
Trust (other than those in respect of the
Converted Interest Series); the option may only
be exercised for all of such shares and not in
part.
Exercise Price of the
Purchase Option........ Prior to the first anniversary of the closing of
the restructuring plan pursuant to a formula set
forth in the Stock Option Agreement, and
described below under "Description of AHMSA
Creditor Voting Trust--Purchase Option."
Thereafter, the greater of the option price in
the first year and 40.0% of the sum of six times
EBITDA (as defined) less specified indebtedness
plus cash on hand.
32
Right of First Refusal...... The special purpose vehicle created by GAN that
holds the purchase option will be granted a right
to purchase any of our shares held by the AHMSA
Creditor Voting Trust (other than shares
corresponding to the Converted Interest Series of
trust interests) that are proposed to be
purchased by a third party, on the same terms as
proposed by the third party.
Right of First Refusal
Period.................. From termination of the purchase option until the
earlier of the fifth anniversary of the closing
of the restructuring plan, or waiver of the right
of first refusal by us.
Non-cash consideration.. If the consideration proposed to be paid for our
shares consists of something other than cash,
then GAN's special purpose vehicle is obligated
to pay the cash equivalent of such consideration
(as agreed to by the AHMSA Creditor Voting Trust
and GAN's special purpose vehicle, or as
determined pursuant to the appraisal procedure
set forth in the stock option agreement). Debt
instruments delivered by the special purpose
vehicle will be considered cash for purposes of
this analysis to the extent that the instruments
are guaranteed by an investment grade company.
Obligation of Holders of
Trust Interests............. If for any reason either of the two purchase
options or the right of first refusal is not
enforceable against the AHMSA Creditor Voting
Trust, each individual holder of trust interests
agrees to have the two purchase options and the
right of first refusal with respect to block
trades apply directly to its interest in the
AHMSA Creditor Voting Trust.
33
Registration Rights Agreement
Upon the consummation of the restructuring plan, we, the AHMSA Creditor
Voting Trust, the Supplemental Share Trust and each creditor who consents to
the restructuring plan will enter into a Registration Rights Agreement which
will provide for, among other things:
Registration of Trust
Interests by the AHMSA
Creditor Voting Trust..... We have agreed to provide all information
required under applicable law in connection with
up to two registrations of trust interests by the
AHMSA Creditor Voting Trust, subject to customary
blackout provisions. We have also agreed to pay
certain fees and expenses in connection with such
registrations, including up to U.S.$150,000 for
fees and expenses for counsel to the voting trust
trustee for the first registration and up to
U.S.$50,000 for fees and expenses for counsel to
the voting trust trustee for the second
registration.
Demand Registration Rights.. We have also agreed to register the following
securities under applicable Mexican or U.S. law,
subject to customary blackouts, but in the case
of registrations under paragraphs (a), (b) and
(c) below, no more than a total of two such
demands may be made, and in the case of
registrations under paragraph (d) below, no more
than two such demands may be made:
(a) after the expiration of the purchase option,
any of the shares subject to the AHMSA
Creditor Voting Trust, other than the shares
corresponding to the MICARE Series and the
Converted Interest Series of trust interests;
(b) at any time after the expiration of the
MICARE share repurchase option, the shares
corresponding to the MICARE Series of trust
interests;
(c) at any time, the shares corresponding to the
Converted Interest Series of trust interests;
and
(d) after a payment default, any of the shares
held in the Supplemental Share Trust.
We have also agreed to pay certain fees and
expenses in connection with each such
registration, including up to U.S.$75,000 for
fees and expenses for counsel to the Voting Trust
Trustee, up to U.S.$50,000 for fees and expenses
for counsel to the Supplemental Trust Trustee,
and up to U.S.$125,000 for fees and expenses for
counsel to holders of trust interests.
Piggyback Registration Rights We have also granted customary piggyback
registration rights in connection with any
registration by us of our own securities.
United States Federal Income Tax Considerations
For a discussion of certain United States federal income tax consequences
relating to the restructuring plan, see "Certain United States Federal Income
Tax Considerations."
Treatment of Creditors Who Do Not Accept the Restructuring Plan
Creditors who do not consent to the restructuring plan will not have their
claims recognized by us, and will not receive any consideration pursuant to the
terms of the restructuring plan upon the lifting of suspension of payments.
Such non-consenting creditors will have the right following the lifting of
suspension of payments to seek to enforce the pre-suspension of payments
obligations owed to them. See Risk Factors--Additional Risks to Holders of Our
Indebtedness Who Do Not Consent to the Restructuring Plan."
34
General
The Steering Committee...... The steering committee of our general creditors,
consisting of an informal, unofficial group of
eight institutional holders of the claims against
AHMSA (which collectively hold approximately
44.2% in principal amount of such claims) and the
trustee for our old notes, was formed in an
effort to engage in orderly negotiations with us.
From June 1999 until the date hereof, the
steering committee and its advisors met regularly
with us and our representatives in order to
review and finalize the restructuring of our
indebtedness. In addition, the steering
committee's advisors met regularly (with and
without our representatives), with
representatives of other large holders of claims
against us to attempt to explain and negotiate
the transaction so that the final documentation
might be acceptable to the holders of those
claims. Based on discussions with members of the
steering committee of our general creditors, we
believe that those members of the steering
committee (other than Wells Fargo Bank Minnesota,
N.A. in its capacity as trustee for our existing
notes), which hold approximately U.S.$753.9
million in principal amount of our existing
indebtedness, representing approximately 40.8% of
the outstanding indebtedness, intend to consent
to the restructuring plan, subject to
satisfactory final documentation, and subject to
our and our affiliates' promptly proceeding to
implement the restructuring plan and lift our
suspension of payments.
In addition, the steering committee will nominate
the four initial AHMSA directors which the
trustee of the AHMSA Creditor Voting Trust is
entitled to designate and, together with us, will
select our chief financial officer. The steering
committee has informed us that they have
conducted a search for qualified candidates for
membership on the AHMSA Board of Directors and
for the position of chief financial officer, and
that the steering committee will formally make
its selections prior to the lifting of suspension
of payments.
The steering committee has informed us that, in
the opinion of the steering committee, there is
no legal relationship among the members of the
steering committee or between the steering
committee and other holders of claims against
AHMSA (other than Wells Fargo Bank Minnesota,
N.A., which acts as trustee for the old
noteholders, and JPMorgan Chase Bank (as
successor to Morgan Guaranty Trust Company of New
York), which acts as agent with respect to our
secured export note facility). The steering
committee, and its legal and financial advisors,
do not purport to represent, in any capacity,
other holders of claims against us. See "Risk
Factors--Risks Arising from Our Capital Structure
After Consummation of the Restructuring Plan--The
steering committees are not acting in a fiduciary
capacity on behalf of our creditors."
All information contained in this Prospectus and
Consent Solicitation Statement relating to us and
the restructuring plan was prepared and
35
furnished by us. The steering committee, and its
legal and financial advisors, disclaim any
responsibility for the accuracy, completeness,
nature, and form of presentation of such
information. See "Description of Restructuring
Plan--Negotiation of the Restructuring Plan" for
a list of the members of the steering committee
of our general creditors.
General Procedures for
Voting on the
Restructuring Plan........ In order to consent to or reject the
restructuring plan, a form of consent or master
form of consent properly completed and duly
executed by a current registered holder of old
notes (including the forms of consent duly
executed by its beneficial holders) and old loans
must be received by the solicitation agent prior
to the Expiration Time at its address set forth
in "Consent Process--Solicitation Agent."
Beneficial holders of old notes registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee may consent to the
restructuring plan in one of two ways
. through such nominee by completing a form of
consent and returning it to such nominee,
provided such nominee completes and delivers to
the solicitation agent a master form of consent
that reflects such vote; or
. directly, by completing a form of consent that
has been executed in blank by such nominee and
forwarding it directly to the solicitation
agent.
While each holder of old notes and old loans
should check the appropriate box, any form of
consent or master form of consent which is
executed by a holder but does not indicate a
consent or rejection of the restructuring plan
will be counted as a consent to the restructuring
plan. See "Consent Process."
Only creditors who affirmatively consent to the
restructuring plan will receive the consideration
described in this Prospectus and Consent
Solicitation. Creditors who fail to submit a
valid consent will be deemed to have rejected the
restructuring plan.
Contents of the Form of
Consent and the Master
Form of Consent........... The form of consent and master form of consent
will include:
. an agreement to be bound by the suspension of
payments settlement agreement;
. an appointment of designees of HSBC Financial
Services (Cayman) Limited, as co-trustee for
the AHMSA Creditor Voting Trust, as
attorneys-in-fact with the power to execute on
such holders behalf certain agreements to be
entered into among AHMSA, the AHMSA Creditor
Voting Trust and such holders, including the
Company Agreement, Stock Option Agreement,
Share Transfer and Voting Agreement and
Registration Rights Agreement;
36
. a consent (in its capacity as a shareholder of
Newco) to the merger with and into us and to
the adoption of the new Estatutos;
. a form of letter of transmittal, which must be
completed by beneficial owners of old notes
that consent to the restructuring plan in order
to tender their beneficial interests in the old
notes in exchange for restructuring plan
consideration;
. in the case of holders of indebtedness other
than old notes, an election to receive new
notes or new loans;
. in the case of MICARE creditors, an election to
receive Class B Loans or additional Class A
Loans; and
. a form of power of attorney and assignment,
which must be completed by holders of other
outstanding indebtedness that consent to the
restructuring plan in order to grant us the
irrevocable right to retrieve the promissory
notes evidencing such indebtedness from the
Mexican court upon the closing of the
restructuring plan.
Issues relating to the
Consent Process........... All questions as to the validity of any form of
consent or master form of consent shall be
determined by us in our reasonable discretion.
See "Consent."
Expiration Time............. 5:00 p.m. New York City time, , unless
extended by AHMSA.
Solicitation Agent.......... The Weston Group.
Revocation of Consents...... Forms of consent or master forms of consent may
be revoked, subject to the procedures described
herein, at any time prior to the Expiration Time.
37
Summary Financial Information
Except as indicated, the following summary selected financial information is
derived from the Company's audited and unaudited consolidated financial
statements included elsewhere in this Prospectus and Consent Solicitation. This
information should be read in conjunction with, and is qualified in its
entirety by reference to, the Company's audited consolidated financial
statements for the years ended December 31, 1998, 1999 and 2000 (the "Audited
Financial Statements") and unaudited consolidated financial statements for the
six month periods ended June 30, 2000 and 2001 (the "Unaudited Financial
Statements"). The Audited Financial Statements and the Unaudited Financial
Statements were prepared in accordance with Mexican GAAP, which differs in
significant respects from generally accepted accounting principles in the
United States ("U.S. GAAP"). Note 21 to the Audited Financial Statements and
the Unaudited Financial Statements provides a description of the principal
differences between Mexican GAAP and U.S. GAAP, as they relate to the Company,
and a reconciliation to U.S. GAAP of consolidated net income (loss) and total
shareholders' equity.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--General--Inflation," for a discussion of the impact of inflation
on the Company's financial statements.
Unless otherwise stated, the Audited Financial Statements and all financial
and operating data in this Prospectus and Consent Solicitation do not reflect
the results of operations of the galvanizing and painting plant (the
"Galvanizing Plant") or Aceros Nacionales, S.A. de C.V. ("ANSA") between
January 1, 1996 and December 31, 1998. These results are reflected in the item
"Discontinued Operations." The Galvanizing Plant was sold on January 28, 1999
and ANSA was sold on January 29, 1999. See Note 5 to the Audited Financial
Statements.
38
Audited (1) Unaudited (1)
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------ ------------------------------
1996 1997 1998 1999 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- ------- ------------
(millions of constant Mexican pesos with purchasing power (millions of
as of June 30, 2001, except for Other Data) US$, except
for Other
Data)(2)
Income Statement Data:
Mexican GAAP:
Net Sales..................................... 18,162.4 17,269.0 16,159.8 13,359.9 12,805.7 6,815.1 5,020.0 554.1
Cost of Sales................................. 12,414.8 12,274.6 11,711.0 10,108.8 9,633.7 4,799.7 4,468.6 493.2
Depreciation(3)............................... 1,328.2 1,258.0 1,293.0 1,286.4 1,189.1 607.8 607.4 67.1
Gross Profit.................................. 4,419.4 3,736.4 3,155.8 1,964.7 1,982.9 1,407.6 (56.0) (6.2)
Selling, General and Administrative Expenses.. 1,115.3 1,047.0 1,015.7 927.2 766.0 400.3 327.3 36.1
Operating Income (Loss)....................... 3,304.1 2,689.4 2,140.1 1,037.5 1,216.9 1,007.3 (383.3) (42.3)
Financing and Related Costs
Interest Income............................. (461.1) (215.0) (241.1) (109.4) (104.3) (23.8) (22.4) (2.5)
Interest Expense............................ 2,505.0 2,506.5 2,825.1 1,947.3 1,100.5 454.1 429.0 47.4
Foreign Exchange (Gain) Loss................ 30.5 208.0 4,287.4 (1,177.0) 72.9 19.2 (56.9) (6.3)
(Gain) from Monetary Position............... (4,218.3) (2,405.9) (3,538.4) (2,684.9) (2,091.7) (1,095.1) (498.5) (55.0)
Net Financing Result.......................... (2,143.9) 93.6 3,333.0 (2,024.0) (1,022.6) (645.6) (148.8) (16.4)
Other Expense (Income), Net................... 50.5 (40.5) 502.0 1,573.9 294.5 40.4 294.3 32.5
Cost of Inactive Plant(3)..................... -- -- 71.3 68.3 -- -- -- --
Income (Loss) Before Taxes and Employee Profit
Sharing and Results of Associated Companies.. 5,397.5 2,636.3 (1,766.2) 1,419.3 1,945.0 1,612.5 (528.8) (58.4)
Income and Asset Taxes........................ 14.9 13.9 2.7 17.0 771.8 607.1 12.9 1.4
Employee Profit Sharing....................... 58.8 20.1 20.7 21.0 12.8 12.4 2.2 0.2
Income (Loss) Before Results of Associated
Companies.................................... 5,323.8 2,602.3 (1,789.6) 1,381.3 1,160.4 993.0 (543.9) (60.0)
Results of Associated Companies(4)............ 15.8 18.4 (0.7) 37.7 (8.3) 0.2 (0.9) (0.1)
Extraordinary Items(5)........................ 786.2 (574.8) -- -- -- -- -- --
Discontinued Operations(6).................... 161.3 (258.4) (540.0) (25.6) -- -- -- --
Net Income (Loss)............................. 6,287.1 1,787.5 (2,330.3) 1,393.4 1,152.1 993.2 (544.8) (60.1)
U.S. GAAP:
Net Sales..................................... 18,162.4 17,269.0 16,159.8 13,359.9 12,805.7 6,815.1 5,020.0 554.1
Operating Income (Loss)....................... 1,935.5 1,924.5 859.2 690.2 787.8 799.0 (706.0) (77.9)
Net Income (Loss)(7).......................... 1,922.1 1,453.2 (2,123.0) 1,428.0 1,111.0 1,199.0 (753.0) (83.1)
Other Data:
Mexican GAAP:
Basic Earnings (Loss) per Share(8)(9)......... 14.1 6.7 (4.8) 3.9 3.2 2.8 (1.5) (0.2)
Basic Earnings (Loss) per ADS(8)(9)........... 70.9 33.4 (23.9) 19.5 15.8 14.0 (7.5) (0.8)
Weighted Average Shares Outstanding (000s)(9). 388,375 386,462 376,428 362,298 357,873 357,873 357,873 357,873
U.S. GAAP:
Basic Earnings (Loss) per Share(8)(9)......... 5.0 3.8 (5.6) 3.9 3.1 3.3 (2.1) (0.2)
Basic Earnings (Loss) per ADS(8)(9)........... 25.0 19.0 (28.0) 19.5 15.5 16.5 (10.5) (1.0)
Weighted Average Shares Outstanding (000s)(9). 388,375 386,462 376,428 362,298 357,873 357,873 357,873 357,873
- --------
(1) Totals may vary due to rounding.
(2) U.S. dollar amounts provided are translations from the peso amounts, solely
for the convenience of the reader, at an exchange rate of Ps.9.0600 per
U.S. dollar, the noon buying rate as published by the Federal Reserve for
Mexican pesos on June 30, 2001. The U.S. dollar-peso exchange rate has been
volatile in recent years. Accordingly, the translation to dollars at the
June 30, 2001 exchange rate may not accurately represent the financial
condition of the Company in U.S. dollar terms as of the present date.
(3) Cost of inactive plant is not deducted in calculating depreciation in the
Mexican GAAP financial statements but is deducted in calculating
depreciation under U.S. GAAP. In the Mexican GAAP financial statements,
only depreciation charges related to plant in full current use and the
utilized portion of plant operating at less than full capacity are charged
against the Company's ordinary operations and are a component of operating
income.
(4) Represents our income (losses) in companies in which we have a minority
interest.
(5) The extraordinary income recorded in 1996 resulted from the prepayment at a
discount of certain of the Company's long-term debt; the amount shown is
net of income tax and employee profit sharing. The extraordinary expense
reported in 1997 was caused by a change in accounting policy which resulted
in the write-off of the unamortized balance of deferred technical
assistance fees payable to Hoogovens.
(6) For a complete description of what is included in discontinued operations
as of December 31, 1998 and 1999, see Note 5 to the Audited Financial
Statements.
(7) For a discussion of the principal differences between the Company's net
income under Mexican and U.S. GAAP, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--U.S. GAAP
Reconciliation."
(8) Basic earnings (loss) in each period is calculated by subtracting
extraordinary items from majority net income (loss), in each case according
to Mexican or U.S. GAAP, as the case may be. See Notes 7 o) and 21 to the
Audited Financial Statements.
(9) Basic earnings (loss) per share in each period is calculated by dividing
basic earnings (loss) by the weighted average number of shares outstanding
during such period. Basic earnings (loss) per ADS is calculated by
multiplying basic earnings (loss) per share by five, to reflect the ratio
of five shares of Common Stock per ADS.
39
Audited (1) Unaudited (1)
As of December 31, As of June 30,
------------------------------------------------ ---------------------
1996 1997 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- -------- ------------
(millions of constant Mexican pesos with purchasing power (millions of
as of June 30, 2001) US$(2)
Balance Sheet Data:
Mexican GAAP:
Assets
Cash and Cash Equivalents................. 429.8 503.0 404.1 93.5 162.2 121.0 13.4
Trade Accounts Receivable, Net............ 1,994.3 2,316.6 2,131.9 1,845.2 1,461.5 1,098.4 121.2
Due from Affiliated Companies............. 564.0 564.2 344.9 257.4 400.8 160.0 17.8
Inventories............................... 5,241.0 5,276.9 5,094.6 3,697.4 3,464.7 3,435.0 379.1
Other Current Assets...................... 465.5 518.2 1,803.7 336.5 295.0 306.7 33.8
Total Current Assets...................... 8,694.6 9,178.9 9,779.2 6,230.0 5,784.2 5,121.1 565.3
Other Long-Term Receivables(3)............ 1,393.3 1,440.5 1,208.7 921.0 822.0 710.3 78.4
Property, Plant and Equipment, Net........ 31,694.7 31,473.8 31,516.7 27,911.0 26,256.0 25,140.5 2,774.9
Deferred Charges, Net..................... 1,030.8 1,477.0 2,204.4 2,374.1 2,315.0 2,136.1 235.7
Total Assets.............................. 42,813.4 43,570.2 44,709.0 37,436.1 35,177.2 33,108.0 3,654.3
Liabilities and Shareholders' Equity
Short-Term Debt(4)........................ 18,882.9 20,753.1 23,350.5 17,923.0 16,514.1 16,211.2 1,789.3
Interest Payable.......................... 210.9 343.2 427.5 786.0 809.0 830.0 91.6
Due to Suppliers and Contractors.......... 2,558.3 2,823.9 2,570.4 1,960.0 2,050.0 2,067.2 228.1
Taxes Payable............................. 162.3 230.9 427.3 228.0 172.6 299.5 33.1
Due to Affiliated Companies............... 15.0 2.3 83.4 25.0 30.0 33.2 3.6
Other Payables............................ 1,530.0 1,269.4 1,928.4 2,704.0 1,856.8 1,958.0 216.1
Total Current Liabilities................. 23,359.4 25,422.8 28,787.5 23,626.0 21,432.5 21,399.1 2,361.8
Long-Term Debt............................ -- -- -- 450.0 208.0 91.9 10.1
Due to Affiliated Companies............... 269.9 -- -- -- -- -- --
Other Long-Term Liabilities(5)............ 686.4 1,087.3 1,601.1 1,286.0 5,487.7 4,753.0 524.6
Total Liabilities......................... 24,315.7 26,510.1 30,388.6 25,362.0 27,128.2 26,244.0 2,896.5
Majority Shareholders' Equity............. 18,493.2 17,056.0 14,291.8 12,045.5 8,022.0 6,847.0 755.8
Minority Interest in Subsidiaries......... 4.5 4.1 28.6 28.6 27.0 17.0 2.0
Total Liabilities and Shareholders' Equity 42,813.4 43,570.2 44,709.0 37,436.1 35,177.2 33,108.0 3,654.3
U.S. GAAP:
Total Assets.............................. 43,494.9 43,106.9 46,215.0 41,159.5 39,924.7 38,689.2 4,270.3
Shareholders' Equity(6)................... 10,354.7 11,769.4 8,258.0 8,371.0 8,645.0 7,948.0 877.3
- --------
(1) Totals may vary due to rounding.
(2) U.S. dollar amounts provided are translations from the peso amounts, solely
for the convenience of the reader, at an exchange rate of Ps.9.0600 per
U.S. dollar, the noon buying rate for Mexican pesos as published by the
Federal Reserve on June 30, 2001. The U.S. dollar-peso exchange rate has
been volatile in recent years. Accordingly, the translation to dollars at
the June 30, 2001 exchange rate may not accurately represent the financial
condition of the Company in U.S. dollar terms as of the present date.
(3) Includes employee housing developments and equity in affiliated companies.
(4) Reflects on a pro forma basis the acceleration of the maturity of the
long-term debt due to the suspension of payments.
(5) Includes retirement and pension plans and seniority premiums of Ps.533.6
million as of December 31, 1996, Ps.968.1 million as of December 31, 1997,
Ps.969.4 million as of December 31, 1998, Ps.1,052.5 million as of December
31, 1999 and Ps.1,206.8 million as of December 31, 2000. Also includes
Ps.3,789.7 of deferred income tax liability as of December 31, 2000. See
Note 7a) to our audited consolidated financial statements for the years
ended December 31, 1998, 1999 and 2000.
(6) Shareholders' equity under U.S. GAAP principally reflects the adjustments
for deferred income taxes, employee profit sharing and restatement of
machinery and equipment.
40
RISK FACTORS
Consenting to the Restructuring Plan described in this Prospectus and
Consent Solicitation is highly risky. You should consider carefully the risk
factors described below and the information included in the rest of this
Prospectus and Consent Solicitation before deciding whether to consent to the
restructuring plan. We have grouped these risks into the following general
categories:
. Risks Arising from the Failure to Consummate the Restructuring Plan
. Additional Risks to Holders of Our Indebtedness Who Do Not Consent to
the Restructuring Plan
. Risks Arising from Our Capital Structure After Consummation of the
Restructuring Plan
. Additional Risks to Holders of Common Stock and Trust Interests After
Consummation of the Restructuring Plan
. Risks Arising from Our Steel and Steam Coal Business in Mexico
. Market Risks
. Other Risks
Risks Arising from the Failure to Consummate the Restructuring Plan
If the restructuring plan is not consummated, we may be forced to negotiate a
new restructuring plan, our assets may be seized for unpaid taxes or we may be
declared bankrupt and forced to liquidate our assets
If the restructuring plan is not consummated, all agreements reached between
our creditors and us described in this Prospectus and Consent Solicitation
would be unenforceable. In that case, in our opinion, we would have only three
alternatives. First, we could remain in suspension of payments. However, since
we entered into suspension of payments we have not generated positive cash
flow, and as of September 30, 2001 we have defaulted in the payment of over
Ps.260.0 million in withholding taxes. Thus, unless either (a) we obtain
additional financing and experience an improvement in our operations or (b)
there is a general increase in steel prices, we believe that remaining in
suspension of payments will eventually result in either a shut-down of our
operations and a distress sale of our assets not as a going concern or seizure
of our assets by the Mexican government for nonpayment of taxes. Moreover, were
we to be able to remain in suspension of payments indefinitely, we would not be
obligated to make any payments with respect to our pre-suspension of payments
indebtedness. Second, we could seek to negotiate a different restructuring
proposal with the steering committee of our creditors; however the steering
committee has informed us that they are unwilling to accept any further
economic changes to the restructuring plan unless the creditors receive
additional concessions regarding equity interests, governance rights and
changes in management that are unacceptable to our controlling stockholder.
Third, we could seek a sale of the company, which has been done without the
receipt of an offer acceptable to our controlling stockholder. Under each of
these three alternatives, it is likely that the creditors would receive less
than they would pursuant to the restructuring plan proposed in this Prospectus
and Consent Solicitation. See "Description of Restructuring Plan."
Additional Risks to Holders of Our Indebtedness Who Do Not Consent to the
Restructuring Plan
We are limited in our ability to incur indebtedness to pay the obligations of
holders of our indebtedness who do not consent to the restructuring plan
Under the terms of the new indenture and the new credit agreement, we are
prohibited from incurring indebtedness for the purpose of making payments to
the holders of our outstanding indebtedness who fail to accept the
restructuring plan, except pursuant to a final court judgment, or with the
consent of a majority of our directors, including a majority of those directors
nominated by the AHMSA Creditor Voting Trust.
41
Holders of the old notes who do not consent to the restructuring plan will have
the terms of their securities altered
Upon consummation of the restructuring plan, substantially all of the
covenants and events of default (other than for non-payment) in the indentures
for the old notes will be eliminated. See "Proposed Amendments to Old Note
Indentures." The elimination of these provisions will permit us to take actions
that could increase the credit risks faced by the holders of the remaining old
notes, adversely affect the market prices of the old notes or otherwise be
adverse to the interests of the holders of the remaining old notes. The
continuing payment default, the limited principal amount of old notes
outstanding and the changes to the indenture for the old notes are likely to
have an adverse affect on the trading prices, if any, for the old notes.
Holders of our old indebtedness who do not consent to the restructuring plan
must initiate new actions to enforce their claims
Holders of our old indebtedness who do not consent to the restructuring plan
must initiate new actions to enforce their claims; the filing of a proof of
claim in connection with the suspension of payments obtained by us on May 25
and May 28, 1999 will be of no further effect upon consummation of the
restructuring plan. However, the trustee for the old notes has informed us that
it intends to institute a new legal action immediately following consummation
of the restructuring plan to enforce the rights of old note holders who do not
consent to the restructuring plan. We intend to vigorously defend against any
such claims.
Risks Arising from Our Capital Structure After Consummation of the
Restructuring Plan
Our independent auditors' report reflects our auditors' uncertainty regarding
our ability to continue as a going concern
The report of independent auditors on our consolidated financial statements
for the year ended December 31, 2000 contains an explanatory paragraph
regarding our need for additional financing and indicating substantial doubt
about our ability to continue as a going concern because of our suspension of
payments and liquidity problems. Although we believe that the restructuring
plan will provide us with the opportunity to address the concerns raised by our
independent auditors, there can be no assurance that changes in our business,
financial conditions, results of operations and cash flow, or in business
conditions or outlook during 2001 or 2002 will alleviate the substantial doubts
about our ability to continue as a going concern. Accordingly, we may not be
able to continue as a going concern and our auditors' opinion may continue to
include an explanatory paragraph in the future.
Even after the restructuring plan is implemented, we will be highly leveraged,
and we will not be able to meet our restructured obligations unless we
experience a substantial improvement in our financial condition, results of
operations and cash flow
After implementation of the restructuring plan, we will continue to have a
high level of indebtedness and we will not be able to meet our restructured
obligations unless we experience a substantial improvement in our financial
condition, results of operations and cash flow.
On a pro forma historical basis, we would already have been in default of our
obligations under the restructured indebtedness
Upon consummation of the restructuring plan, we will have outstanding
combined long-term indebtedness in the principal amount of approximately
U.S.$1,193.8 million. The following chart shows certain important pro
42
forma credit statistics based on the assumption that we had completed the
restructuring plan as of the dates or at the beginning of the periods specified
below and applied the proceeds as the restructuring plan contemplates:
Pro Forma
At December 31, 2000
--------------------
(in millions)
Total indebtedness............................ U.S.$1,222.4
Total combined equity......................... U.S.$1,418.3
For the Year Ended
December 31, 2000
--------------------
On a pro forma basis, earnings would have been
insufficient to cover fixed charges by...... U.S.$83.3(1)
(1) "Fixed charges" represent interest expense relating to any indebtedness
whether expensed or capitalized.
For the twelve months ended December 31, 2000 (on a pro forma basis), our
earnings would have been insufficient to cover our fixed charges by
approximately U.S.$83.3 million.
We will not be able to meet our restructured obligations unless we experience a
substantial improvement in our financial condition, results of operations and
cash flow
Our ability to service the new notes and the new loans will be dependent
upon us experiencing a substantial improvement in our financial condition,
results of operations and cash flow, which in turn will depend upon financial,
business, competitive, regulatory and other factors affecting us and the steel
industry in general, as well as prevailing economic conditions, some of which
are beyond our control. Such an improvement is possible if all of the following
occur:
. a 25% increase in steel prices in 2002, with additional increases
throughout the term of the restructured obligations;
. the sale of coal from a mine for which we have not obtained the necessary
mining concessions;
. commencing in 2004 the sale of approximately U.S.$12.5 million of coal to
an energy plant that is not yet permitted, constructed or financed;
. the availability of up to U.S.$130.0 million of customer advances and the
ability to incur U.S.$45.0 million of additional indebtedness in 2003;
. no material increase in interest rates over the term of the restructured
obligations; and
. continued accelerated collection of accounts receivable without the
continuation of historically high prepayment discounts to customers.
If one or more of the preceding events do not occur, then it is likely that
we will not be able to meet our restructured obligations. In that event, we
could be forced to seek further protection under, or our creditors could
involuntarily force us into insolvency proceedings under the recently adopted
Law of Mercantile Insolvency Proceedings, which is substantially less favorable
to debtor companies than the current suspension of payments law under which we
are operating. We would then have to either negotiate a new restructuring plan
or we may be declared bankrupt, thereby forcing us to liquidate our assets.
Even if we are able to meet the payment obligations of our restructured
indebtedness, the high level of debt service will have an adverse impact on our
business operations.
As a result of our high level of debt:
. We may be unable to obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate purposes.
43
. A major portion of our cash flow must be dedicated to the repayment of
indebtedness which will reduce the amount of cash we will have available
for other purposes.
. We may be disadvantaged when compared to our competitors if they are
operating on a less leveraged basis.
. Our ability to adjust to changing market conditions and our ability to
withstand competition may be hampered by the amount of debt we owe.
. We may be more vulnerable in an economic downturn than less leveraged
companies.
In the event that we are unable to service our debt, we may be forced to (1)
reduce or delay acquisitions and capital expenditures, (2) sell assets, (3)
restructure or refinance our indebtedness, or (4) seek equity capital. We may
not be able to successfully implement any of these strategies, which will be
limited by the terms of our new indebtedness, Estatutos and agreements with the
AHMSA Creditor Voting Trust. If we do not develop a successful strategy to
respond to liquidity problems, we may become unable to respond to changing
business and economic conditions, fund capital expenditures, make future
acquisitions, absorb negative operating results and make payments on the
indebtedness to be issued under the restructuring plan.
Even if the restructuring plan is implemented, we may not generate sufficient
cash flow to pay delinquent withholding taxes to the Mexican government and, as
a result, Mexican tax authorities may seize our assets
We are currently delinquent in the payment of withholding taxes for 2001 to
the Mexican government in an amount in excess of Ps.260.0 million as of
September 30, 2001. Although we anticipate that we will be able to satisfy
delinquent tax payments prior to the consummation of the restructuring plan and
avoid such delinquencies in the future if the restructuring plan is
consummated, there can be no assurance that we will be able to generate the
funds necessary to do so. Our ability to make these payments will depend upon
the success of our operations, and such success will depend upon financial,
business, competitive, regulatory and other factors affecting us and the steel
industry in general, as well as prevailing economic conditions, some of which
are beyond our control. There can be no assurance, however, that the
anticipated results will occur. Continued failure to make these delinquent
payments, or failure to make withholding tax payments in the future, could
result in the seizure of our assets by Mexican tax authorities. Under Mexican
law, if our assets are seized by Mexican tax authorities, the claim of such
authorities with respect to our assets could take priority over claims of
holders of our indebtedness, including the new loans and the new notes.
The restrictions on the conduct of our business imposed by the terms of our
agreements may prevent us from fulfilling our obligations under our new notes
and new loans
The indenture for the new notes will impose certain limitations on our
ability to, among other things, incur additional indebtedness, consummate
certain asset sales, enter into certain transactions with affiliates, incur
liens, merge or consolidate or sell all or substantially all of our assets. If
we fail to comply with these covenants, we would be in default under the new
indenture and the principal and accrued interest on the new notes would become
due and payable. In addition, the new credit agreement contains other more
restrictive covenants, including the requirement to maintain specified
financial ratios and satisfy certain financial conditions and operating tests.
Our ability to meet those financial ratios and tests may be affected by events
beyond our control and there can be no assurance that we will meet those ratios
and tests. Both the new indenture and the new credit agreement require us to
comply with the terms of our agreements with the AHMSA Creditor Voting Trust. A
breach of any of these covenants could result in a default under the new credit
agreement and the new indenture. If such defaults occur, the creditors could
declare all principal and interest on the new notes and new loans immediately
payable and, if we were unable to repay such amounts, the creditors could
proceed against their collateral. If the indebtedness were to be accelerated,
there can be no assurance that our assets would be sufficient to repay in full
that indebtedness and other indebtedness.
The new Estatutos will also impose limitations on our ability to, among
other things, incur indebtedness, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, merge or consolidate or
44
sell all or substantially all of our assets, without the consent of a majority
of the directors nominated to AHMSA's Board of Directors by the AHMSA Creditor
Voting Trust or in certain circumstances, the holders of a majority of the
voting interests in the AHMSA Creditor Voting Trust. In the event we propose to
engage in a transaction that is otherwise restricted by the new indenture, the
new credit agreement, the new Estatutos or our arrangements with the AHMSA
Creditor Voting Trust, we will be required to obtain the consent of each of
those constituencies. Obtaining such consent may entail substantial delay and
expense, and any one of these constituencies may withhold its consent. In that
event we may not be able to engage in a transaction that is otherwise
beneficial to us or required to maintain our business or our ability to service
our indebtedness and other obligations.
We have a history of failing to comply with the restrictive covenants relating
to our indebtedness
The indenture for the new notes and the new credit agreement will contain
certain restrictive covenants relating to our operations, including
restrictions on incurrence of indebtedness, entering into transactions with
affiliates and the making of restricted dividends and distributions. While we
fully intend to comply with the covenants in the new indenture and the new
credit agreement if the restructuring plan is implemented, we failed to comply
with similar covenants relating to our outstanding notes and outstanding credit
facilities even before we experienced liquidity problems. In general, operating
management has not changed since the date of such defaults. If we fail to
comply with covenants under our new indenture and our new credit agreement, the
holders of our new notes and new loans could declare all principal and interest
on the new notes and new loans immediately payable and, if we were unable to
repay such amounts, such creditors could accelerate the maturity of the
indebtedness owed to them, proceed against their collateral, and exercise other
remedies. If the indebtedness were to be accelerated, there can be no assurance
that our assets would be sufficient to repay in full that indebtedness, our
employees' claims and other indebtedness.
In addition, when negotiating the terms of the restructuring plan with the
steering committee of our creditors, we agreed in principle that the aggregate
principal amount of the new Class B Loans and new Series B Notes issued to our
creditors would be U.S.$180.0 million less 1.5 times the amount of any net
proceeds from the sale of the Subject Assets prior to the closing of the
restructuring plan and that such proceeds would be paid to the creditors at
closing. We have used, and expect that we will continue to use, all net
proceeds from the sale of non-core assets received prior to the closing to fund
current operations. The steering committee has asserted that such use of
proceeds constitutes a breach of our agreement in principle.
If you consent to the restructuring plan and the restructuring plan is approved
and implemented, you will lose all of your existing contractual rights
If you consent to the restructuring plan and the restructuring plan is
approved and implemented, you will be required to exchange your old notes or
old loans, as the case may be, for the restructuring plan consideration
described in this Prospectus and Consent Solicitation. As a result, you will
lose the specific rights that you may currently have as a holder of the old
notes or old loans, except for holders of secured debt whose security interest
is recognized in our suspension of payments proceeding who will maintain a
priority right to repayment from the proceeds of sale of their identified
collateral. The new credit agreement and new indenture also contain releases of
us, our affiliates and the steering committee and their respective advisors and
representatives for all actions prior to the lifting of suspension of payments.
For a comparison of the rights with respect to the old notes and the new notes,
see "Summary--Comparison of Terms of the Old Notes and the New Notes,"
"Description of New Notes," "Annex I--Description of Old Senior Notes," and
"Annex II--Description of Old Discount Convertible Notes." In addition, as a
holder of an interest in the AHMSA Creditor Voting Trust, you will be
vulnerable to decreases in the value of your investment in the event that
future adverse developments in our business occur. For a description of your
rights as a holder of interests in the AHMSA Creditor Voting Trust, see
"Description of AHMSA Creditor Voting Trust."
45
The security for the new notes and the new loans may not be sufficient to pay
outstanding obligations with respect to the new notes and the new loans
The new notes and the new loans will be fully and unconditionally guaranteed
by our significant subsidiaries (the guarantee of each significant subsidiary
will be released upon the sale or other disposition of such significant
subsidiary in accordance with the new credit agreement and the new indenture to
an entity which is not AHMSA or a restricted subsidiary of AHMSA) and secured
by a grant of a security interest in substantially all of our assets and the
assets of the subsidiary guarantors located in the United States (if any) and
all of the following assets located in Mexico: (i) all real estate and
equipment owned by us; (ii) all shares directly owned by us; (iii) subject to
the consent of CFE and certain U.S. dollar limitations, all accounts receivable
from CFE; (iv) all Mexican trademarks; and (v) the Subject Assets; (vi) certain
exploitation concessions and/or rights relating to, among other things, natural
resources and certain exploration concessions and/or rights; and (vii)
insurance policies related to the above. If an event of default occurs with
respect to the new notes or the new loans, proceeds from foreclosure on the
secured assets will be shared ratably among the holders of the new notes and
the holders of the new loans (provided that certain debt holders will have
priority over certain assets). There can be no assurance that a foreclosure on
our secured assets and those of our subsidiary guarantors would produce
proceeds in an amount that would be sufficient to pay the principal of, and
accrued unpaid interest on, the new notes and the new loans after the
employees' claims, which are entitled to statutory priority, are paid in full.
Moreover, the ability of our subsidiary guarantors to make payments pursuant to
the guarantees they provide will be subject to the same factors affecting our
ability to make payments on the new notes and new loans.
The steering committees are not acting in a fiduciary capacity on behalf of our
creditors
A steering committee of our creditors, which collectively holds
approximately 40.8% in principal amount of claims against us, has negotiated
the terms of the restructuring plan with us. Based on discussions with members
of the steering committee of our general creditors, we believe that those
members of the steering committee (other than Wells Fargo Bank Minnesota, N.A.
in its capacity as trustee for our existing notes), which hold approximately
U.S.$753.9 million in principal amount of our existing indebtedness,
representing approximately 40.8% of the outstanding indebtedness, intend to
consent to the restructuring plan, subject to satisfactory final documentation,
and subject to our and our affiliates' promptly proceeding to implement the
restructuring plan and lift our suspension of payments. That steering committee
together with the steering committee for our senior export note facility have
also informed us, however, that in their opinion there is no legal relationship
among members of the steering committees or among the steering committees and
you (other than Wells Fargo Bank Minnesota, N.A., which acts as trustee for the
old note holders, and JPMorgan Chase Bank, which acts as agent with respect to
our secured export note facility). The steering committee and its legal and
financial advisors do not otherwise purport to represent you in any capacity
and expressly disclaim any fiduciary, agency or other obligation or
responsibility to you. By consenting to the restructuring plan, you are
agreeing to the release of us and the steering committees contained in the new
indenture and the new credit agreement. All information contained in this
Prospectus and Consent Solicitation relating to us and the restructuring plan
was prepared and furnished by us. The steering committees and their legal and
financial advisors disclaim any responsibility for the accuracy, completeness,
nature and form of presentation of such information. There can be no assurance
that interests of the steering committees members in voting to accept the
restructuring plan are consistent with your interests.
Interest Rate Fluctuations
After consummation of the restructuring plan, substantially all of our
indebtedness will bear interest at variable rates. In addition, our ability to
hedge future fluctuations in interest rates is limited by the new indenture and
new credit agreement. As a result, future fluctuations in interest rates may
have a material impact on the amounts of interest that we have to pay, and our
interest payments may increase significantly in the future without a
corresponding increase in revenue, cash flow, or net income.
46
Holders of our indebtedness who do not consent to the restructuring plan may
seek to enforce their rights under existing agreements, which could have a
material adverse effect on our business and financial condition
Holders of our indebtedness who do not consent to the restructuring plan
will not receive any consideration pursuant to the restructuring plan. After
the lifting of our suspension of payments, such holders will have the right to
enforce their agreements as they existed prior to the commencement of the
suspension of payments. These holders could seek to collect the amount
outstanding under such agreements, and could seek to attach our assets or could
seek other judicial relief. We have been informed by the trustee for our old
senior notes and old discount convertible notes that upon the lifting of our
suspension of payments, they intend to commence an action seeking payment of
all of the old senior notes and old discount convertible notes that did not
consent to the restructuring plan. We may not have the financial resources to
pay any such claims, and the payment of the claims or any judicial relief that
such holders are able to obtain could have a material adverse effect on our
financial condition and results of operations. In addition, under the terms of
the new indenture and the new credit agreement we are prohibited from incurring
indebtedness for the purpose of making any payments to the holders of our
outstanding indebtedness who fail to consent to the restructuring plan, except
pursuant to a final court judgment, or with the consent of a majority of our
directors nominated by the AHMSA Creditor Voting Trust.
It is a condition to the consummation of the restructuring plan that holders
of no more than U.S.$25.0 million of claims against us fail to accept the
restructuring plan; however, such condition may be waived by us with the
consent of the holders of a majority of the claims against us.
Holders of our existing indebtedness may be subject to adverse tax consequences
from the restructuring plan.
U.S. and non-U.S. holders of our existing indebtedness should consult their
tax advisors regarding the tax implications of the restructuring plan under
Mexican and their own local tax laws.
Under certain circumstances the exchange of existing indebtedness for the
consideration described in this Prospectus and Consent Solicitation will be a
taxable event for U.S. holders upon which gain (but not loss) may be recognized.
Due to the original issue discount expected in respect of the indebtedness
to be issued as part of the restructuring plan, holders who consent to the
restructuring plan will be required to report interest income for U.S. federal
income tax purposes in advance of their receipt of cash interest. If either the
new indebtedness, or the old indebtedness for which it is exchanged is
publicly-traded (within the meaning of the applicable Treasury Regulations),
the holder of such indebtedness may have income inclusions as a result of the
original issued discount that are substantially greater than the amount of cash
interest received by the holder.
In addition, the cash payments to be received in connection with the
restructuring plan may be treated by taxing authorities as additional interest
or fee income subject to ordinary income tax, as opposed to consideration
received in exchange, which would be subject to potentially lower, capital
gains tax.
Additional Risks to Holders of Common Stock and Trust Interests After
Consummation of the Restructuring Plan
After implementation of the restructuring plan, we will continue to be
controlled by GAN
We are currently a majority owned subsidiary of GAN, and after the closing
of the restructuring plan we will continue to be controlled by GAN. There can
be no assurance that GAN will exercise its rights as our controlling
shareholder in a manner consistent with your interests. By virtue of its
ownership of our common stock and the existence of certain common officers and
employees, GAN is in a position to influence our actions for its own benefit.
Alonso Ancira, the Vice Chairman of the Board and Chief Executive Officer of
our company and certain of our subsidiaries, is the vice chairman of the board
and chief executive officer of GAN and, together with his family, owns a 50%
interest in GAN. In addition, certain of our executive officers and employees
are present or former employees of GAN.
47
As part of the restructuring plan, we will enter into an agreement with GAN
under which GAN will agree to transfer shares of AHMSA common stock owned by
GAN to the Supplemental Share Trust in an amount equal to 20% of our
outstanding shares of common stock to secure certain of our indebtedness in
exchange for annual payments of U.S.$20 million. In addition, we will continue
to engage in certain transactions with GAN and GAN affiliates.
After implementation of the restructuring plan, the AHMSA Creditor Voting Trust
will have a veto right over certain of our actions and the parties in control
of the AHMSA Creditor Voting Trust may have different incentives than other
holders of the trust interests
As part of the restructuring plan, we will agree not to enter into certain
transactions without the prior approval of at least three of our directors
nominated by the AHMSA Creditor Voting Trust, or, in certain circumstances, the
approval of the holders of 61% of our outstanding capital stock, which
effectively requires the consent of a majority of the voting interests in the
AHMSA Creditor Voting Trust. Only holders of voting interests as of the date of
the closing of the restructuring plan (subject to certain ownership limits) or
holders receiving voting interests in the AHMSA Creditor Voting Trust upon the
transfer of AHMSA common stock to the AHMSA Creditor Voting Trust in connection
with the converted interest option and transferees receiving such voting
interests which are affiliates of such holders or which are receiving such
voting interests in connection with a transfer by such holders of a
proportional amount of our new notes and new loans will have the right to vote
their interests in the AHMSA Creditor Voting Trust. As a result, the holders of
voting interests may vote such interests to protect their positions as holders
of our indebtedness and not approve actions that, in our view, would be in the
best interest of our stockholders.
If the AHMSA Creditor Voting Trust is classified as an Investment Company under
the U.S. Investment Company Act, the AHMSA Creditor Voting Trust could be
limited in its ability to exercise governance rights
The AHMSA Creditor Voting Trust is being formed as a trust to concentrate
the voting power of the shares of common stock to be issued to our creditors
under the restructuring plan. As such, the AHMSA Creditor Voting Trust believes
that it is exempt from the requirements of the United States Investment Company
Act of 1940, as amended, by virtue of a provision exempting voting trusts from
the application of such statute. There is, however, little case law or
interpretive guidance relating to such exemption. If the AHMSA Creditor Voting
Trust were deemed to be an unregistered investment company not exempt from the
requirements of the Investment Company Act, then the AHMSA Creditor Voting
Trust could be limited in its ability to exercise certain of the governance
rights afforded to it and its rights under the registration rights agreement
and certain other agreements to be entered into in connection with the
restructuring plan. If the AHMSA Creditor Voting Trust is determined to be an
unregistered investment company under the Investment Company Act, holders of
trust interests will be deemed to have entered into a shareholders agreement
with voting provisions substantially the same as those that governed the AHMSA
Creditor Voting Trust.
Risks Arising from Our Steel and Coal Business in Mexico
Our financial condition, results of operations, and cash flow have continued to
deteriorate since we entered suspension of payments and there can be no
assurance that a lifting of suspension of payments will reverse those trends
Notwithstanding the relief from debt service and collection actions afforded
by the suspension of payments proceeding, our financial condition, results of
operations, and cash flow have continued to deteriorate since we obtained the
judicial declaration of suspension of payments on May 25, 1999 regarding the
suspension of payments of AHMSA, MICARE, MIMOSA and MINOSA and on May 28, 1999
for CEMESA. These adverse developments have been due, among other things, to
general economic and industry conditions, including a general decline in the
price of steel and increase in the cost of energy, the effect of suspension of
payments, and other conditions both within and outside of our control, and
include the following:
. We have been unable to obtain financing for our operations and capital
expenditures, other than advance payments from customers, accelerated
payments of accounts receivable in exchange for discounted terms
48
and delayed payments to certain suppliers. These forms of financing are of
limited amounts and contain onerous terms.
. A number of our suppliers have for the most part required either cash on
delivery or advance deposit of the purchase price of goods and services
purchased, increasing our working capital requirements. As a result, we have
ceased to use those suppliers to the extent practicable.
. We have been unable to generate sufficient cash flow to adequately fund our
operations. As a result, as of September 30, 2001, we have not made required
withholding tax payments for 2001 in excess of Ps.260.0 million to the
Mexican government, and we have not made necessary capital expenditures to
permit the continued extraction of raw materials necessary for the
production of steel, requiring us to purchase more costly raw materials from
third party suppliers. We are no longer able to pay amounts due to such
suppliers in a timely manner and do not anticipate being able to do so in
the foreseeable future.
. We have either been unable to obtain necessary performance bonds required by
our customers, or have been able to obtain such bonds at costs far in excess
of historical levels.
. An arrest warrant has been issued for our Chairman and our Chief Financial
Officer, related to alleged fraud at an affiliated company. The individuals
have obtained a stay of execution of the warrants, and we believe that the
allegations are unfounded and are being used as a collection tactic by a
creditor of the affiliated company.
. Due to layoffs and resignations, our white-collar workforce has been reduced
by 26.0% and our blue-collar workforce has been reduced by 5.6%.
There can be no assurance that any or all of these trends will be reversed upon
the lifting of suspension of payments.
A change in Mexican economic policy, as well as currency instability, could
have a material adverse effect on our business, financial condition, prospects
and results of operation
AHMSA currently conducts all of its steel manufacturing, mining and other
business activities (other than export sales) in Mexico. The level of steel
manufacturing activity in Mexico has in the past been affected by prevailing
conditions in the Mexican economy, and the demand for steel has been, to a
significant extent, vulnerable to economic downturns and changes in government
policies and public spending. Our business, financial condition, results of
operations or prospects may also be affected by exchange rate movements, price
instability, inflation, interest rates, regulation, taxation, social
instability and other political or economic developments in or affecting Mexico.
In 1994, Mexico experienced an economic crisis characterized by exchange
rate instability and devaluation of the peso, high inflation, high domestic
interest rates, negative economic growth, reduced consumer purchasing power and
high unemployment. These adverse conditions in Mexico resulted in a marked
increase in the rate of inflation to 52% in 1995 and a liquidity crisis
affecting the ability of the Mexican government and the banking system to
refinance or refund maturing debt issues. Mexico also experienced sharply
higher interest rates in 1995, both domestically and externally, on Mexican
public-sector and private-sector debt and sharply reduced opportunities for
refinancing or refunding maturing debt issues. In response to these
developments, the Mexican government instituted an economic recovery and
stabilization plan that sought, among other things, to stabilize exchange rates
and maintain the present floating rate exchange policy, stabilize the Mexican
banking sector and increase public-sector revenues. While economic conditions
in Mexico generally improved in the late 1990s, reversal of these improvements,
as well as civil unrest (which Mexico continues to experience despite the
general improvement in its economic conditions) or other adverse social,
political or economic developments in or affecting Mexico, could adversely
affect AHMSA's business, results of operations, financial condition, prospects
and ability to obtain financing.
49
Mexican presidential and congressional elections took place on July 2, 2000,
and power was transferred in December 2000, at which time Vicente Fox Quesada,
a member of the National Action Party, or "PAN", became the President of
Mexico. PAN is the party with the most members in Congress, although it does
not have a majority position. This is the first time in 71 years that the
President is not a member of the Institutional Revolutionary Party, or "PRI".
While in the recent past, the transfer of power after presidential elections
has been accompanied by a significant deterioration of the Mexican economy,
AHMSA believes the transfer of power to PAN has taken place without any
significant effect on the Mexican economy or on AHMSA's business and results of
operations beyond those experienced as a result of global economic conditions
and the decline in worldwide steel prices. However, future transfers of power
could trigger, among other events, currency instability. A change in economic
policy, as well as currency instability, could have a material adverse effect
on our business, financial condition, prospects and results of operation.
Due to increased competition in the steel industry, we may not be able to
compete successfully in the Mexican steel market in the future
We are one of two Mexican producers manufacturing finished flat steel
products. We are the only Mexican supplier of plate and tinplate steel products
in Mexico. A number of Mexican steel producers, however, have undergone
modernization plans. As these steel producers become more efficient, we may
experience significantly increased competition from domestic steel
manufacturers. Moreover, imports into Mexico historically have represented
significant competition. Beginning in the second half of 1997, imports
increased as a result of a decrease in demand for steel products in Asia
following its economic crisis. Mexican steel producers, including us,
traditionally have sought to compete with imports on price, and domestic
producers' prices are approximately equal to prices for imports, including
duties. Recently, competition has also begun to focus on quality and service.
While we believe that we offer more competitive prices than foreign suppliers
and more competitive service than most foreign producers by allowing customers
to place smaller orders, permitting greater flexibility in changes to customer
orders and providing weekly delivery, faster settlement of claims and assurance
of supply, there can be no assurance that we will compete successfully in the
domestic market in the future.
In recent years, the world steel industry has been characterized by
overcapacity, reflecting generally sluggish demand for steel in western
industrialized countries as well as significantly increased steel production
capacity in a number of developing countries. The worldwide steel industry is a
cyclical business characterized by intense competition. The financial condition
and results of operations of companies in the steel industry are generally
affected by macroeconomic fluctuations in the world economy and the companies'
respective domestic economies. There can be no assurance that fluctuations in
the Mexican and world economies will not have a material adverse effect on us
in the future. As a result of excess worldwide capacity, particularly in
periods of economic slowdown, we have experienced significant competition from
imports in the past and expect that we will continue to do so in the future.
Moreover, the North American Free Trade Agreement which became effective on
January 1, 1994 and the Mexican-European Free Trade Agreement, which became
effective on July 1, 2000, provide for progressive elimination of duties
imposed by Mexico on imported steel products. These trade agreements could
result in increased competition in the Mexican steel market from North American
and European steel producers.
Foreign exchange rate fluctuations could result in future losses
Our principal foreign exchange rate risk involves changes in the value of
the peso relative to the U.S. dollar.
We estimate that, in 2000, approximately 36.0% of our consolidated revenues
were denominated in U.S. dollars. We estimate that the majority of our
consolidated costs and expenses are denominated in pesos. Because the
percentage of U.S. dollar denominated revenues is higher than the percentage of
U.S. dollar denominated costs, increases in the value of the peso relative to
the U.S. dollar will decrease AHMSA's gross profit, as the costs of production
will become more expensive relative to the sales price.
50
As of December 31, 2000, as a result of our suspension of payments,
approximately 94.0% of our consolidated liabilities were denominated in pesos,
with the balance denominated in U.S. dollars or other currencies. However, upon
consummation of the restructuring plan, substantially all of our indebtedness
will be denominated in foreign currencies, substantially all of it in U.S.
dollars. Decreases in the value of the peso relative to the U.S. dollar will
increase the cost in pesos of our foreign currency denominated debt service
obligations with respect to our foreign currency denominated indebtedness.
Depreciation of the peso relative to the U.S. dollar will also result in
foreign exchange losses as the peso value of our foreign currency denominated
indebtedness is increased.
We generally do not hedge or enter into derivative transactions with respect
to our foreign currency exposure as we believe that these risks are mitigated
by the correlation of domestic steel prices to the U.S. dollar. In addition,
our ability to hedge and enter into derivative transactions is restricted by
the terms of the new credit agreement and the new indenture.
Our reduction in capital expenditures has left us unable to extract sufficient
raw materials to maintain our current level of production of steel
As a result of our financial difficulties, in the past three years we have
reduced our capital expenditure spending. As a result of this reduction in
spending we have not been able to open new mines or to extract sufficient
additional raw materials from our existing mines to maintain our current level
of production. This has forced us to purchase more expensive raw materials from
third-party suppliers. After the closing of the restructuring plan we will have
the additional burden of paying restructuring fees and principal and interest
on our new debt. There can be no assurance that these additional obligations
will not require us to reduce our capital expenditures further.
Commodity price fluctuations could result in future losses
Although until recently we produced a significant portion of the raw
material necessary for the production of our steel, we are exposed to commodity
price risk through our use of commodities, principally energy. We have not
always been able to adjust our end product prices to reflect changes in the
costs of our main raw materials in a short period of time, which has resulted
in lost profitability, as was the case when the cost of gas and fuel increased
by 28.4% in the last quarter of 2000, compared to the last quarter of 1999.
While we have and plan to enter into certain commodity price hedging
arrangements, there can be no assurance that such arrangements will prevent
lost profitability resulting from commodity price fluctuations.
We are subject to interruptions to our business
Our operations are subject to planned and unplanned outages due to required
maintenance, equipment malfunctions, work stoppages, various hazards (including
mine accidents, explosions, fires and severe weather conditions) and the
availability of raw materials, supplies, utilities and other items needed for
the production of steel. These outages could result in reduced production and
increased costs.
Variations in the price of steel or the cost of raw materials may have a
material effect on our profitability
Our financial results are significantly affected by relatively small (on a
percentage basis) variations in the realized prices for steel and in the cost
of energy. A one percent increase or decrease in the average price per BTU of
natural gas would, on a pro forma basis, have resulted in an increase or
decrease in pre-tax income of approximately U.S.$0.7 million during 2000.
Similarly, a one percent increase or decrease in the average price per tonne of
steel would, on a pro forma basis, have resulted in an increase or decrease in
net sales and pre-tax income of approximately U.S.$11.6 million during 2000.
Competitive pressures in the steel industry are severe. During 2000, certain
factors such as a 30% decline in international steel prices, a 178% increase in
the cost of natural gas, a 24% increase in the cost of electricity, and the
strengthening of the peso (which encourages imports
51
and discourages exports), severely impacted results and reduced our
profitability. In addition, consolidation of customers in major steel-consuming
industries, such as the automotive and container industries, has increased
their buying leverage and may make it more difficult to increase steel prices
in the future. These pressures could limit our ability to obtain price
increases and could lead to a decline in prices, which could have a material
adverse effect on us.
International trade proceedings could limit our ability to sell our products in
foreign markets
We are subject to a number of ongoing trade proceedings and to the
imposition of antidumping and countervailing duties in the United States. Such
duties increase the cost of our products in the foreign jurisdiction, and
impair our ability to compete in such jurisdictions. For example, we have been
unable to export Cut-to-Length Carbon Steel Plate into the United States since
August 1993 due to such proceedings. Mexico has been included by the United
States International Trade Commission in the preliminary list of countries that
will be subject to an additional duty, subject to a quota on . The final
list will be known in February 2002.
We may have difficulty attracting additional qualified senior management
Due to the corporate governance terms that we have agreed to with the
holders of our indebtedness and our remote location, we may have difficulty
attracting additional qualified senior management. Under the terms of our
agreements with the AHMSA Creditor Voting Trust, responsibility for hiring and
firing the chief financial officer is divided between the chief executive
officer, our directors nominated by GAN, our directors nominated by the AHMSA
Creditor Voting Trust and directors nominated by our minority shareholders.
Officers reporting to the chief financial officer are subject to minimal
oversight by the chief executive officer. The job responsibility of certain
officers is also circumscribed by the terms of our corporate governance.
In addition we have reduced our white collar workforce by 26% since the
declaration of our suspension of payments. After we emerge from suspension of
payments, even if economic conditions improve, we may have difficulties in
hiring quality personnel.
Payment of judgments in Mexican pesos; currency conversions on bankruptcy
Under the Ley Monetaria de los Estados Unidos Mexicanos (the Mexican
Monetary Law), if any proceedings are brought in Mexico seeking performance of
our obligations under the new notes or the new loans,
pursuant to a judgment or on the basis of an original action, we may discharge
our obligations denominated in any currency other than pesos by paying pesos
converted at the rate of exchange prevailing on the date payment is made. This
rate is currently determined by Banco de Mexico every business day in Mexico
and published the next business day in the Diario Oficial de la Federacion (the
Official Gazette of Mexico).
In the case of our bankruptcy after the closing of the restructuring plan,
our foreign currency denominated liabilities will be converted into pesos at
the rate of exchange applicable on the date on which the declaration of
bankruptcy is effective. Also, all obligations under the new indenture and the
new credit agreement would cease to accrue interest from the date of the
bankruptcy declaration (other than ordinary interest, which will continue to
accrue to the extent of the collateral provided for in the new indenture and
the new credit agreement).
Costs of potential environmental remediation obligations could have a material
adverse effect on our financial condition and results of operations
There are currently no material legal or administrative proceedings pending
against us with respect to any environmental matter. Until relatively recently,
Mexican law contained little or no restriction on the release of hazardous
substances into the environment. Current Mexican law imposes no remediation
(i.e., clean-up) obligations on us, although we could be held liable to any
party injured by the environmental conditions caused by us. Moreover, there can
be no assurance that such obligations will not arise in the future or that we
will not be required to devote significant expenditures to environmental
remediation. We have no reserves in respect of potential environmental
remediation obligations. Any obligation to remediate environmental damage
caused by us could be material and adverse to our financial condition and
results of operations.
52
As in other industrialized countries, environmental regulations and laws in
Mexico have become increasingly stringent over the last decade. This trend is
likely to continue and may be influenced by the environmental agreement entered
into by Mexico, the United States and Canada in connection with the North
American Free Trade Agreement. Accordingly, there can be no assurance that our
operations will not be subject to stricter Mexican federal or state
environmental laws in the future.
Foreign exchange controls imposed by the Mexican government may have a material
adverse effect on our ability to service our debt
The Mexican government currently imposes no restrictions on a Mexican
company's ability to transfer U.S. dollars offshore. However, while the North
American Free Trade Agreement and the Mexican-European Free Trade Agreement
limit the Mexican government's ability to impose such restrictions, there can
be no assurance that the Mexican government will not institute any transfer
restrictions in the future. In the event that the Mexican government imposes
any such restrictions in the future, our access to U.S. dollars to meet our
U.S. dollar obligations under the new indenture and the new credit agreement
may be prevented or restricted.
Market Risks
The absence of a public market for the new notes and interests in the AHMSA
Creditor Voting Trust offered under this Prospectus and Consent Solicitation
could limit opportunities to sell your new notes and trust interests in the
future
The new notes and the interests in the AHMSA Creditor Voting Trust will
constitute new issues of securities with no established trading market. The new
notes and the interests in the AHMSA Creditor Voting Trust will not be listed
on any national securities exchange or on the Nasdaq Stock Market. If a trading
market does not develop or is not maintained, holders of the new notes and the
trust interests may experience difficulty in reselling the new notes and trust
interests or may be unable to sell them at all. We cannot assure you that an
active public or other market for the new notes or the trust interests will
develop or be maintained. If a market for the new notes or the trust interests
develops, it may be discontinued at any time.
The liquidity of any market for the new notes and the trust interests will
depend upon the number of holders of these securities, our operating
performance, the interest of securities dealers in making a market in these
securities and other factors. A liquid trading market may not develop for the
new notes and the trust interests. Furthermore, the market price for the new
notes and the trust interests may be subject to substantial fluctuations.
Factors such as the following may have a significant effect on market price:
. actual or anticipated fluctuations in our operating results;
. our perceived business prospects;
. general economic conditions, including prevailing interest rates in
Mexico and elsewhere around the world; and
. the market for similar securities.
The terms of the AHMSA Creditor Voting Trust may prevent the establishment of a
liquid market for the interests in the AHMSA Creditor Voting Trust
Only holders of voting interests as of the date of the closing of the
restructuring plan (subject to certain ownership limits), holders who purchased
their trust interests concurrently with their purchase of a proportional amount
of the indebtedness under our new credit agreement or our new indenture,
certain permitted transferees and holders receiving voting interests upon the
transfer of AHMSA common stock from the Supplemental Share Trust to the AHMSA
Creditor Voting Trust in connection with AHMSA's converted interest option will
have the right to vote their interests in the AHMSA Creditor Voting Trust. A
transfer of interests in the AHMSA Creditor
53
Voting Trust to any other person will result in the conversion of such interest
from a voting interest to a non-voting interest. In addition, each holder of
interests in the AHMSA Creditor Voting Trust will be required to become a party
to certain agreements with AHMSA. Moreover, interests in the AHMSA Creditor
Voting Trust will be divided into different classes. These provisions are
likely to inhibit the formation of a liquid market for the interests in the
AHMSA Creditor Voting Trust and may impair the market price for such interests.
Additionally, the shares held in the AHMSA Creditor Voting Trust (other than
shares related to the Converted Interests Series of trust interests) will be
subject to a three-year purchase option and an additional two-year right of
first refusal in favor of a special purpose vehicle created by our parent
company, and in the case of shares to be issued to the creditors of MICARE a
nine-year purchase option in our favor. Also, the majority of holders of voting
interests and the majority of holders of all interests (voting and non-voting)
in the AHMSA Creditor Voting Trust may force a sale of the shares held in the
trust after expiration of certain of the options.
Other Risks
Mexican corporate disclosure and accounting standards may differ from those in
the United States
Publicly available information about Mexican companies authorized to
publicly offer securities is generally less detailed and less current than the
information regularly published by or about public companies in the United
States and certain other countries. In addition, we maintain our financial
books and records in pesos and in accordance with Mexican GAAP. Mexican GAAP
differs in certain respects from U.S. GAAP. Thus, the reported earnings and
presentation of our financial statements may differ from what they would have
been if prepared using U.S. GAAP or another country's methodologies. See Note
21 to the Audited Financial Statements included in this Prospectus and Consent
Solicitation.
Our Chairman and another senior executive are subject to arrest warrants
alleging fraud
Arrest warrants have been issued for our Chairman and our Chief Financial
Officer, related to alleged fraud at an affiliated company. The individuals
have obtained a stay of execution of the warrants, and we believe that the
allegations are unfounded and are being used as a collection tactic by a
creditor of the affiliated company. However, if such allegations prove to be
true, there can be no assurance as to what effect such fraud would have on us.
54
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Prospectus and Consent Solicitation includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended, (the "Exchange Act"). All statements regarding our expected future
financial position, prospects, results of operations, cash flows, financing
plans, business strategy, budgets, projected costs, capital expenditures,
competitive positions, growth opportunities, plans and objectives of management
for future operations and statements that include words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," "may," "could," "will,"
"should" and other similar expressions are forward-looking statements. Such
forward-looking statements are inherently uncertain, and readers of this
Prospectus and Consent Solicitation must recognize that actual results may
differ from our expectations. Actual results could differ materially from those
projected in such forward-looking statements as a result of various factors
that may be beyond our control, including but not limited to:
. those discussed in this Prospectus and Consent Solicitation under the
caption "Risk Factors";
. the market price for our steel products;
. our ability to restructure our debt and fund our working capital
requirements;
. our ability to fund and implement our capital expenditure programs;
. our ability to maintain relationships with customers;
. the effects on us from competition;
. increases in interest rates;
. our ability to recover the amounts of iron ore and coal reserves
estimated in this Prospectus and Consent Solicitation;
. changes in our regulatory environment; and
. the effects of various economic factors on the future demand and prices
for steel products in domestic and export markets, including the state
of the Mexican and world economies and manufacturing industries and the
relative value of the peso compared to other currencies.
Accordingly, you are cautioned not to place undue reliance on these
forward-looking statements. In any event, these statements speak only as of
their dates, and we undertake no obligation to update or revise any of them,
whether as a result of new information, future events or otherwise.
55
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
Year Ended December 31,
------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges 1.36 1.05 * * *
==== ==== = == =
The ratio of earnings to fixed charges is calculated as earnings from
continuing operations before income taxes divided by fixed charges. For the
purpose of this ratio, "earnings" consists of earnings from continuing
operations before income taxes as determined in accordance with Mexican GAAP,
adjusted for undistributed earnings of less-than-fifty-percent-owned affiliates
and does not include the gain from monetary position or exchange gain or loss
attributable to our indebtedness, and "fixed charges" represent interest
expense relating to any indebtedness whether expensed or capitalized. Upon the
issuance of the declaration of suspension of payments in May 1999 we ceased
accruing interest on substantially all of our indebtedness; nevertheless, we
were still unable to generate earnings sufficient to cover fixed charges in
1999 or 2000.
During 1998, 1999 and 2000, earnings were insufficient to cover fixed
charges. An asterisk indicates that earnings were insufficient to cover fixed
charges in the corresponding period. On a pro forma basis for the year ended
December 31, 2000, we would not have been able to cover fixed charges. See
"Risk Factors."
CAPITALIZATION
The following table sets forth our historical capitalization at December 31,
2000 and on a pro forma basis assuming that the lifting of our suspension of
payments had occurred as of such date. This table should be read in conjunction
with our consolidated financial statements and notes thereto included elsewhere
in this Prospectus and Consent Solicitation.
December 31, 2000 Pro forma
--------------------- --------------
(Million of Pesos as of June 30, 2001)
Current Liabilities
Accounts payable...................... Ps 2,050 Ps 2,050
Accrued Interest on Old Debt.......... 809 181
Old Debt.............................. 16,514 53
Restructured Debt..................... -- 206
Other................................. 2,060 2,060
------ -------
Total Current Liabilities......... Ps 21,433 Ps 4,550
====== =======
Non-Current Liabilities
Old Debt.............................. Ps 208 Ps 121
Restructured Debt..................... -- 10,123
New Subordinated Notes................ -- 572
Deferred Income Taxes................. 3,789 3,789
Other................................. 1,698 1,698
------ -------
Total Non Current Liabilities..... Ps 5,695 Ps 16,303
------ -------
Stockholders' Equity
Common Shares......................... Ps 8,216 Ps 13,018
Legal Reserve and Capital Adjustment.. (2,613) (2,614)
Retained Earnings..................... 2,446 2,446
------ -------
Total Stockholders' Equity............... Ps 8,049 Ps 12,850
------ -------
Total Capitalization.............. Ps 35,177 Ps 33,702
====== =======
56
DESCRIPTION OF RESTRUCTURING PLAN
Current Situation of our Creditors
We are currently under suspension of payments. As a result:
. we have not made any payments on our outstanding indebtedness since we
obtained the declaration of suspension of payments, except for payments on
indebtedness entitled to preference under applicable law and on capital
leases approved by the suspension of payments court;
. interest on our outstanding indebtedness has ceased to accrue, except in
the case of creditors that are overcollateralized, to the extent of such
overcollateralization; and
. because indebtedness denominated in U.S. dollars was converted into pesos
for purposes of the suspension of payments, if the peso were to devalue
against the U.S. dollar while we remain under suspension of payments, the
U.S. dollar value of our creditors claims would decrease as a result.
Given the nature of the suspension of payments proceedings, in general, and the
size and complexity of our suspension of payments, including the large number
of filed claims, there is no prospect for a court approved reorganization
agreement in the foreseeable future.
Purpose and Effects of the Restructuring Plan
We are proposing the restructuring plan because we believe that it is the
best alternative available to us at this time and provides our creditors with
the opportunity for a greater recovery than they would receive if we remained
in suspension of payments. This restructuring plan is highly risky and we will
not be able to meet our restructured obligations unless we experience a
substantial improvement in our financial condition, results of operations and
cash flow. See "Risk Factors." If the restructuring plan is not implemented, we
may be forced to negotiate a new restructuring plan, our assets may be seized
for unpaid taxes, or we may be declared bankrupt and forced to liquidate our
assets.
The purpose of the restructuring plan is to provide for a restructuring of
our liabilities in a manner designed to give us the opportunity to continue as
a going concern. As a result of the restructuring plan our indebtedness will be
restructured into a combination of a lower principal amount of indebtedness and
new equity pursuant to the terms described in this Prospectus and Consent
Solicitation and our suspension of payments proceeding will be terminated. We
believe that by emerging from suspension of payments, we will be able to reduce
the uncertainty regarding our continued viability and, as a result, obtain new
financing and improved payment terms from suppliers and other parties with whom
we deal.
Events Leading to the Declaration of Suspension of Payments
In the second half of 1998, international steel prices fell sharply due to
the financial crisis in Asia. The decline deepened toward the end of 1998 and
into 1999. This decline in steel prices resulted in a reduction of the profit
margins and operating cash flows of most companies in the steel industry,
including us. In 1998, our management decided to implement a strategy to
respond to these events, including a cost reduction program and the sale of
certain assets in order to increase liquidity.
In April 1999, in order to avoid preferring any one creditor over another,
to preserve our cash flow to ensure normal operations and to provide for the
time required to develop our restructuring plan, we did not make certain debt
payments, including a scheduled payment of approximately U.S.$39.0 million that
was due on April 16, 1999 with respect to our U.S.$330.0 million Loan
Agreement, dated April 11, 1997, with JPMorgan Chase Bank and certain other
lenders relating to our secured export note facility (the "Old SEN Facility"),
and a scheduled payment of approximately U.S.$24.7 million of interest that was
due on April 30, 1999 in respect of our outstanding 11 3/8% Series A Senior
Notes due 2002 (the "Old Series A Notes") and our outstanding 11 7/8%
57
Series B Senior Notes due 2004 (the "Old Series B Notes" and, together with the
Old Series A Notes, the "Old Senior Notes"). The failure to make scheduled
principal and interest payments and the failure to comply with covenants
contained in the instruments governing our indebtedness allowed the holders of
our old loans and old notes to claim their indebtedness to be in default, to
accelerate the maturity of their indebtedness and to take other enforcement
action against us.
On April 30, 1999, our shareholders authorized our Board of Directors to
take all necessary measures to restructure our outstanding indebtedness,
including filing a petition for suspension of payments under Mexican bankruptcy
law at such time as the Board of Directors determined. On May 14, 1999,
Citibank began enforcement proceedings against us and our subsidiaries
Minerales Monclova, S.A. de C.V., or "MIMOSA", and MICARE, by attaching all of
the assets of MICARE and MIMOSA, including all income to be received from the
CFE. This attachment was lifted as a result of the suspension of payments
declaration described below.
The Suspension of Payments Proceeding
As a result of actions taken by certain of our creditors, we, along with our
principal subsidiaries, obtained a judicial declaration of suspension of
payments on May 25, 1999 and May 28, 1999 in the Civil Court of First Instance
for the Judicial District of Monclova, Coahuila, United Mexican States (the
"Mexican Bankruptcy Court"). Under Mexican law in effect on May 1999, the
suspension of payments procedure was still available and constituted a form of
legal protection afforded to companies which allowed them to (1) seek a debt
restructuring agreement with their creditors in an orderly fashion, (2)
continue their operations and (3) avoid declaration of bankruptcy and
liquidation of assets. In May 2000, Mexico abolished the procedure under which
we obtained a declaration of suspension of payments and replaced it with a new
Law of Mercantile Insolvency Proceedings (the "New Insolvency Law"). However,
the old suspension of payments procedure continues to apply to us because we
obtained the declaration of suspension of payments before the New Insolvency
Law took effect. As a result of a suspension of payments order:
. all debts we had incurred up to the date of declaration of suspension of
payments were deemed due and payable;
. we were granted an automatic stay from collection of any indebtedness
arising out of transactions completed prior to the declaration of
suspension of payments;
. interest ceased to accrue on all outstanding indebtedness, other than
ordinary interest with respect to secured indebtedness (as defined under
applicable Mexican bankruptcy and suspension of payments laws) to the
extent of the security;
. all lawsuits filed for the collection of any monetary obligation against
us were suspended, except for tax obligations, proceedings for the
enforcement of labor liabilities or secured credits (as defined under
applicable Mexican law) and any enforcement of such secured credits;
. a trustee (sindico) was appointed by the court to supervise our
operations (our management retained administrative control and continued
our operations in the ordinary course of business under the trustee's
supervision); and
. for purposes of recognition and classification of our debt obligations
and in order to provide certainty and equal treatment to all creditors,
all credit obligations (other than obligations entitled to be paid
currently under suspension of payments law) stated in foreign currency
were converted into pesos at the rate of exchange prevailing on the date
of the judicial declaration of suspension of payments. For AHMSA,
MICARE, MIMOSA and MINOSA, which obtained a judicial declaration of
suspension of payments on May 25, 1999, this rate of exchange is
Ps.9.359 per U.S.$1.00 and for CEMESA, which obtained a judicial
declaration of suspension of payments on May 28, 1999, this rate of
exchange is Ps.9.672 per U.S.$1.00.
In addition, following the suspension of payments declaration, we disbursed
an aggregate of U.S.$10.6 million under our U.S. dollar denominated credit
facility with Bank One for certain payments in connection with the
58
purchase of batch annealing furnaces. These disbursements were permitted under
the suspension of payments because the promissory notes were signed before the
suspension of payments was declared, a letter of credit had been issued to
Delta Brands, Inc. (the supplier) and the loan had been insured by the
Export-Import Bank of the United States.
Also following the suspension of payments declaration, we reimbursed (in
full or in part) the following three loan facilities:
. The loan facility with Marubeni Corporation: this facility had an escrow
account to which we assigned certain letters of credit (placed before
the declaration of suspension of payments) from our customers. Payments
under the letters of credit in the aggregate amount of U.S.$1.1 million
were made to the escrow account following the suspension of payments,
which payments were directed to Marubeni Corporation; from this amount,
Marubeni applied U.S.$0.4 million to interest and the remaining U.S.$0.7
million to the outstanding principal. As of December 31, 2000, the
outstanding principal balance of this loan was Ps.391.5 million.
. Loan facilities with Banco Nacional de Comercio Exterior ("Bancomext"):
in connection with these facilities we assigned the account receivables
originated from the supply of steel under certain agreements and the
purchase orders between us and our customers to Bancomext. As a result
of the collection mechanism defined in such facilities, they are being
or will be reimbursed to Bancomext in full. Payments for an aggregate
amount of U.S.$36.4 million were made between May 26, 1999 and December
31, 2000 following the suspension of payments. As of December 31, 2000,
the outstanding principal balance of this loan was U.S.$30.4 million.
Between January 1, 2001 and September 30, 2001 payments under this
facility totaled U.S.$7.6 million. As of September 30, 2001 the amount
owed to Bancomext was U.S.$22.8 million.
. One of our loan facilities with ECOBAN: this facility was secured by a
supply contract between us and one of our principal customers and a
payment instruction notice by which the customer was required to make
the payments under the supply contract to an escrow account. Payments
under the supply contract in the aggregate amount of U.S.$17.9 million
were made following the suspension of payments until January 2000, the
date on which this facility was repaid in full, concurrently with the
termination of the supply contract.
In addition, the judge that granted the suspension of payments declaration
authorized us and some of our subsidiaries to comply with payment obligations
with respect to certain capital leases including the capital leases with
Caterpillar Arrendadora Financiera S.A. de C.V., Arrendadora Bankamerica and
The Capita Corporation, pursuant to each of which we lease heavy duty machinery
and equipment. As of September 30, 2001, we owe Caterpillar Arrendadora
Financiera S.A. de C.V., Arrendadora Bankamerica and the Capita Corporation a
total of U.S.$2.3 million, U.S.$11.3 million and U.S.$ 2.7 million,
respectively.
As a result of an order of the court supervising the suspension of payments
of our parent company, GAN, on May 26, 1999, the Bolsa Mexicana de Valores
suspended trading of our common stock on the Mexican Stock Exchange and the
CNBV ordered the suspension of the effects of the registration of our common
stock at the Registro Nacional de Valores e Intermediarios for a period not to
exceed 60 days, thereby preventing the trading of the common stock on the
Mexican Stock Exchange. In response, the New York Stock Exchange halted the
trading of our American Depositary Shares and our outstanding 51/2% Senior
Discount Convertible Notes due 2001 (the "Old Discount Convertible Notes" and,
together with the Old Senior Notes, the "Old Notes") and our securities were
delisted from the New York Stock Exchange on September 8, 2000. On July 2,
1999, we were notified by the CNBV that it was extending the suspension of the
effects of the registration of our common stock indefinitely during the
pendency of the suspension of payments. The resumption of the trading of our
common stock on the Mexican Stock Exchange remains at the discretion of the
CNBV, subject to the liquidity and solvency requirements proscribed by Mexican
law. On October 16, 2000, we filed a Certification and Notification of
Termination of Registration on Form 15 with the United States Securities and
Exchange Commission, terminating our public reporting obligations in the United
States.
59
While subject to the suspension of payments order, we intend to continue
operating our business and to continue to pay for goods and services supplied
since the declaration of suspension of payments while developing and seeking
your consent to the restructuring plan.
Negotiation of the Restructuring Plan
After we obtained the suspension of payments declaration, our creditors
formed an unofficial steering committee to monitor our restructuring
negotiations (the "Steering Committee"). The Steering Committee is comprised of
representatives of the following AHMSA creditors:
Bank of America, N.A.
JPMorgan Chase Bank
Scotiabank Inverlat, S.A.
Banco Nacional de Mexico, S.A.
BBVA-Bancomer, S.A.
Banco Mercantil del Norte, S.A.
Wells Fargo Bank Minnesota, N.A., in its capacity as trustee for the Old
Notes
West Merchant Bank Limited
Export-Import Bank of the United States
The Steering Committee retained PricewaterhouseCoopers LLP ("PWC") as its
financial advisor and Mayer, Brown & Platt as its lead U.S. counsel (with
assistance on voting trust matters by Paul, Hastings, Janofsky & Walker LLP).
The Steering Committee has also retained Mexican counsel, Jauregui, Navarrete,
Nader y Rojas, S.C. and Javier Perez-Rocha. The lenders under the Old SEN
Facility formed their own steering committee (the "SEN Committee"), and
retained E&Y Restructuring L.L.C. ("E&Y") as their financial advisor and
Shearman & Sterling ("S&S") as their lead U.S. counsel. We have agreed upon the
lifting of suspension of payments to pay certain of the reasonable fees and
expenses of PWC and E&Y and to pay to the creditors a restructuring fee that is
designed, in part, to reimburse the expenses of the Steering Committee and the
SEN Committee, including the fees and expenses of counsel.
The Steering Committee's advisors embarked upon a due diligence
investigation of us and our business operations. The primary purpose of this
investigation was to assist the advisors in understanding our historical,
current and projected financial status and business operations and to enable
them to recommend to the Steering Committee an appropriate framework for a
restructuring. Following the completion of their due diligence work, the
advisors reported to the Steering Committee regarding their findings and
conclusions. Thereafter, the Steering Committee began meeting with our
representatives regarding a restructuring of our indebtedness.
From September 1999 through February 2000 such discussions focused on a
potential restructuring that included a business combination with the steel
segment of Industrias Monterrey, S.A. de C.V. ("IMSA"). After it became
apparent to us and to GAN that such a business combination would not be
advantageous to us, we entered into discussions with Aceralia Corporacion
Siderurgica, S.A. ("Aceralia") regarding a potential cash investment in AHMSA.
On February 23, 2000, we entered into a non-binding letter of intent with
Aceralia providing for the creation of a joint venture.
Subject to Mexican bankruptcy law, on April 26, 2000, we entered into a
non-binding letter of intent with the Steering Committee setting forth a
framework for our restructuring. The letter of intent provided for three
alternative plans for the restructuring of our indebtedness. Plan A provided
for a restructuring in connection with a U.S.$400 million equity investment in
AHMSA by Aceralia. The letter of intent further provided that, if we failed to
enter into an acceptable agreement with Aceralia in order to implement Plan A
by June 15, 2000, then the parties agreed to pursue Plan B, which provided for
our restructuring independent of a business combination transaction. Plan C,
which was to be pursued if Plan B was not implemented by August 15, 2000,
provided for an exchange by GAN of its entire equity interest in AHMSA for all
of the capital stock of a debt-free MICARE and up to 6% of the capital stock in
AHMSA (based on the success of certain asset sales).
60
By letter dated July 19, 2000, the Steering Committee informed us that they
would not approve a restructuring involving a joint venture with Aceralia
(which was separate and apart from Plan A). The Steering Committee has informed
us that they rejected the proposal because in their view (a) Aceralia did not
provide a firm commitment, (b) they considered the up-front cash payment to be
paid to AHMSA to be too low, (c) Aceralia would manage and control the joint
venture, (d) there was no assurance that the joint venture would generate cash
flow for AHMSA, (e) AHMSA would have been obligated to supply to the joint
venture substantial raw or unfinished materials at cost for 20 years, and (f)
they were doubtful of the ability of AHMSA to generate payments from the joint
venture sufficient to pay the restructured debt. Since then we have been
working with the Steering Committee to agree upon a restructuring plan along
the lines of Plan B outlined in the April 26, 2000 letter.
Subject to Mexican bankruptcy law, on August 25, 2000 we entered into a
non-binding term sheet for the restructuring of our outstanding indebtedness
(which was amended and restated on September 12, 2000) along the lines of Plan
B of the April 26 letter.
On September 12, 2000, we along with representatives of the Steering
Committee made a presentation to certain of our creditors who had signed a
confidentiality agreement, regarding the terms of the proposed restructuring as
outlined in the September 12, 2000 term sheet.
From September 2000 through May 2001 we negotiated the terms of certain of
the essential documents governing the terms of the restructuring plan with the
Steering Committee and their advisors. These documents included the Credit
Agreement, the Indenture, the new Estatutos, the agreements governing the AHMSA
Creditor Voting Trust, the Stock Option Agreement, the Company Agreement and
the Registration Rights Agreement. These negotiations included changes to the
terms of the September 12, 2000 term sheet, as well as negotiation of more
detailed terms and conditions.
On May 29, 2001, we signed a non-binding letter of intent with the Steering
Committee in which we and the Steering Committee agreed to the terms of a
restructuring substantially along the lines set forth in the form of seven
agreements which were attached to the letter of intent. The letter of intent
also set forth our intention and the intention of the Steering Committee to
work towards a prompt filing of a registration statement relating to the
restructuring on the understanding that no such registration statement would be
filed until the terms of the GAN restructuring had been agreed upon.
From June 2001 to the present, our representatives and representatives of
the Steering Committee have met to draft this registration statement and to
negotiate the terms of the remaining documents governing the restructuring. We
also understand that during this time period representatives of GAN have been
negotiating the terms of a proposed restructuring with GAN's creditors.
BASED ON DISCUSSIONS WITH MEMBERS OF THE STEERING COMMITTEE OF OUR GENERAL
CREDITORS, WE BELIEVE THAT THOSE MEMBERS OF THE STEERING COMMITTEE (OTHER THAN
WELLS FARGO BANK MINNESOTA, N.A. IN ITS CAPACITY AS TRUSTEE FOR OUR EXISTING
NOTES), WHICH HOLD APPROXIMATELY U.S.$753.9 MILLION IN PRINCIPAL AMOUNT OF OUR
EXISTING INDEBTEDNESS, REPRESENTING APPROXIMATELY 40.8% OF THE OUTSTANDING
INDEBTEDNESS, INTEND TO CONSENT TO THE RESTRUCTURING PLAN, SUBJECT TO
SATISFACTORY FINAL DOCUMENTATION, AND SUBJECT TO OUR AND OUR AFFILIATES'
PROMPTLY PROCEEDING TO IMPLEMENT THE RESTRUCTURING PLAN AND LIFT OUR SUSPENSION
OF PAYMENTS.
Developments Regarding Operations During Suspension of Payments
Notwithstanding the relief from debt service and collection actions afforded
by the suspension of payments proceeding, our financial condition, results of
operations, and cash flow have continued to deteriorate since we obtained the
judicial declarations of suspension of payments on May 25 and May 28, 1999.
These adverse
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developments have been due, among other things, to general economic and
industry conditions including a general decline in steel prices and a general
increase in energy prices, the effect of suspension of payments, and other
conditions both within and outside of our control, and include the following:
. We have been unable to obtain financing for our operations and capital
expenditures, other than advance payments from customers, accelerated
payments of accounts receivable in exchange for discounted terms and
delayed payments to certain suppliers. These forms of financing are of
limited amounts and contain onerous terms.
. A number of our suppliers have for the most part required either cash on
delivery or advance deposit of the purchase price of goods and services
purchased, increasing our working capital requirements. As a result, we
have ceased to use these suppliers to the extent practicable.
. We have been unable to generate sufficient cash flow to adequately fund
our operations. As a result,
(a) as of September 30, 2001, we have not made required withholding tax
payments for 2001 in excess of Ps.260.0 million to the Mexican
government, and
(b) we have not made necessary capital expenditures to permit the
continued extraction of raw materials necessary for the production of
steel, requiring us to purchase more costly raw materials from third
party suppliers. We are no longer able to pay amounts due to such
suppliers in a timely manner and we do not anticipate being able to
do so in the foreseeable future.
. We have either been unable to obtain necessary performance bonds
required by our customers, or have been able to obtain such bonds at
costs far in excess of historical levels.
. Arrest warrants have been issued for our Chairman and our Chief
Financial Officer, related to alleged fraud at an affiliated company.
The individuals have obtained a stay of execution of the warrants, and
we believe that the allegations are unfounded and are being used as a
collection tactic by a creditor of the affiliated company.
. Due to layoffs and resignations, our white-collar workforce has been
reduced by 26.0% and our blue-collar workforce has been reduced by 5.6%.
Steps Taken to Improve Operations
During the suspension of payments proceeding, we have taken the steps
outlined below in an effort to improve our business, financial condition,
results of operations, and cash flow. While we believe that these steps have in
the aggregate reduced the adverse effect on our business, financial condition,
results of operations and cash flow, they nonetheless continue to deteriorate.
Unless either (a) we obtain additional financing and experience an improvement
in our results of operations or (b) there is a general increase in steel
prices, we believe that remaining in suspension of payments will eventually
result in either a shut-down of our operations and a distress sale of our
assets not as a going concern or seizure of our assets by the Mexican
government for nonpayment of taxes.
. We have terminated both union and non-union employees, and have extended
the time period for the payment of severance.
. Since July 2001, we have been deferring ten percent of the salaries of
substantially all employees with the rank of manager or higher
(approximately 189 employees).
. We have sold and continue to market for sale assets not directly related
to our steel and coal mining businesses to fund operations, even though
we had a non-binding agreement-in-principle to use the proceeds from the
sale of certain of those assets to make payments to our creditors upon
our emergence from suspension of payments.
. We have explored merger, sale, and joint venture transactions with
potential strategic partners.
. We have sought governmental permission to exploit the methane gas assets
contained in our coal mines.
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Emergence from Suspension of Payments
The restructuring plan is a voluntary agreement between us and the
consenting creditors that is independent of the suspension of payments
proceeding. The terms of the restructuring plan are not embodied in any single
document, but reflect the terms of a suspension of payments settlement
agreement to be entered into between us and certain representatives of the
creditors and the documents that will be included as exhibits to the suspension
of payments settlement agreement, including the credit agreement, the
indenture, the Supplemental Share Trust Agreement, the agreements governing the
AHMSA Creditor Voting Trust, the Stock Option Agreement and the Registration
Rights Agreement. The forms of those documents are filed as exhibits to the
Registration Statement of which this Prospectus and Consent Solicitation is a
part.
If the conditions to the closing of the restructuring plan are satisfied, we
will petition the court to voluntarily lift our suspension of payments. Once
our suspension of payments is lifted:
. We will no longer be subject to court supervision and we will not be
entitled to the benefit of the suspension of payments law.
. All creditors who consent to the restructuring plan will: (a) have their
claims recognized by us in a bulk recognition filed with the Mexican
Bankruptcy Court, (b) will be entitled to receive the consideration
described in this Prospectus and Consent Solicitation, regardless of
what they may have been entitled to receive in the suspension of
payments proceeding, and (c) will waive all claims against us relating
to our pre-existing debt and all conduct prior to the closing of the
restructuring plan.
. All creditors who do not consent to the restructuring plan, whether by
formally rejecting the restructuring plan or by failing to consent to
the restructuring plan, will not have their claims recognized by us, but
will retain the full rights that they had prior to our entering into
suspension of payments; provided that holders of Old Notes who consent
to the restructuring plan will be deemed to have consented to amendments
to the existing indentures governing those securities that on the date
of the lifting of the suspension of payments will have the effect of
removing substantially all of the negative covenants and events of
default (other than for non-payment), which amendments will be binding
on non-consenting holders of Old Notes. See "Risk Factors--Additional
Risks to Holders of Our Indebtedness Who Do Not Consent to the
Restructuring Plan."
Terms of the Restructuring Plan
Creditors who consent to the restructuring plan will receive a share of the
consideration described below. Under the restructuring plan, claims against us
are generally treated in one of five ways.
(1) Capital Leases
Those capital leases that have been approved by the court overseeing our
suspension of payments proceeding will continue in full force and effect under
the restructuring plan.
(2) Preferred Claims
Under the restructuring plan, claims which we believe are entitled to a
preference will be treated as "Preferred Claims." These claims are held by
Bancomext, Banca Cremi, S.N.C. and Banco Santander S.A. (which Banca Cremi and
Banco Santander claims relate to loans to finance the construction of housing
for our employees, who pay for the homes through deduction from their
salaries). In general, the holders of these claims will be paid in full,
pursuant to their existing agreements, or pursuant to separately negotiated
agreements. There are approximately U.S.$24.6 million of these claims.
(3) Indebtedness for Borrowed Money
Under the restructuring plan, the following are treated as claims relating
to indebtedness for borrowed money: (a) holders of our Old Notes (approximately
U.S.$520.7 million); (b) claims for indebtedness for
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borrowed money of our subsidiary MICARE (approximately U.S.$156.6 million); (c)
claims under the Old SEN Facility (approximately U.S.$227.3 million); and
(d) other claims for indebtedness for borrowed money (approximately U.S.$917.4
million). There are approximately U.S.$1,846.6 million of these claims in the
aggregate. Under the restructuring plan, holders of these claims will receive
their pro rata share (based on the outstanding principal and accrued interest
due as of May 25, 1999, without deductions in the case of claims under the Old
SEN Facility for any cash collateral held or applied by JPMorgan Chase Bank as
the agent under such facility) of the consideration set forth below, regardless
of what they might have been entitled to in the suspension of payments
proceeding; provided that (a) holders of old notes will only be entitled to
receive their pro rata share of the consideration in the form of new notes and
our other creditors will be entitled to receive their pro rata share of the
consideration in the form of either new notes or new loans, and (b) that MICARE
creditors may elect to receive Class A Loans instead of Class B Loans (a
"MICARE A/B Election"), in which event the Class A Loans received by other
creditors will be decreased proportionally and the Class B Loans received by
other creditors will be increased proportionally:
. An aggregate principal amount of our new Floating Rate Series A Senior
Secured Notes due 2009 (the "New Series A Notes") issued under our new
indenture (the "New Indenture") and our new Class A Secured Loans (the
"New Class A Loans") under our new credit agreement (the "New Credit
Agreement"), denominated in U.S. dollars of approximately U.S.$1,115.4
million, which is equal to U.S.$1,140.0 million less the amount of
claims which we believe are entitled to a preference (currently
estimated to be US$24.6 million). See "Description of New Credit
Agreement" and "Description of New Notes."
. Net cash proceeds, if any, from the sale of the following non-core
assets (the "Subject Assets'') on or prior to the closing of the
restructuring plan, which are estimated to be approximately U.S.$0.0
million (see "--Sale of Assets"):
(a) our oxygen plant;
(b) our railroad cars;
(c) our electric plant;
(d) certain of our real estate;
(e) our joint venture rights (including stock in joint ventures); and
(f) certain other of our non-core assets.
. An aggregate principal amount of new 4% Series B Senior Secured Notes
("New Series B Notes" and, together with the New Series A Notes, the
"New Notes") and new Class B Secured Loans (the "New Class B Loans" and,
together with the Class A Loans, the "New Loans") denominated in U.S.
dollars equal to U.S.$180.0 million less 1.5 times the aggregate amount
of net cash proceeds from the sale of the Subject Assets paid to our
creditors at closing (to the extent the aggregate amount of such
proceeds does not exceed U.S.$120.0 million). See "Description of Credit
Agreement" and "Description of New Notes."
. 302,000,000 shares of our common stock that are required to be deposited
in the AHMSA Creditor Voting Trust representing 40% of our outstanding
common stock on a fully diluted basis, subject to a three-year purchase
option and additional two-year right of first refusal in favor of a
special purpose vehicle created by our parent company, and in the case
of shares to be issued to the creditors of our subsidiary MICARE, a
nine-year purchase option in our favor. See "--Mechanics of Common Stock
Issuance" and "Description of the AHMSA Creditor Voting Trust."
. A restructuring fee of U.S.$20.0 million in cash plus the amount of
certain documented expenses of the Steering Committee and the SEN
Committee incurred after April 1, 2001 not to exceed U.S.$200,000 per
month that will be used first to pay certain expenses of the Steering
Committee and the SEN Committee, and then to pay a pro rata fee to all
creditors, U.S.$7.0 million of which will be paid upon
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the closing of the restructuring plan and the balance of which will be
paid quarterly over a nine-month period, without interest (such net
amount to be paid to the creditors estimated to be U.S.$ ). The
Steering Committee has informed AHMSA that U.S.$2.0 million of the
restructuring fee will be set aside in an escrow account for
indemnification, if any, of the trustee for the AHMSA Creditor Voting
Trust.
. An additional fee in cash equal to a notional three months of interest
on the restructured debt (estimated to be approximately U.S.$18.5
million) payable over an eighteen-month period, without interest.
. In addition, creditors of MICARE will receive U.S. $35.4 million
aggregate principal amount of our Subordinated Promissory Notes, Series
D (the "New Series D Notes"), and U.S. $27.7 million aggregate principal
amount of our Subordinated Promissory Notes, Series E (the "New Series E
Notes" and, together with New Series D Notes, the "New Subordinated
Notes").
Holders of our Old Notes will be entitled to receive indebtedness under the
restructuring plan in the form of New Notes. Holders of other indebtedness for
borrowed money may elect to receive the same consideration as holders of Old
Notes, or (1) in the case of holders of claims for indebtedness of borrowed
money of our subsidiary MICARE ("Old MICARE Loans"), such creditors will
receive a separate tranche of New Class A Loans, and, unless they make a MICARE
A/B Election, New Class B Loans for such creditors of MICARE (the "Tranche
MICARE-A Loans" and the "Tranche MICARE-B Loans" and, together, the "Tranche
MICARE Loans"); (2) in the case of holders of claims under the Old SEN
Facility, such creditors will receive a separate tranche of New Class A Loans
and New Class B Loans for such creditors (the "Tranche SEN-A Loans" and the
"Tranche SEN-B Loans" and, together, the "Tranche SEN Loans"); and (3) other
holders of claims for indebtedness for borrowed money ("Old AHMSA Loans"), will
receive a separate tranche of New Class A Loans and New Class B Loans for such
creditors (the "Tranche AHMSA-A Loans" and the "Tranche AHMSA-B Loans" and,
together, the "Tranche AHMSA Loans"). The Tranche MICARE Loans, the Tranche SEN
Loans and the Tranche AHMSA Loans are referred to in this Prospectus and
Consent Solicitation collectively as the "New Loans." The Old MICARE Loans, the
loans under the Old SEN Facility and the Old AHMSA Loans are referred to in
this Prospectus and Consent Solicitation collectively as the "Old Loans."
Notwithstanding the foregoing, holders of claims under our Old SEN Facility
will only receive Tranche SEN Loans instead of Tranche AHMSA Loans if one or
more of the steel buyers agree to enter into new steel contracts.
As a condition to receiving the consideration of the restructuring plan, all
creditors (other than our suppliers) will be required to agree to deposit the
AHMSA common stock to be received in connection with the restructuring into the
AHMSA Creditor Voting Trust. See "Description of AHMSA Creditor Voting Trust."
We currently own Old Series A Notes for which the original issue price plus
accrued original issue discount and interest to May 25, 1999 is U.S.$1.1
million, Old Series B Notes for which the original issue price plus accrued
original issue discount and interest to May 25, 1999 is U.S.$5.3 million and
Old Discount Convertible Notes for which the accreted value and interest to May
25, 1999 is U.S.$5.6 million. These Old Notes will be cancelled upon
consummation of the restructuring plan.
(4) Suppliers
Suppliers to whom amounts are outstanding for goods or services supplied on
or prior to May 25, 1999 have claims that total approximately U.S.$125.4
million.
Suppliers with a claim for pre-May 25, 1999 obligations of less than Ps.2.0
million will receive non-interest bearing promissory notes denominated in pesos
with monthly payments over a nine-month period in satisfaction of their claims.
Suppliers with a claim for pre-May 25, 1999 obligations of Ps.2.0 million or
more (a) will receive promissory notes denominated in dollars bearing interest
at the LIBO rate plus 2% per annum with maturities of twenty-four months and
quarterly principal and interest payments in satisfaction of their claims, and
(b) will be obligated to sell a pro rata portion of U.S.$40.0 million of claims
to certain individual shareholders of AHMSA (who are also AHMSA's affiliates)
in exchange for a pro rata portion of 22,108,346 shares of our common stock,
65
which will represent approximately 2.9% of the common stock outstanding
following consummation of the restructuring plan. Those claims will be
exchanged for non-interest bearing, non-amortizing promissory notes denominated
in dollars with a maturity of in favor of those individual shareholders.
(5) Equity Holders
Our current equity holders will maintain their existing interests subject to
dilution by the new common stock being issued pursuant to the terms of the
restructuring plan.
Mechanics of Common Stock Issuance
Under the restructuring plan, holders of our Old Notes and Old Loans shall
receive 302,000,000 shares of our common stock representing 40% of our
outstanding common stock on a fully diluted basis, subject to a three-year
purchase option and an additional two-year right of first refusal in favor of a
special purpose vehicle created by our parent company, and in the case of
shares to be issued to the creditors of MICARE, a nine-year purchase option in
our favor. In order that this issuance of our common stock may be accomplished
in a tax efficient manner under Mexican law, it will be accomplished as follows:
. GAN will form a new wholly-owned subsidiary ("NewCo"), which will assume
U.S.$551.2 million of AHMSA's indebtedness in exchange for an equal U.S.
dollar amount claim against us.
. NewCo will then capitalize its claim against us in exchange for
397,127,498 new shares of AHMSA's common stock, representing 52.6% of
AHMSA's outstanding capital stock on a fully diluted basis.
. The holders of our Old Notes and Old Loans will then contribute the
U.S.$551.2 million of indebtedness to NewCo in exchange for the issuance
of 302,000,000 shares of NewCo's common stock representing 76.0% of
NewCo's outstanding capital stock on a fully diluted basis.
. NewCo will then merge into AHMSA, so that AHMSA will be the surviving
entity. Each share of NewCo common stock will be converted into a share
of our common stock. As a result of the merger, GAN, the holders of the
Old Notes and Old Loans and our other shareholders will own 50.1%, 40.0%
and 9.9%, respectively, of our outstanding capital stock on a fully
diluted basis.
Holders of Old Notes and Old Loans that receive shares of our common stock
pursuant to the restructuring plan must deposit such shares in the AHMSA
Creditor Voting Trust in exchange for interests in the AHMSA Creditor Voting
Trust. See "Description of AHMSA Creditor Voting Trust."
Supplemental Share Trust
To secure our obligations with respect to the New Loans and the New Notes,
GAN will transfer title of shares of our common stock representing 20% of our
outstanding common stock on a fully diluted basis to a trust for the benefit of
the holders of New Loans and New Notes (the "Supplemental Share Trust"). The
creditors of GAN will have a security interest in the shares of AHMSA's Common
stock held in the Supplemental Share Trust, but the security interest will be
subordinate to the interest of the Supplemental Share Trust. See "Description
of New Credit Agreement--Payment of Principal and Interest" and "Description of
New Notes--General."
Other Collateral
The New Loans and the New Notes also will be secured ratably by
substantially all of our assets located in the United States (if any) and
substantially all of the following assets located in Mexico: (i) all real
estate and equipment owned by us; (ii) all shares directly owned by us; (iii)
subject to the consent of CFE and certain U.S. dollar limitations, all accounts
receivable from CFE; (iv) all Mexican trademarks; (v) the Subject Assets; (vi)
all rights, including rights to minerals and certain other natural resources,
arising out of or derived from exploitation
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concessions and/or rights, and certain exploration concessions and/or rights;
and (vii) all insurance policies related to the above; provided, however, (w)
the Tranche SEN Loans will have a first priority claim to the German Contract
Receivables, (x) the Tranche MICARE Loans will have a first priority claim to
the equity in and assets of MICARE, (y) the Series B Loans and Series B Notes
will have a first priority claim to the subject assets, and (z) holders of
liens recognized by the court overseeing our suspension of payments case will
have a first priority claim to the assets subject to such liens to the extent
recognized by the court. We do not currently own any assets located in the
United States, and it is unlikely that we will own any such assets in the near
future with greater than a nominal value, either individually or in the
aggregate.
Sale of Assets
In order to generate cash, we may sell or sell and leaseback the Subject
Assets prior to the closing date of the restructuring plan, including but not
limited to certain oxygen plants, railroad cars, power plants and other
non-core assets, provided that the aggregate negative annual EBITDA impact is
not more than U.S. $11.0 million. The Subject Assets not sold on or prior to
the closing date for the restructuring plan will be placed in one or more
trusts to be used in the restructuring.
We have agreed to sell our lime processing plant for U.S.$19.0 million,
subject to the approval of the Mexican Bankruptcy Court; however, we have been
forced to use the U.S.$8.0 million of the proceeds from the sale of the lime
processing plant received to date to fund operations. See "AHMSA's
Business--Mining Operations." We are also seeking purchasers for our oxygen
plants and power plants. Although to date we have received bids for our oxygen
plants and for certain other assets, no agreements have been reached for the
sale of any such assets, nor can there be any assurance that if we choose to
sell assets, we will be able to do so on commercially reasonable terms, if at
all.
As we sell Subject Assets after the closing date, the net proceeds from such
sales will be applied to redeem the New Notes and repay the New Loans. See
"Description of New Notes" and "Description of New Credit Agreement." Any net
proceeds from the sale of Subject Assets that are received within six months of
the closing date (to the extent such proceeds, when taken together with net
proceeds from the Sale of Subject Assets prior to the closing date, do not
exceed U.S.$120.0 million) will be applied to repay the New Series B Notes and
the New Class B Loans by an amount equal to 1.5 times the amount of such net
proceeds.
Notwithstanding the foregoing, after net cash proceeds from the sale of
Subject Assets have reached U.S.$120.0 million, the next U.S.$60.0 million of
net cash proceeds from such sales may, at AHMSA's option, be deferred until the
first payment date following the first anniversary of the closing date for the
restructuring plan provided that we have a cash flow deficit in the first year
after the closing date of the restructuring plan and have delivered notice to
that effect. If we have a cash flow deficit in the first year after the closing
date of the restructuring plan, we may use such funds to the extent necessary
to cover such cash flow deficit in the first year after the closing date of the
restructuring plan. To the extent such funds are not used in this manner, they
will be applied to repay the New Notes and the New Loans on a pro rata basis.
Conditions to the Restructuring Plan
Our obligations and the obligations of our creditors to consummate the
transactions contemplated by the restructuring plan are subject to the
satisfaction of the following conditions on or prior to the closing date for
the restructuring plan:
. all holders of preferred claims against us recognized in the suspension
of payments proceeding must have consented to the restructuring plan and
agreed to be bound by the terms of the suspension of payments settlement
agreement (the "Settlement Agreement") to be filed with and approved by
the Mexican Bankruptcy Court;
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. all other holders of claims against us (including supplier claims),
other than holders of claims with an aggregate principal amount of less
than U.S.$25.0 million, must have consented to the restructuring plan
and agreed to be bound by the terms of the Settlement Agreement;
. the Securities and Exchange Commission must have declared the
registration statement containing this Prospectus and Consent
Solicitation effective and not have instituted any stop order with
respect to the registration statement;
. the Civil Court of First Instance for the Judicial District of Monclova,
Coahuila, United Mexican States, must have lifted our suspension of
payments and the suspension of payments of each of our subsidiaries;
. we must have delivered disclosure schedules to the New Credit Agreement
entered into pursuant to the restructuring plan that have not been
objected to by the holders of 40% or more of claims who are entitled to
receive promissory notes under the New Credit Agreement;
. the aggregate amount of indebtedness that we have incurred since
December 31, 2000 (net of repayments of indebtedness made during such
period) must not exceed U.S.$40.0 million;
. a material adverse change to our business, operations or financial
condition must not have occurred since December 31, 2000;
. we must have U.S.$50.0 million of cash to pay restructuring fees and
expenses associated with the restructuring plan;
. the creditors of GAN must have approved the restructuring plan to the
extent required under the terms of the GAN suspension of payments and
GAN must have emerged from suspension of payments on terms satisfactory
to GAN, us and a majority of the outstanding claims against us;
. all necessary Mexican governmental approvals must have been obtained for
the restructuring plan (including necessary approvals from the Mexican
National Commission of Foreign Investment);
. the creditors shall have received favorable legal opinions of United
States and internal and external Mexican counsel to us and GAN;
. each of the parties approving the restructuring plan must have granted a
general release to each other party for any actions or failures to act
in connection with the Old Notes and Old Loans occurring on or prior to
the closing date;
. our suppliers must have agreed to a payment schedule for outstanding
suppliers' credits reasonably acceptable to us and our creditors;
. Bancomext must have agreed that no principal payments in respect of its
preferred claims against us are due prior to 2003; and
. Holders of no more than U.S.$35.5 million of aggregate principal amount
of Old Loans elect to receive New Notes under the New Indenture.
These conditions may be waived by us and the holders of a majority of the
outstanding claims against us.
Alternatives to the Restructuring Plan
We are proposing the restructuring plan described in this Prospectus and
Consent Solicitation because we believe that it is the best alternative
available to us at this time. In our opinion we have only three alternatives to
the restructuring plan at this time and provides our creditors with the
opportunity for a greater recovery than they would receive if we remained in
suspension of payments. First, we could remain in suspension of payments, which
unless either (a) we obtain additional financing and experience an improvement
in our operations or (b) there is a general increase in steel prices, we
believe will eventually result in either a shut-down of our operations and a
distress sale of our assets not as a going concern or seizure of our assets by
the Mexican government for nonpayment of taxes. Second, we could seek to
negotiate a different restructuring proposal with the Steering
68
Committee of our creditors; however the Steering Committee has informed us that
it is unwilling to accept any further economic changes to the restructuring
plan unless the creditors receive additional concessions regarding equity
interests and governance rights and changes in management that are unacceptable
to our controlling stockholder. Third, we could seek a sale of the company,
which has been done without the receipt of an offer acceptable to our
controlling stockholder.
Payment of the Restructured Indebtedness Requires Substantial Improvements in
Our Business
The restructuring plan is highly risky, and we will not be able to meet our
restructured obligations unless we experience a substantial improvement in our
financial condition, results of operations and cash flow. See "Risk Factors."
Such an improvement is possible if all of the following occur:
. a 25% increase in steel prices in 2002, with additional increases
throughout the term of the restructured obligations;
. the sale of coal from a mine for which we have not obtained the
necessary mining concessions;
. commencing in 2004 the sale of approximately U.S.$12.5 million of coal
to an energy plant that is not yet permitted, constructed or financed;
. the availability of up to U.S.$130.0 million of customer advances and
the ability to incur U.S.$45.0 million of additional indebtedness in
2003;
. no material increase in interest rates over the term of the restructured
obligations; and
. continued accelerated collection of accounts receivable without the
continuation of historically high prepayment discounts to customers.
If one or more of the preceding events do not occur, then it is likely that
we will not be able to meet our restructured obligations. In that event, we
could be forced to seek further protection under, or our creditors could
involuntarily force us into insolvency proceedings under, the recently adopted
Law of Mercantile Insolvency Proceedings, which is substantially less favorable
to debtor companies than the current suspension of payments law under which we
are operating. We would then have to either negotiate a new restructuring plan
or be declared bankrupt, thereby forcing us to liquidate our assets.
Consequences of Payment Default Under the Restructured Debt
If we are unable to make payments when due on the new loans and the new
notes (including upon acceleration following other types of events of default),
holders of the new loans and new notes will be entitled to enforce all remedies
available under applicable law, including:
. Foreclosing upon the collateral for the new loans and new notes;
. In the case of the shares in the Supplemental Share Trust, selling such
shares, distributing them to the holders of the new loans and new notes,
and/or exercising any other rights of ownership; and
. Forcing us into insolvency proceedings under the newly adopted Law of
Mercantile Insolvency Proceedings, which is substantially less favorable
to debtor companies than the current suspension of payments law under
which we are operating.
In addition the following changes will be made to our equity arrangements:
. All shares used to pay interest on the new loans and new notes will be
transferred to the AHMSA Creditor Voting Trust;
. The AHMSA Creditor Voting Trust will (a) have the right to designate a
majority of our Board of Directors, and (b) direct the trustee for the
Supplemental Share Trust in the voting of any shares remaining in the
Supplemental Share Trust.
There can be no assurance that holders of new loans and new notes will be
successful in asserting such remedies. In addition, we believe that it is
likely that upon a payment default holders of the new loans and new notes would
receive less than the outstanding principal and interest due to them.
69
CONSENT PROCESS
The following is a brief summary regarding the procedures for consenting to
the restructuring plan. Additional information regarding consent procedures is
set forth in the form of consent accompanying this Prospectus and Consent
Solicitation.
Consent Instructions
This Prospectus and Consent Solicitation is accompanied by a form of consent
(or a master form of consent, as the case may be), which you should use to
consent to or reject the restructuring plan. We are distributing these
materials to the holders of our Old Loans and the registered, nominal and
beneficial owners of our Old Notes, provided that registered and nominal
holders of Old Notes are not entitled to consent to or reject the restructuring
plan, except to the extent that they do so on behalf of beneficial holders of
Old Notes. See "--Brokerage Firms, Banks and other Record Holders of Old
Notes." In light of the benefits to be attained under the restructuring plan by
our creditors, we recommend that you consent to the restructuring plan and
return the form of consent (or a master form of consent) prior to the consent
deadline referred to below.
FORMS OF CONSENT (OR MASTER FORMS OF CONSENT) MUST BE RECEIVED BY THE
SOLICITATION AGENT ON OR BEFORE 5:00 P.M., NEW YORK CITY TIME, ON .
FORMS OF CONSENT (OR MASTER FORMS OF CONSENT) RECEIVED AFTER THAT TIME MAY NOT
BE COUNTED. ANY FORM OF CONSENT (OR MASTER FORM OF CONSENT) WHICH IS EXECUTED
BY A CREDITOR BUT WHICH DOES NOT INDICATE A CONSENT OR REJECTION OF THE
RESTRUCTURING PLAN WILL BE DEEMED A CONSENT TO THE RESTRUCTURING PLAN. FAILURE
TO DELIVER A PROPERLY COMPLETED FORM OF CONSENT TO THE SOLICITATION AGENT BY
THE CONSENT DEADLINE WILL HAVE THE SAME EFFECT AS REJECTING THE RESTRUCTURING
PLAN.
In connection with our request for approval of the restructuring plan, we
will not accept or count any form of consent (or master form of consent)
received after the consent deadline, except to the extent that we determine
otherwise. We expressly reserve the right to amend, at any time and from time
to time, the terms of the restructuring plan. If we make a material change in
the terms of the restructuring plan or if we waive a material condition of the
restructuring plan, we will circulate additional solicitation materials and
will extend the consent deadline, in each case to the extent required by law.
The form of consent and master form of consent will include:
. an election (for the holders of Old Loans) to receive either New Loans
or New Notes;
. a form for MICARE creditors to make a MICARE A/B Election;
. an agreement to be bound by the Suspension of Payments Settlement
Agreement;
. an appointment of designees of HSBC Financial Services (Cayman) Limited,
as co-trustee for the AHMSA Creditor Voting Trust, as attorneys-in-fact
with the power to execute on such holders behalf certain agreements to
be entered into among AHMSA, the AHMSA Creditor Voting Trust and such
holders, including the Company Agreement, Share Transfer and Voting
Agreement, Stock Option Agreement and Registration Rights Agreement;
. a consent (in capacity as a shareholder of NewCo) to the merger with and
into us and the adoption of the new Estatutos;
. a form of letter of transmittal, which must be completed by beneficial
owners of Old Notes who consent to the restructuring plan in order to
tender their beneficial interests in the Old Notes in exchange for
restructuring plan consideration; and
. a form of power of attorney and assignment, which must be completed by
holders of Old Loans that consent to the restructuring plan in order to
grant us the irrevocable right to retrieve the promissory notes
evidencing such indebtedness from the Mexican Bankruptcy Court upon the
closing of the restructuring plan.
70
The form of consent and master form of consent will also require that
holders of Old Loans and beneficial holders of Old Notes provide the following
information in order to permit the trustee of the AHMSA Creditor Voting Trust
to issue certificates representing interests in the trust ("Voting Trust
Certificates") to such creditors:
. the name of such creditor;
. its designated representative with respect to its trust interests and
the representative's address, telephone number, facsimile number, e-mail
address and specimen signature;
. the address to which such creditor's Voting Trust Certificates should be
delivered; and
. a representation that such creditor and any participant in such
creditor's claim is not a shareholder of GAN or an affiliate of AHMSA,
GAN or any shareholder of GAN.
In connection with our request for approval of the restructuring plan, we
will not accept or count any:
. forms of consent of beneficial owners of Old Notes (or master forms of
consent indicating the consent of beneficial holders of Old Notes) that
do not contain a properly completed letter of transmittal, and with
respect to which the procedures set forth in the form of consent (or
master form of consent) have not been followed with respect to tendering
Old Notes; or
. forms of consent of holders of Old Loans that do not contain a properly
completed power of attorney and assignment.
If a form of consent (or master form of consent) is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation
or other person or entity acting in a fiduciary or representative capacity,
such person must so indicate and, unless otherwise determined by us, must
submit evidence satisfactory to us of such person's authority.
The method of delivery of forms of consent and master forms of consent to be
delivered to the solicitation agent is at the election and risk of each
beneficial owner and nominal holder of the Old Notes and each holder of the Old
Loans. Except as otherwise provided in this Prospectus and Consent
Solicitation, such delivery will be deemed made only when actually received by
the solicitation agent. Instead of effecting delivery by mail, it is
recommended that you use an express courier, overnight or hand delivery service
and deliver a fax copy to the solicitation agent. In all cases, sufficient time
should be allowed to assure timely delivery.
Subject to applicable law, we reserve the absolute right to reject any and
all forms of consent (or master forms of consent, as the case may be) not in
proper form the acceptance of which would, in our or our counsel's opinion, not
be in accordance with the provisions of applicable law. Subject to applicable
law, we further reserve the right to waive any defects or irregularities or
conditions of delivery as to any particular form of consent (or master form of
consent). Other than with respect to the requirements of the trustee of the
AHMSA Creditor Voting Trust, our interpretation of the terms and conditions of
the restructuring plan (including the forms of consent and the master forms of
consent), unless otherwise required under applicable law, shall be final and
binding on all parties. Unless waived or as required by applicable law, any
defects or irregularities in connection with deliveries of forms of consent (or
master forms of consents) must be cured within such time as we (or any relevant
governmental authority) determines. Neither AHMSA nor any other person or
entity will be under any duty to provide notification of defects or
irregularities with respect to the delivery of forms of consent (or master
forms of consent) and neither AHMSA nor any other person or entity will incur
any liability for failure to provide such notice. Unless otherwise required by
applicable law, delivery of such forms of consent (or master forms of consent)
will not be deemed to have been made until such irregularities have been cured
or waived. Forms of consent (or master forms of consent) as to which any
irregularities have not been cured or waived before the voting deadline will
not be counted.
General Consent Procedures
You should complete only the form of consent corresponding to Old Loans that
you hold or Old Notes that you beneficially own on the record date. Creditors
who purchase Old Loans or Old Notes after the record date and who
71
wish to consent to or reject the restructuring plan must arrange with the
seller to receive proxies from such persons or the nominal holders through whom
such persons held their Old Loans or Old Notes on the record date.
Creditors who elect to vote on the restructuring plan should complete and
sign the form of consent (including power of attorney and assignment or the
letter of transmittal, as the case may be) in accordance with the instructions
on the form of consent, being sure to check the appropriate box entitled
"Consent to the restructuring plan" or "Reject the restructuring plan."
Creditors may not split their vote on the restructuring plan. Creditors must
vote all Old Loans held or Old Notes beneficially owned, as the case may be, in
the same way (that is, all "consent" or all "reject") even if, in the case of
beneficial owners of Old Notes, such Old Notes are owned through more than one
broker or bank.
You may receive multiple copies of this Prospectus and Consent Solicitation,
especially if you own Old Notes through more than one broker or bank. If you
submit more than one form of consent because you beneficially own Old Notes
through more than one broker or bank, be sure to indicate in item of
the form(s) of consent the names of ALL other brokers or other nominal holders
who hold Old Notes for you.
Beneficial Owners of Old Notes
A beneficial owner of Old Notes on the record date is eligible to consent to
or reject the restructuring plan regardless of whether the Old Notes were held
on the record date in such beneficial owner's name or in the name of a
brokerage firm, commercial bank, trust company or other nominal holder.
IF A BENEFICIAL OWNER'S CLAIM OR INTEREST IS A RESULT OF SUCH BENEFICIAL
OWNER'S OWNERSHIP OF OLD NOTES ON SUCH BENEFICIAL OWNER'S BEHALF IN THE NAME OF
A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINAL HOLDER, ONLY
THE BENEFICIAL OWNER MAY EXECUTE A FORM OF CONSENT WITH RESPECT TO SUCH CLAIM
OR INTEREST TO CONSENT TO OR REJECT THE RESTRUCTURING PLAN, PROVIDED THAT
BENEFICIAL OWNERS MUST TRANSMIT THEIR COMPLETED FORMS OF CONSENT EITHER TO THE
SOLICITATION AGENT OR OTHERWISE TO THE RECORD HOLDER, WHO MUST THEN RETURN
MASTER FORMS OF CONSENT (TOGETHER WITH THE CORRESPONDING ORIGINAL FORMS OF
CONSENT DELIVERED BY THE BENEFICIAL OWNERS) TO THE SOLICITATION AGENT WHICH
PROVIDE IN SUMMARIZED TABULAR FORM THE VOTES BY EACH BENEFICIAL OWNER. ALL SUCH
ACTIONS MUST BE COMPLETED PRIOR TO THE CONSENT DEADLINE. BECAUSE OF THE NUMBER
OF STEPS WHICH MAY BE NECESSARY FOR YOUR VOTE TO BE VALID, PLEASE ALLOW
YOURSELF SUFFICIENT TIME TO COMPLETE THE PROCESS.
Any beneficial owner as of the record date, holding Old Notes in physical
certificated form, registered in its own name or nominal holders voting for
their own account can vote by completing and signing the enclosed form of
consent, duly notarized, and returning the original directly to the
solicitation agent so that it is actually received by the solicitation agent
before the consent deadline of 5:00 p.m., New York City time, on ,
which may be extended at AHMSA's sole discretion.
By completing the letter of transmittal contained in the form of consent,
beneficial owners of Old Notes held in book-entry form will instruct the
nominal holder of such Old Notes to tender the Old Notes by book-entry transfer
to the account of the solicitation agent at DTC. Such transfer must be credited
to the account of the solicitation agent before the consent deadline in order
for such beneficial owner's consent to be counted. Beneficial owners of Old
Notes in physical certificated form must tender their Old Notes by delivering
them, duly endorsed for transfer, to the solicitation agent. Such delivery must
be received by the solicitation agent before the consent deadline in order for
such beneficial owner's consent to be counted.
Authorized signatories voting on behalf of more than one beneficial owner
must complete a separate form of consent for each such beneficial owner. Any
form of consent submitted to a nominal holder will not be counted
72
until such nominal holder either validates such form of consent or properly
completes and delivers a corresponding master form of consent to the
solicitation agent, accompanied by the corresponding original forms of consent
delivered by the beneficial owners.
With respect to Old Notes that are held through Euroclear or Clearstream,
see "--Special Procedures for Holders of Old Notes Held Through Euroclear or
Clearstream."
By submitting a form of consent consenting to or rejecting the restructuring
plan, you are certifying that you are the beneficial owner of the Old Notes
being voted, or an authorized signatory for such a beneficial owner. Your
submission of a form of consent will also constitute a request that you (or in
the case of an authorized signatory, the beneficial owner) be treated as the
beneficial owner of such securities for purposes of consenting to or rejecting
the restructuring plan.
Brokerage Firms, Banks and Other Record Holders of Old Notes
A brokerage firm, commercial bank, trust company or other nominee which is
the nominal holder on the record date of Old Notes for a beneficial owner of
Old Notes, or is a participant, directly or indirectly, in DTC, Euroclear or
Clearstream, each a clearing system, and is authorized to vote in the name of
such clearing system, directly or indirectly, pursuant to an omnibus proxy,
assignment letter form or similar document (as described below) and is acting
for a beneficial owner of Old Notes, may obtain the consent to or rejection of
the restructuring plan of the beneficial owner of such Old Notes, consistent
with customary practices for obtaining the votes of securities held in "street
name", in the following way:
. The nominal holder must obtain the consent or rejection of the
beneficial owners by forwarding to the beneficial owners the unsigned
forms of consent, together with a copy of this Prospectus and Consent
Solicitation, a return envelope provided by, and addressed to, the
nominal holder, and other materials requested to be forwarded.
. Each such beneficial owner must then indicate his, her or its vote on
the original form of consent, complete the information requested in the
form of consent (including the information in the letter of
transmittal), review the certifications contained in the form of
consent, execute the form of consent and return the original form of
consent to the nominal holder or to the solicitation agent.
. After collecting the forms of consent, the nominal holder should, in
turn, complete a master form of consent compiling the votes and other
information from the forms of consent (including instructions contained
in the forms of consent to tender Old Notes by book-entry transfer to
the account of the solicitation agent at DTC), execute the master form
of consent and deliver the original master form of consent (together
with the corresponding original forms of consent delivered by the
beneficial owners) to the solicitation agent so that it is actually
received by the solicitation agent before the consent deadline.
. The nominal holder should advise the beneficial owner that if it chooses
to return its form of consent to the nominal holder rather than to the
solicitation agent, it must return its form of consent to the nominal
holder by a date calculated by the nominal holder to allow it to prepare
and return the master form of consent to the solicitation agent so that
it is actually received by the solicitation agent before the consent
deadline.
A proxy intermediary on behalf of a nominal holder may follow the procedures
outlined in the preceding paragraph to vote on behalf of such beneficial owner.
Special Procedures for Holders of Old Notes Held Through Euroclear or
Clearstream
The solicitation agent will distribute this Prospectus and Consent
Solicitation, forms of consent and other materials to Euroclear and Clearstream
with a request that each such clearing system distribute such materials to the
beneficial owners of Old Notes through the participant firms holding accounts
in such clearing systems.
73
Participants in Euroclear and Clearstream should generally follow the
procedures set forth in the immediately preceding section ("--Brokerage Firms,
Banks and Other Record Holders") by using master forms of consent, with two
exceptions, as follows:
. The party executing the form of consent or master form of consent
(either the clearing system participant or the beneficial owner) should
send the original form of consent or master form of consent (accompanied
by the corresponding original forms of consent delivered by the
beneficial owners), upon execution, by overnight courier and a copy by
telecopy or facsimile to the solicitation agent. However, to be counted
for purposes of consent to or rejection of the restructuring plan, the
original of the form of consent or master form of consent (not merely a
telecopy or facsimile thereof) must be received by the solicitation
agent before the consent deadline. The party executing the form of
consent or master form of consent should retain a copy of the form of
consent or master form of consent.
. Each participant in Euroclear and Clearstream should also send a custody
instruction to Euroclear or Clearstream, as applicable, that repeats the
substance of the information contained in the executed forms of consent
or master forms of consent. Euroclear and Clearstream will forward duly
validated master forms of consent summarizing the instructions received
from their participants to the solicitation agent (accompanied by the
corresponding original forms of consent delivered by the beneficial
owners).
DTC
We expect that DTC, as a registered holder of Old Notes, will arrange for
its participants to vote by executing an omnibus proxy, assignment letter form,
or similar document in favor of its participants. It is expected that such
participants will validate, directly or indirectly, the forms of consent or
master forms of consent. We also expect that Euroclear and Clearstream, upon
the direction of their respective participants, will provide duly validated
master forms of consent summarizing the form of consent received from their
respective participants to the solicitation agent, thus confirming the validity
of signed forms of consent or master forms of consent.
Revocation of Votes; Withdrawal of Tendered Old Notes; Revocation of Powers of
Attorney for Old Loans
Except as otherwise provided in this Prospectus and Consent Solicitation and
in the form of consent (or master form of consent), forms of consent and master
forms of consent may be revoked at any time prior to the consent deadline. In
the case of forms of consent (or master forms of consent) of beneficial and
nominal holders of Old Notes, revocation of such forms of consent (or master
forms of consent) will constitute a withdrawal of the Old Notes tendered in
connection with such forms of consent (or master forms of consent). In the case
of forms of consent of holders of Old Loans, revocation of such ballots will
constitute revocation of the power of attorney and assignment giving us the
right to retrieve the promissory notes evidencing such Old Loans from the
Mexican Bankruptcy Court. To revoke a form of consent (or master form of
consent), a written or facsimile transmission notice of revocation must be
received by the solicitation agent at its address set forth herein prior to
5:00 p.m., New York City time, on the business day prior to the consent
deadline. Any such notice of revocation
. must specify the name of the person having delivered the form of consent
(or master form of consent) to be revoked;
. in the case of revoked form of consent (or master form of consent)
pursuant to which Old Notes were tendered by book-entry transfer, must
specify the account information necessary to transfer such Old Notes to
effect their withdrawal;
. in the case of revoked forms of consent pursuant to which Old Notes in
certificated form were tendered, must specify the name and address of
the person to whom such Old Notes should be sent to effect their
withdrawal; and
74
. must be signed by the person having delivered the form of consent (or
master form of consent) to be revoked in the same manner as the original
signature on the form of consent (or master form of consent), including
any required signature guarantees.
All questions as to the validity, form and eligibility (including time of
receipt) for such revocation and withdrawal notices will be determined by
AHMSA, whose determination shall be final and binding on all parties. Any forms
of consent revoked or deemed to be revoked will be deemed not to have been
validly delivered to the solicitation agent for purposes of counting consents
to and rejections of the restructuring plan.
Taxes
Certain United States federal income tax consequences of the exchange of
restructuring plan consideration for Old Notes and Old Loans pursuant to the
restructuring plan and of the acquisition, ownership and disposition of
restructuring plan consideration are discussed below under "Certain United
States Federal Income Tax Considerations."
Solicitation Agent
We have appointed The Weston Group as the solicitation agent for the consent
solicitation. Requests for additional copies of this Prospectus and Consent
Solicitation, the form of consent and other related documents should be
addressed to the solicitation agent as follows:
. By hand, overnight courier or registered or certified mail: .
. By telephone: .
. By fax: .
. By e-mail: .
Fees and Expenses
We will be responsible for payment of all fees and expenses relating to the
solicitation of consents pursuant to this Prospectus and Consent Solicitation.
75
SELECTED FINANCIAL INFORMATION
Except as indicated, the following selected financial information is derived
from the Company's audited and unaudited consolidated financial statements
included elsewhere in this Prospectus and Consent Solicitation. This
information should be read in conjunction with, and is qualified in its
entirety by reference to, the Company's audited consolidated financial
statements for the years ended December 31, 1998, 1999 and 2000 (the "Audited
Financial Statements") and the Company's unaudited consolidated financial
statements for the six months ended June 30, 2000 and 2001 (the "Unaudited
Financial Statements"). The Audited Financial Statements and Unaudited
Financial Statements were prepared in accordance with Mexican GAAP, which
differs in significant respects from generally accepted accounting principles
in the United States ("U.S. GAAP"). Note 21 to the Audited Financial Statements
and Unaudited Financial Statements provides a description of the principal
differences between Mexican GAAP and U.S. GAAP, as they relate to the Company,
and a reconciliation to U.S. GAAP of consolidated net income (loss) and total
shareholders' equity.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--General--Inflation," for a discussion of the impact of inflation
on the Company's financial statements.
Unless otherwise stated, the Audited Financial Statements and all financial
and operating data in this Prospectus and Consent Solicitation do not reflect
the results of operations of the galvanizing and painting plant (the
"Galvanizing Plant") or Aceros Nacionales, S.A. de C.V. ("ANSA") between
January 1, 1996 and December 31, 1998. These results are reflected in the item
"Discontinued Operations." The Galvanizing Plant was sold on January 28, 1999
and ANSA was sold on January 29, 1999. See Note 5 to the Audited Financial
Statements.
76
Audited(1) Unaudited(1)
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------ ------------------------------
1996 1997 1998 1999 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- ------- ------------
(millions of constant Mexican pesos with purchasing power as of (millions of
June 30, 2001, except for Other Data) US$, except
for Other
Data)(2)
Income Statement Data:
Mexican GAAP:
Net Sales............................ 18,162.4 17,269.0 16,159.8 13,359.9 12,805.7 6,815.1 5,020.0 554.1
Cost of Sales........................ 12,414.8 12,274.6 11,711.0 10,108.8 9,633.7 4,799.7 4,468.6 493.2
Depreciation(3)...................... 1,328.2 1,258.0 1,293.0 1,286.4 1,189.1 607.8 607.4 67.1
Gross Profit......................... 4,419.4 3,736.4 3,155.8 1,964.7 1,982.9 1,407.6 (56.0) (6.2)
Selling, General and Administrative
Expenses............................ 1,115.3 1,047.0 1,015.7 927.2 766.0 400.3 327.3 36.1
Operating Income (Loss).............. 3,304.1 2,689.4 2,140.1 1,037.5 1,216.9 1,007.3 (383.3) (42.3)
Financing and Related Costs
Interest (Income).................. (461.1) (215.0) (241.1) (109.4) (104.3) (23.8) (22.4) (2.5)
Interest Expense................... 2,505.0 2,506.5 2,825.1 1,947.3 1,100.5 454.1 429.0 47.4
Foreign Exchange (Gain) Loss....... 30.5 208.0 4,287.4 (1,177.0) 72.9 19.2 (56.9) (6.3)
(Gain) from Monetary Position...... (4,218.3) (2,405.9) (3,538.4) (2,684.9) (2,091.7) (1,095.1) (498.5) (55.0)
Net Financing Result................. (2,143.9) 93.6 3,333.0 (2,024.0) (1,022.6) (645.6) (148.8) (16.4)
Other Expense (Income), Net.......... 50.5 (40.5) 502.0 1,573.9 294.5 40.4 294.3 32.5
Cost of Inactive Plant (3)........... -- -- 71.3 68.3 -- -- -- --
Income (Loss) Before Taxes and
Employee Profit Sharing and Results
of Associated Companies............. 5,397.5 2,636.3 (1,766.2) 1,419.3 1,945.0 1,612.5 (528.8) (58.4)
Income and Asset Taxes............... 14.9 13.9 2.7 17.0 771.8 607.1 12.9 1.4
Employee Profit Sharing.............. 58.8 20.1 20.7 21.0 12.8 12.4 2.2 0.2
Income (Loss) Before Results of
Associated Companies................ 5,323.8 2,602.3 (1,788.7) 1,381.3 1,160.4 993.0 (543.8) (60.0)
Results of Associated Companies(4)... 15.8 18.4 (0.7) 37.7 (8.3) 0.2 (0.9) (0.1)
Extraordinary Items (5).............. 786.2 (574.8) -- -- -- -- -- --
Discontinued Operations(6)........... 161.3 (258.4) (540.0) (25.6) -- -- -- --
Net Income (Loss).................... 6,287.1 1,787.5 (2,330.3) 1,393.4 1,152.1 993.2 (544.9) (60.1)
U.S. GAAP:
Net Sales............................ 18,162.4 17,269.0 16,159.8 13,359.9 12,805.7 6,815.1 5,020.0 554.1
Operating Income (Loss).............. 1,935.5 1,924.5 859.2 690.2 787.8 799.0 (706.0) (77.9)
Net Income (Loss)(7)................. 1,922.1 1,453.2 (2,123.0) 1,428.0 1,111.0 1,199.0 (753.0) (83.1)
Other Data:
Mexican GAAP:
Basic Earnings (Loss) per Share(8)(9) 14.1 6.7 (4.8) 3.9 3.2 2.8 (1.5) (0.2)
Basic Earnings (Loss) per ADS(8)(9).. 70.9 33.4 (23.9) 19.5 15.8 14.0 (7.5) (0.8)
Weighted Average Shares Outstanding
(000s)(9)........................... 388,375 386,462 376,428 362,298 357,873 357,873 357,873 357,873
U.S. GAAP:
Basic Earnings (Loss) per Share(8)(9) 5.0 3.8 (5.6) 3.9 3.1 3.3 (2.1) (0.2)
Basic Earnings (Loss) per ADS(8)(9).. 25.0 19.0 (28.0) 19.5 15.5 16.5 (10.5) (1.0)
Weighted Average Shares Outstanding
(000s)(9)........................... 388,375 386,462 376,428 362,298 357,873 357,873 357,873 357,873
- --------
(1) Totals may vary due to rounding.
(2) U.S. dollar amounts provided are translations from the peso amounts, solely
for the convenience of the reader, at an exchange rate of Ps.9.0600 per
U.S. dollar, the noon buying rate as published by the Federal Reserve for
Mexican pesos on June 30, 2001. The U.S. dollar-peso exchange rate has been
volatile in recent years. Accordingly, the translation to dollars at the
June 30, 2001 exchange rate may not accurately represent the financial
condition of the Company in U.S. dollar terms as of the present date.
(3) Cost of inactive plant is not deducted in calculating Depreciation in the
Mexican GAAP financial statements but is deducted in calculating
Depreciation under U.S. GAAP. In the Mexican GAAP financial statements,
only depreciation charges related to plant in full current use and the
utilized portion of plant operating at less than full capacity are charged
against the Company's ordinary operations and are a component of operating
income.
(4) Represents the Company's income (losses) in companies in which the Company
has a minority interest.
(5) The extraordinary income recorded in 1996 resulted from the prepayment at a
discount of certain of the Company's long-term debt; the amount shown is
net of income tax and employee profit sharing. The extraordinary expense
reported in 1997 was caused by a change in accounting policy which resulted
in the write-off of the unamortized balance of deferred technical
assistance fees payable to Hoogovens.
(6) For a complete description of what is included in discontinued operations
as of December 31, 1998 and 1999, see Note 5 to the Audited Financial
Statements.
(7) For a discussion of the principal differences between the Company's net
income under Mexican and U.S. GAAP, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--U.S. GAAP
Reconciliation."
(8) Basic earnings (loss) in each period is calculated by subtracting
extraordinary items from majority net income (loss), in each case according
to Mexican or U.S. GAAP, as the case may be. See Notes 7 o) and 21 to the
Audited Financial Statements.
(9) Basic earnings (loss) per share in each period is calculated by dividing
basic earnings (loss) by the weighted average number of shares outstanding
during such period. Basic earnings (loss) per ADS is calculated by
multiplying basic earnings (loss) per share by five, to reflect the ratio
of five shares of Common Stock per ADS.
77
Audited(1) Unaudited(1)
As of December 31, As of June 30,
----------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2001 2001
-------- -------- -------- -------- -------- -------- ------------
(millions of constant Mexican pesos with purchasing power as of (millions of
June 30, 2001) US$)(2)
Balance Sheet Data:
Mexican GAAP:
Assets
Cash and Cash Equivalents................. 429.8 503.0 404.1 93.5 162.2 121.0 13.4
Trade Accounts Receivable, Net............ 1,994.3 2,316.6 2,131.9 1,845.2 1,461.5 1,098.4 121.2
Due from Affiliated Companies............. 564.0 564.2 344.9 257.4 400.8 160.0 17.8
Inventories............................... 5,241.0 5,276.9 5,094.6 3,697.4 3,464.7 3,435.0 379.1
Other Current Assets...................... 465.5 518.2 1,803.7 336.5 295.0 306.7 33.8
Total Current Assets...................... 8,694.6 9,178.9 9,779.2 6,230.0 5,784.2 5,121.1 565.3
Other Long-Term Receivables(3)............ 1,393.3 1,440.5 1,208.7 921.0 822.0 710.3 78.4
Property, Plant and Equipment, Net........ 31,694.7 31,473.8 31,516.7 27,911.0 26,256.0 25,140.5 2,774.9
Deferred Charges, Net..................... 1,030.8 1,477.0 2,204.4 2,374.1 2,315.0 2,136.1 235.7
Total Assets.............................. 42,813.4 43,570.2 44,709.0 37,436.1 35,177.2 33,108.0 3,654.3
Liabilities and Shareholders' Equity
Short-Term Debt(4)........................ 18,882.9 20,753.1 23,350.5 17,923.0 16,514.1 16,211.2 1,789.3
Interest Payable.......................... 210.9 343.2 427.5 786.0 809.0 830.0 91.6
Due to Suppliers and Contractors.......... 2,558.3 2,823.9 2,570.4 1,960.0 2,050.0 2,067.2 228.1
Taxes Payable............................. 162.3 230.9 427.3 228.0 172.6 299.5 33.1
Due to Affiliated Companies............... 15.0 2.3 83.4 25.0 30.0 33.2 3.6
Other Payables............................ 1,530.0 1,269.4 1,928.4 2,704.0 1,856.8 1,958.0 216.1
Total Current Liabilities................. 23,359.4 25,422.8 28,787.5 23,626.0 21,432.5 21,399.1 2,361.8
Long-Term Debt............................ -- -- -- 450.0 208.0 91.9 10.1
Due to Affiliated Companies............... 269.9 -- -- -- -- -- --
Other Long-Term Liabilities(5)............ 686.4 1,087.3 1,601.1 1,286.0 5,487.7 4,753.0 524.6
Total Liabilities......................... 24,315.7 26,510.1 30,388.6 25,362.0 27,128.2 26,244.0 2,896.5
Majority Shareholders' Equity............. 18,493.2 17,056.0 14,291.8 12,045.5 8,022.0 6,847.0 755.8
Minority Interest in Subsidiaries......... 4.5 4.1 28.6 28.6 27.0 17.0 2.0
Total Liabilities and Shareholders' Equity 42,813.4 43,570.2 44,709.0 37,436.1 35,177.2 33,108.0 3,654.3
U.S. GAAP:
Total Assets.............................. 43,494.9 43,106.9 46,215.0 41,159.5 39,924.7 38,689.2 4,270.3
Shareholders' Equity(6)................... 10,354.7 11,769.4 8,258.0 8,371.0 8,645.0 7,948.0 877.3
- --------
(1) Totals may vary due to rounding.
(2) U.S. dollar amounts provided are translations from the peso amounts, solely
for the convenience of the reader, at an exchange rate of Ps.9.0600 per
U.S. dollar, the noon buying rate for Mexican pesos as published by the
Federal Reserve on June 30, 2001. The U.S. dollar-peso exchange rate has
been volatile in recent years. Accordingly, the translation to dollars at
the June 30, 2001 exchange rate may not accurately represent the financial
condition of the Company in U.S. dollar terms as of the present date.
(3) Includes employee housing developments and equity in affiliated companies.
(4) Reflects on a pro forma basis the acceleration of the maturity of the
long-term debt due to the suspension of payments.
(5) Includes retirement and pension plans and seniority premiums of Ps.533.6
million as of December 31, 1996, Ps.968.1 million as of December 31, 1997,
Ps.969.4 million as of December 31, 1998, Ps.1,052.5 million as of December
31, 1999 and Ps.1,206.8 million as of December 31, 2000. Also includes
Ps.3,789.7 of deferred income tax liability as of December 31, 2000. See
Note 7 a) of the Audited Financial Statements.
(6) Shareholders' equity under U.S. GAAP principally reflects the adjustments
for deferred income taxes, employee profit sharing and restatement of
machinery and equipment.
78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve inherent risks and
uncertainties. Actual results may differ materially from those contained in
such forward-looking statements. See "Forward-Looking Statements."
The following discussion should be read in conjunction with the Audited
Financial Statements and the Unaudited Financial Statements. The Audited
Financial Statements and the Unaudited Financial Statements have been prepared
in accordance with Mexican GAAP, which differs in significant respects from
U.S. GAAP. Note 21 to the Audited Financial Statements and Note 21 to the
Unaudited Financial Statements provide a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to AHMSA, and a
reconciliation to U.S. GAAP of consolidated net income (loss) and total
shareholders' equity.
Inflation
Mexico experienced high inflation in some of the periods covered by the
Audited Financial Statements. The rates of inflation in Mexico, as measured by
changes in the National Consumer Price Index ("NCPI") (as provided by Banco de
Mexico), were 18.61%, 12.32% and 8.96% for the years 1998, 1999 and 2000,
respectively, and 2.11% for the six months ended June 30, 2001.
The Mexican Institute of Public Accountants has issued Bulletin B-10,
"Recognition of the Effects of Inflation on Financial Information," and
Bulletin B-12, "Statement of Changes in Financial Position," which outline the
inflation accounting methodology that is mandatory for all Mexican companies
reporting under Mexican GAAP. The Third Amendment to Bulletin B-10, which has
been effective since January 1, 1990, requires that all financial information
be presented in constant pesos (having the same purchasing power for each
period indicated taking into account inflation) as of the date of the most
recent balance sheet. The presentation of financial information in constant
pesos is intended to recognize certain effects of inflation on the financial
statements and to permit comparisons between periods in comparable monetary
units. Except where otherwise indicated, financial data for all periods in the
Audited Financial Statements and the Unaudited Financial Statements and
throughout this Prospectus and Consent Solicitation have been restated in
constant pesos with purchasing power as of June 30, 2001. References in this
Prospectus and Consent Solicitation to "real" amounts are to inflation-adjusted
numbers, and references to "nominal" amounts are to unadjusted numbers. Unless
otherwise specified, all growth rates in the following discussion are stated in
real terms.
In accordance with Bulletin B-10, AHMSA is required to report, as a gain or
loss on its net monetary position, the effects of inflation on its monetary
assets and liabilities. This net amount, which is reflected in the income
statement under the caption "Financing and Related Costs--Loss (Gain) from
Monetary Position," reflects the gain or loss arising from holding a net
liability or asset monetary position in an inflationary period because, over
time, a monetary liability can be settled for units of less purchasing power,
whereas a monetary asset decreases in value in real terms. AHMSA's operations
continually generate monetary assets (primarily in the form of cash, cash
equivalents and accounts receivable), while AHMSA's trade and accounts payable
and borrowings result in monetary liabilities. For presentation purposes, all
effects relating to financing are reflected in net financing result and include
(i) interest earned on cash and temporary investments and interest paid on
borrowed funds; (ii) foreign exchange gains or losses associated with monetary
assets and liabilities denominated in foreign currencies; and (iii) losses
resulting from holding monetary assets exposed to inflation net of gains
resulting from having monetary liabilities adjusted for inflation, less amounts
capitalized. AHMSA records a foreign exchange gain or loss if the exchange rate
of the peso to the currency in which the monetary assets or liabilities are
denominated fluctuates.
Prior to January 1, 1997, Bulletin B-10 required that AHMSA restate
non-monetary assets at current replacement cost (as determined by appraisals)
and restate nonmonetary liabilities and the components of shareholders' equity
using the NCPI. Beginning January 1, 1997, under the Fifth Amendment to
Bulletin B-10,
79
all non-monetary assets, including property, plant and equipment, are required
to be restated using the NCPI. However, the Fifth Amendment permits the use of
the replacement cost method for the recognition of the effects of inflation in
the case of inventories and costs of sales. In addition, imported machinery and
equipment is restated using the inflation rate of the country of origin and the
period-end exchange rate. In 2000 the value of the peso decreased by 0.81%
relative to the U.S. dollar, representing a decrease in the value of fixed
assets of Ps 1,176.3 million. For the six months ended June 30, 2001, the value
of the peso increased by 5.31% relative to the U.S. dollar, representing a
decrease in the value of the fixed assets of Ps. 926.3 million.
The prices of substantially all of AHMSA's products and a portion of its
costs of sales is based on, or linked to, the U.S. dollar. Because AHMSA's
results of prior periods are restated in constant pesos of the current period,
when the rate of inflation during any period exceeds the peso-U.S. dollar
devaluation rate, the U.S. dollar-related net sales and cost of sales of prior
periods, as so restated, will increase even if U.S. dollar-related sales and
U.S. dollar-related costs of the prior period were lower than or equal to the
U.S. dollar-related sales and U.S. dollar-related costs, as the case may be, of
the current period. This was the case in 1999 when, for the full year, the
value of the peso in U.S. dollars appreciated 3.47% and the inflation rate was
12.32% and in 2000, the value of the peso decreased by 0.81% and the inflation
rate was 8.96%. In the first half of 2001, the value of the peso increased by
5.31% and the inflation rate was 2.11%.
Plant Slowdowns and Shutdowns
In connection with certain regularly scheduled maintenance as well as the
implementation of its capital expenditure programs, AHMSA expects to suspend
operations in certain facilities from time to time. Although AHMSA intends to
minimize any disruption to sales and operations during any such suspension of
operations through the use of less efficient back-up facilities, advance
coordination with customers and build-up of inventory, AHMSA expects that the
use of less efficient back-up facilities and other measures will temporarily
increase production costs and adversely affect AHMSA's operating margins.
Certain Macroeconomic Effects on AHMSA
The devaluation of the peso has had a number of effects on the Mexican
economy that have adversely affected the financial condition of AHMSA. First,
the devaluation caused the peso value of AHMSA's non-peso-denominated
indebtedness to increase significantly prior to the filing for suspension of
payments. Substantially all of AHMSA's indebtedness is denominated in
currencies other than the peso, principally the U.S. dollar; however, as a
result of AHMSA's filing for suspension of payments, all of such indebtedness
was converted into pesos at the rate of exchange of Ps.9.359 per U.S. dollar.
Second, the devaluation increased the rate of inflation, resulting in a sharp
rise in nominal interest rates on peso-denominated borrowings. Each of the
foregoing factors caused an increase in the peso-denominated debt service
requirements of AHMSA. Third, the devaluation led to a lack of investor
confidence in Mexico, which reduced international capital flows to both the
Mexican public and private sectors. Fourth, in response to the devaluation and
its effects, the Mexican government established an economic recovery program,
which caused a decline in gross domestic product and an increase
in unemployment.
Steel and steam coal prices in Mexico are generally set by reference to
international prices, but many of AHMSA's costs (such as labor and certain
inputs) are priced domestically. In 1997, AHMSA's operating margins were
adversely affected because inflation in Mexico of 15.71% outpaced the
devaluation of the peso of 2.51%. This trend reversed in 1998 as the rate of
inflation in Mexico of 18.61% was less than the rate of devaluation of the peso
of 22.27%. During 2000, the peso weakened to Ps.9.5997 per U.S. dollar on
December 31, 2000 in comparison with Ps.9.5222 one year before. In 2000,
inflation in Mexico of 8.96% outpaced the devaluation of the peso of 0.81%. In
the first half of 2001, the value of the peso increased by 5.31% and the
inflation rate was 2.11%. There can be no assurance that increased peso costs
will be offset by any price or exchange rate-related increase in revenues.
80
In the second half of 1998, international steel prices fell sharply due to
the financial crisis in Asia. The decline deepened toward the end of 1998 and
continued through 1999 with a slight recovery in early 2000 that was reversed
during the second half of 2000 and into 2001. The fall in steel prices resulted
in a reduction of the profit margins and operating cash flows of most companies
in the steel industry, including AHMSA.
Sales Volume, Product Mix and Average Sales Price
AHMSA's net sales of steel products in recent years have been affected by
the demand for its products in the domestic market and, more recently, in the
international market, AHMSA's capacity to meet that demand, price levels for
steel products and AHMSA's ability to shift its product mix towards more higher
value-added products. AHMSA's net sales of steam coal in recent years have
reflected the demand from its sole customer, CFE, and prices for steam coal
sold to CFE.
The table below sets forth, for each segment, the total sales revenue, sales
volume and the average sales price for the periods indicated.
Expressed in pesos with purchasing power as of June 30, 2001
Year Ended December 31, (1)
-----------------------------------
1997 1998 1999 2000
-------- -------- -------- --------
Aggregate Net Sales (millions of pesos)........... 17,269.0 16,159.8 13,359.9 12,805.7
Steel Segment:
Net Sales of Steel Products (millions of pesos)(2) 14,534.5 13,558.0 10,862.2 10,533.9
Other Sales (millions of pesos)(3)................ 307.5 230.7 214.1 130.5
Volume (thousands of tonnes)(2):
Flat Products..................................... 2,437.0 2,374.0 2,547.0 2,496.5
Coated Products................................... 127.0 148.0 110.0 131.3
Other (principally long products)(4).............. 323.0 367.0 242.0 175.9
Total Sales Volume of Steel Products....... 2,887.0 2,889.0 2,899.0 2,803.7
Average Sales Price (pesos per tonne)(5).......... 5,034.4 4,692.9 3,746.9 3,757.1
Operating Income (millions of pesos).............. 1,817.8 1,390.2 431.7 795.3
Steam Coal Segment:
Net Sales (millions of pesos)(6).................. 2,427.0 2,371.1 2,283.6 2,141.3
Volume (thousands of tonnes)(7)................... 7,480.0 7,913.0 7,677.9 6,941.6
Average Sales Price (pesos per tonne)(5).......... 312.2 299.7 292.2 308.5
Operating Income (millions of pesos).............. 871.6 750.0 605.8 421.6
- --------
(1) Totals may vary due to rounding.
(2) Includes sales of steel products that were purchased and resold by AHMSA.
The sales of purchased steel accounted for 0.2%, 0.1%, 0.0% and 0.0% of
AHMSA's net sales of steel products during 1997, 1998, 1999 and 2000,
respectively.
(3) Other sales in the steel segment include sales of certain other products
(principally by-products of the coke plants and pig iron scrap) and
administrative services rendered by an AHMSA subsidiary to affiliates.
Other sales represented 2.1%, 1.7%, 2.0% and 1.2% of AHMSA's net sales of
the steel segment for 1997, 1998, 1999 and 2000, respectively.
(4) Also includes net sales of pipe produced by third parties using hot rolled
coil supplied by AHMSA.
(5) Based on net sales of steel products or steam coal, as the case may be,
divided by total tonnes sold of steel products or steam coal, as the case
may be. Changes in average sales price of steel products reflect changes in
price levels and changes in product mix. Average sales prices for the steel
segment are for steel products and do not take into account other sales in
the steel segment. The average sales price of steam coal for 1997 excludes
Ps.91.8 million in revenues from CFE resulting from a claim relating to
payments made between December 16, 1994 and December 31, 1996 under AHMSA's
coal supply agreement with Carbon I. The average sale price of steam coal
for 1999 excludes Ps.39.8 million in revenues from CFE resulting from
adjustment to payments made between January 1, 1997 and December 31, 1998.
(6) Net sales of steam coal for 1997 included Ps.91.8 million in revenues from
CFE and net sales of steam coal for 1999 include PS.39.8 million in
revenues from CFE as described above.
(7) Includes sales of coal purchased and resold by AHMSA. The sales of
purchased coal accounted for 5.7%, 8.5%, 3.8% and 0.0% of AHMSA's net sales
of steam coal in 1997, 1998, 1999 and 2000, respectively.
81
Results of Operations for the First Six Months of 2001 Compared to the First
Six Months of 2000
The following discussion of the Company's results of operations for the six
months ended June 30, 2001 is based on unaudited consolidated information for
that period and for the six months ended June 30, 2000. Information for the
unaudited six-month periods ended June 30, 2000 and June 30, 2001 reflects all
adjustments (consisting of normal recurring adjustments) that in the opinion of
management are necessary to present fairly such information for the interim
periods.
Pursuant to Mexican GAAP, peso amounts set forth below are in constant pesos
as of June 30, 2001. For purposes of preparing the following financial
information, the Company used the NCPI for the first six months of 2001, which
was 2.11%. Other financial data presented elsewhere in this Prospectus and
Consent Solicitation was restated in constant pesos as of June 30, 2001, as
well. The preliminary results of operations for the first six months of 2001
are not necessarily indicative of the result expected for the full year 2001 or
any other interim period.
The table below sets forth summary financial and operating data for the
first six months of 2000 and 2001.
Six Months Ended June 30,
(Unaudited) (1)
-------------------------------------------------
2000 2001 2001
------- ------- -----------------
(Except as noted, in millions (Except as noted
of constant pesos as of June 30, in millions of
2001 purchasing U.S. dollars) (2
power)
Income Statement Data:
Aggregate Net Sales...................................... 6,815.1 5,020.0 554.1
Cost of Sales......................................... 4,799.7 4,468.6 493.2
Depreciation.......................................... 607.8 607.4 67.1
Gross Profit............................................. 1,407.6 (56.0) (6.2)
Selling, General and Administrative Expenses.......... 400.3 327.3 36.1
Operating Income (Loss).................................. 1,007.3 (383.3) (42.3)
Net Financing Result..................................... (645.6) (148.8) (16.4)
Income (Loss) Before Taxes and Profit Sharing and Results
of Associated Companies................................ 1,612.5 (528.8) (58.4)
Net Income (Loss)........................................ 993.2 (544.8) (60.1)
Segment Data:
Steel Segment:
Net Sales of Steel Products....................... 5,719.0 3,944.9 435.4
Volume (thousands of tonnes)...................... 1,457.2 1,295.4 NA
Average Sales Price (pesos per tonne) (3)......... 3,881.5 2,994.5 330.5
Operating Income (Loss)........................... 754.4 (617.9) (68.2)
Steam Coal Segment:
Net Sales......................................... 1,096.1 1,075.1 118.7
Volume (thousands of tonnes) (4).................. 3,547.3 3,523.5 NA
Average Sales Price (pesos per tonne) (3)......... 309.0 305.1 33.7
Operating Income.................................. 252.9 234.6 25.9
- --------
(1) Totals may vary due to rounding.
(2) U.S. dollar amounts provided are translations from peso amounts, solely for
the convenience of the reader, at an exchange rate of Ps.9.0600 per U.S.
dollar, the noon buying rate for Mexican pesos as published by the Federal
Reserve on June 30, 2001. The U.S. dollar-peso exchange rate has been
volatile in recent years. Accordingly, the translation to U.S. dollars at
the June 30, 2001 exchange rate may not accurately represent the financial
position of the Company in U.S. dollars at the present date.
(3) Based on net sales of steel products or steam coal, as the case may be.
Changes in average sales price of steel products reflect changes in price
levels and changes in product mix. Average sales prices for the steel
segment are for steel products and do not take into account other sales in
the steel segment of Ps.62.8 million and Ps.65.9 million in the six months
ended June 30, 2000 and 2001, respectively.
(4) Includes sales of coal purchased and resold by the Company. The sales of
purchased coal accounted for 2.4% and 8.3% of the Company's sales volume of
steam coal in the six months ended June 30, 2000 and 2001, respectively.
82
Sales Volume
Steel Segment. Sales of steel products for the first half of 2001 totaled
1,295.4 thousand tonnes, a 11.1% decrease from the 1,457.2 thousand tonnes of
steel products sold in the first half of 2000 due principally to a global
economic slowdown and to an increase of imports to Mexico. Export sales
represented 17.3% (223.6 thousand tonnes) of AHMSA's sales volume of steel
products in the first half of 2001, as compared to 12.2% (178.0 thousand
tonnes) for the first half of 2000. Export sales volume increased 25.6% in the
first half of 2001 as compared to the first half of 2000 due principally to the
increase of imports to Mexico mentioned earlier, which forced us to sell our
products in the export market.
Steam Coal Segment. In the first half of 2001, AHMSA sold 3,523.5 thousand
tonnes of steam coal, a 0.7% decrease from the 3,547.3 thousand tonnes sold in
2000.
Net Sales
AHMSA's overall net sales in the first half of 2001 were Ps.5,020.0 million,
a 26.3% decrease from AHMSA's overall net sales of Ps.6,815.1 million in the
first half of 2000.
Steel Segment. Net sales from the steel segment decreased 31.0% from
Ps.5,719.0 million in the first half of 2000 to Ps.3,944.9 million in the first
half of 2001. This decrease reflected an 11.1% decrease in sales volume and a
22.8% decrease (in real terms) in AHMSA's average sales price per tonne of
steel products from Ps.3,881.5 million in the first half of 2000 to Ps.2,994.5
million in the first half of 2001. This decrease was mainly due to the increase
in the value of the peso against the U.S. dollar and the inability to increase
prices in dollar terms due to the increase in imports from Asia. During the
first half of 2001, the inflation rate in Mexico was 2.11% and the appreciation
of the value of the peso was 5.3%. Export sales represented 12.4% of AHMSA's
sales revenues in the first half of 2001 (17.3% of sales volume of steel
products for that half) as compared to 9.9% of AHMSA's sales revenue in the
first half of 2000 (12.2% of sales volume of steel products for that half).
In the first half of 2000 and the first half of 2001, AHMSA reported other
sales of Ps.62.8 million and Ps.65.9 million, respectively. Other sales in the
steel segment principally represent sales of by-products of the coke plants and
pig iron scrap as well as the provision of administrative services to
affiliates.
Steam Coal Segment. Steam coal sales were Ps.1,075.1 million during the
first half of 2001 compared to Ps.1,096.1 million reported in the first half of
2000, representing a 1.9% decrease. The price of steam coal per tonne decreased
1.3% in real terms when comparing the first half of 2000 to the first half of
2001.
Cost of Sales; Depreciation; Gross Profit
AHMSA's overall cost of sales (excluding depreciation) decreased 6.9% from
Ps.4,799.7 million (70.4% of overall net sales) in the first half of 2000 to
Ps.4,468.6 million (89.0% of overall net sales) in the first half of 2001,
reflecting decreases in the cost of sales in the steel segment. The increase in
the cost as a percentage of net sales is due to the relatively fixed nature of
many of these costs. AHMSA's overall depreciation expense decreased by 0.1%
from Ps.607.8 million (8.9% of overall net sales) in the first half of 2000 to
Ps.607.4 million (12.1% of overall net sales) in the first half of 2001.
Overall gross profit for AHMSA decreased from Ps.1,407.6 million (20.7% of
net sales) during the first half of 2000 to a gross loss of Ps.56.0 million
(-1.1% of net sales) during the first half of 2001.
Steel Segment. Cost of sales (excluding depreciation) for AHMSA's steel
segment decreased from Ps.4,074.4 million in the first half of 2000 to
Ps.3,738.3 million in the first half of 2001, and the cost of sales as a
percentage of net sales of AHMSA's steel products increased from 71.2% of net
sales in the first half of 2000 to 94.8% of net sales in the first half of
2001. The decline in cost of sales in absolute terms was mainly attributable to
the reduced cost of raw materials and supplies and labor and personnel. On the
other hand the increase in the cost of sales as a percentage of net sales is
due to the relatively fixed nature of many of these costs. Raw
83
materials and supplies costs decreased 21.9% from Ps.1,536.6 million (26.9% of
steel segment net sales) in the first half of 2000 to Ps.1,199.8 million (30.4%
of steel segment net sales) in the first half of 2001. Steel purchase costs
increased from Ps.0.0 million (0.0% of net sales of steel products) in the
first half of 2000 to Ps.2.8 million (0.1% of steel segment net sales) in the
first half of 2001. During the first half of 2001, the volume of imported
metallurgical coal was 73.9 thousand tonnes, due to the decrease in steam coal
production for the mines. In the first half of 2001, AHMSA did not purchase
either coke or iron ore pellet from third parties.
Labor and personnel expenses decreased from Ps.1,111.9 million (19.4% of net
sales of steel segment) in the first half of 2000 to Ps.1,061.5 million (26.9%
of net sales of steel segment) in the first half of 2001, and energy and fuel
costs increased by 21.9% from Ps.715.6 million (12.5% of net sales of steel
segment) in the first half of 2000 to Ps.872.5 million (22.1% of net sales of
steel segment) in the first half of 2001. The increase in the cost as a
percentage of net sales is due to an increase in the cost per unit of energy
and fuel and the decrease in net sales discussed earlier.
Depreciation charges in this segment increased 0.5%, from Ps.533.7 million
(9.3% of steel segment net sales) in the first half of 2000 to Ps.536.6 million
(13.6% of steel segment net sales) in the first half of 2001.
Reflecting the above factors, AHMSA reported a gross loss for its steel
segment of Ps.329.9 million (-8.4% of steel segment net sales) during the first
half of 2001, as compared to a gross profit of Ps.1,110.9 million (19.4% of
steel segment net sales) during the first half of 2000, a decrease of 129.7%.
Steam Coal Segment. Cost of sales (excluding depreciation) for AHMSA's
steam coal segment increased from Ps.725.4 million (66.2% of net sales of steam
coal) in the first half of 2000 to Ps.730.3 million (67.9% of net sales of
steam coal) in the first half of 2001.
Labor and personnel expenses for this segment increased 2.7% from Ps.159.9
million (14.6% of net sales of steam coal) in the first half of 2000 to
Ps.164.3 million (15.3% of net sales of steam coal) in the first half of 2001
due to a personnel increase related to the restart of open pit 3 and Mine V.
Depreciation charges in this segment decreased in absolute terms by 4.4% and
as a percentage of net sales of steam coal decreased from Ps.74.1 million (6.8%
of net sales of steam coal) in the first half of 2000 to Ps.70.8 million (6.6%
of net sales of steam coal) in the first half of 2001.
Reflecting the above factors, AHMSA reported a gross profit with respect to
its steam coal segment of Ps.273.9 million (25.5% of net sales of steam coal)
during the first half of 2001, as compared to a gross profit of Ps.296.7
million (27.1% of net sales of steam coal) during the first half of 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for AHMSA represented 5.9% and
6.5% of net sales for the first half of 2000 and the first half of 2001,
respectively, while decreasing in absolute terms by 18.2% from Ps.400.3 million
in the first half of 2000 to Ps.327.3 million in the first half of 2001. The
increase in selling, general and administrative expenses as a percentage of net
sales is due to a lower level of net sales during the first half of 2001 and
the reduction in absolute terms is due to the effects of a cost reduction
program.
Steel Segment. Selling, general and administrative expenses for AHMSA's
steel segment decreased by 19.2% from Ps.356.5 million (6.2% of steel segment
net sales) in the first half of 2000 to Ps.288.0 million (7.3% of steel segment
net sales) in the first half of 2001 due to a personnel reduction and a cost
reduction program. The percentage increase to net sales is due to a lower level
of net sales during the first half of 2001.
Steam Coal Segment. Selling, general and administrative expenses for
AHMSA's steam coal segment decreased by 10.3% from Ps.43.8 million in the first
half of 2000 (4.0% of net sales of steam coal) to Ps.39.3 million in the first
half of 2001 (3.7% of net sales of steam coal) due to a personnel reduction and
other items included in the cost reduction program.
84
Operating Income
Operating income for AHMSA decreased from Ps.1,007.3 million (14.8% of net
sales) in the first half of 2000 to an operating loss of Ps.383.3 million
(-7.6% of net sales) in the first half of 2001 reflecting the decline in
operating income in the steel segment.
Steel Segment. Operating income for AHMSA's steel segment decreased by
181.9% from Ps.754.4 million in the first half of 2000 to an operating loss of
Ps.617.9 million in the first half of 2001, principally due to a decline in
average sales price of steel products. Operating income as a percentage of
steel segment net sales was -15.7% in the first half of 2001, as compared to
operating income as a percentage of steel segment net sales of 13.2% in the
first half of 2000.
Steam Coal Segment. Operating income from AHMSA's steam coal segment
decreased by 7.2% from Ps.252.9 million in the first half of 2000 to Ps.234.6
million in the first half of 2001 due to a decrease in sales volume. Operating
income as a percentage of net sales of steam coal was 21.8% in the first half
of 2001, as compared to 23.1% in the first half of 2000.
Financing and Related Costs
Pursuant to Mexican GAAP, statements of operations are required to present
all financial effects of operating and financing the business under
inflationary conditions. For presentation purposes, all such effects are
included under "net financing result" and include (i) interest earned on cash
and temporary investments; (ii) interest paid on borrowed funds; (iii) foreign
exchange gains or losses associated with monetary assets and liabilities
denominated in foreign currencies; and (iv) losses resulting from holding
monetary assets exposed to inflation net of gains resulting from having
monetary liabilities adjusted for inflation. Integral financing cost related to
and incurred during the construction or the installation of fixed assets may be
capitalized under Mexican GAAP. Such integral financing cost related to
construction projects includes interest costs and foreign exchange losses
generated from debt denominated in foreign currencies net of the related
monetary gain.
Interest expense from oversecured debt, capital leases, advances from
customers and receivables collected in advance decreased to Ps.429.0 million in
the first half of 2001 from Ps.454.1 million during the first half of 2000, due
to the effect of restatement of the first half of 2000 amounts.
Interest income decreased to Ps.22.4 million in the first half of 2001 from
to Ps.23.8 million in the first half of 2000.
In addition, during the first half of 2000, the peso experienced a 4.5%
depreciation in value relative to the U.S. dollar, producing during such period
a foreign exchange loss of Ps.19.2 million, because the Company had a net
monetary liability in foreign currencies. However, during the first half of
2001, the peso experienced a 5.3% appreciation in value relative to the U.S.
dollar resulting in a foreign exchange gain of Ps.56.9 million.
The gain from monetary position represents the effects of inflation, as
measured by the NCPI, on AHMSA's monetary assets and liabilities at the
beginning of each month. During the first half of 2000 and the first half of
2001 AHMSA's monetary liabilities exceeded its monetary assets; consequently,
there was a gain from monetary position in both periods. Gain on monetary
position decreased from Ps.1,095.1 million in the first half of 2000 to
Ps.498.5 million in the first half of 2001, reflecting lower levels of
inflation in the first half of 2001.
Reflecting these factors, the net financing result was a reduction from a
gain of Ps.645.6 million in the first half of 2000 to a gain of Ps.148.8
million in the first half of 2001.
Other Expenses, Net
AHMSA reported other expenses (net of other income) of Ps.294.3 million for
the first half of 2001 as compared to an expense of Ps.40.4 million for the
first half of 2000. As part of the Company's cost reduction plan implemented in
1999, AHMSA initiated a personnel reduction and created a reserve of Ps.524.8
to pay severance fees. In the first half of 2000, the Company cancelled Ps.40.0
of this reserve.
85
AHMSA recorded a pre-tax loss of Ps.528.8 million in the first half of 2001,
as compared with pre-tax income of Ps.1,612.5 million in the first half of 2000.
Corporate taxes are imposed in Mexico both on the basis of corporate income
and assets. The asset tax is computed at an annual rate of 1.8% of the average
value of the majority of restated assets less certain liabilities. The asset
tax is paid only to the extent that it exceeds the income tax for the year.
Beginning in 1999, the income tax rate increased from 34% to 35%, with the
obligation to pay the resulting tax each year at a rate of 30% with the
remainder payable upon distribution of earnings. During each year, the
investments being made by AHMSA in new plant and equipment produced benefits
that substantially offset its asset-based tax liability, while tax loss carry
forwards virtually eliminated its income-based tax liability. Accordingly, in
the first half of 2000 and the first half of 2001, AHMSA reported asset tax of
Ps.20.6 million and income tax of Ps.0.9 million and asset tax of Ps.4.0
million and income tax of Ps.0.9 million, respectively.
Income taxes in Mexico are calculated on a stand-alone basis for AHMSA and
each of its subsidiaries. On a stand-alone basis, AHMSA had Ps.7,399.2 million
in tax loss carry-forwards available as to June 30, 2001.
AHMSA reported statutory employee profit-sharing (which is also calculated
on a stand-alone basis for AHMSA and each of its subsidiaries) of Ps.12.4
million in the first half of 2000 and Ps.2.2 million in the first half of 2001.
On January 1, 2000, new Bulletin D-4 issued by the Mexican Institute of
Public Accountants went into effect. This bulletin establishes the accounting
treatment for the deferred effects of income and asset taxes and employee
profit sharing. It consists of recognizing liabilities and assets from deferred
income and asset taxes that may result from the future tax effects of all the
temporary differences between the book and tax basis of assets and liabilities
which are expected to reverse in a specific timeframe and which are not
expected to be replaced by items of a similar nature and amount. For
computation of deferred employee profit sharing effects, only the temporary
differences that result from the reconciliation between net income for the
period and the taxable basis for employee profit sharing, which are expected to
reverse within a certain timeframe, are considered.
This principle resulted in recognizing a provision for income taxes in the
consolidated statement of income of Ps.633.0 and Ps.180.0 in the first half of
2000 and the first half of 2001, respectively.
Net Income (Loss)
After reflecting the participation in associated companies (which represents
the Centro de Servicio Placa y Lamina and Linea Coahuila-Durango), AHMSA
recorded net loss of Ps.544.8 million in the first half of 2001 and net income
of Ps.993.2 million in the first half of 2000.
Results of Operations for 2000 Compared to 1999
Sales Volume
Steel Segment. Sales of steel products for 2000 totaled 2,804 thousand
tonnes, a 3.3% decrease from 2,899 thousand tonnes of steel products sold in
1999 as a consequence of an oversupply of steel on the global market during the
second half of 2000, which resulted in an increase of imports from Asia to
Mexico. Export sales represented 10.3% (288 thousand tonnes) of AHMSA's sales
volume of steel products in 2000, as compared to 15.4% (447 thousand tonnes)
for 1999. Export sales volume decreased 35.6% in 2000 as compared to 1999.
Steam Coal Segment. In 2000, AHMSA sold 6,942 thousand tonnes of steam
coal, a 9.6% decrease from 7,678 thousand tonnes sold in 1999. This decrease
resulted from direct purchases of steam coal by CFE in 2000 from small local
producers as part of a goverment effort to promote their economic development.
Net Sales
AHMSA's overall net sales in 2000 were Ps.12,805.7 million, a 4.1% decrease
from AHMSA's overall net sales of Ps.13,359.9 million in 1999.
86
Steel Segment. The decrease in sales volume of steel products from 2,899 to
2,804 thousand tonnes, resulted in a 3.7% decrease in net sales from the steel
segment from Ps.11,076.3 million in 1999 to Ps.10,664.5 million in 2000.
AHMSA's average sales price per tonne of steel products was virtually
unchanged, increasing 0.3% from Ps.3,746.9 in 1999 to Ps.3,757.1 in 2000.
Export sales represented 8.5% of AHMSA's sales revenues in 2000 (10.3% of
sales volume of steel products for that year) as compared to 9.9% of AHMSA's
sales revenue in 1999 (15.4% of sales volume of steel products for that year).
In 1999 and 2000, AHMSA reported other sales of Ps.214.1 million and
Ps.130.5 respectively. Other sales in the steel segment principally represent
sales of by-products of the coke plants and pig iron scrap as well as the
provision of administrative services to affiliates.
Steam Coal Segment. Steam coal sales were Ps.2,141.3 million during 2000
compared to Ps.2,283.6 million reported in 1999, representing a 6.2% decrease.
The price of steam coal per tonne increased 5.6% in real terms when comparing
1999 to 2000.
Cost of Sales; Depreciation; Gross Profit
AHMSA's overall cost of sales (excluding depreciation) decreased 4.7% from
Ps.10,108.8 million (75.7% of overall net sales) in 1999 to Ps.9,633.7 million
(75.2% of overall net sales) in 2000, reflecting decreases in the cost of sales
in the steel segment. AHMSA's overall depreciation expense decreased by 7.6%
from Ps.1,286.4 million (9.6% of overall net sales) in 1999 to Ps.1,189.1
million (9.3% of overall net sales) in 2000. Overall gross profit for AHMSA
increased from 14.7% of net sales (Ps.1,964.7 million) during 1999 to 15.5% of
net sales (Ps.1,982.9 million) during 2000.
Steel Segment. Despite the increases in energy prices and natural gas
prices during 2000, the cost of sales (excluding depreciation) for AHMSA's
steel segment decreased 6.1% from Ps.8,677.0 million in 1999 to Ps.8,143.5
million in 2000, and the cost of sales as a percentage of net sales of AHMSA's
steel products decreased from 78.3% of net sales in 1999 to 76.3% of net sales
in 2000. The decline in cost of sales in absolute terms was mainly attributable
to the reduction in the cost of raw materials and supplies, reduction in
inventory, and other purchases.
Raw materials and supplies costs decreased from Ps.3,018.9 million (27.3% of
net sales of steel segment) in 1999 to Ps.2,954.4 million (27.7% of net sales
of steel segment) in 2000, other purchases costs decreased from Ps.1,448.6
million (13.1% of net sales of steel segment) in 1999 to Ps.1,368.0 million
(12.8% of net sales of steel segment) in 2000, and changes in inventory costs
decreased from Ps.445.1 million (4.0% of net sales of steel segment) in 1999 to
Ps.29.2 million (0.3% of net sales of steel segment) in 2000.
Depreciation charges in this segment were Ps.1,046.0 million (9.8% of steel
segment net sales) during 2000 and Ps.1,136.3 million (10.3% of steel segment
net sales) in 1999.
Reflecting the above factors, AHMSA reported gross profit for its steel
segment of Ps.1,475.0 million (13.8% of steel segment net sales) during 2000,
as compared to a gross profit of Ps.1,263.0 million (11.4% of steel segment net
sales) during 1999, an increase of 16.8%.
Steam Coal Segment. Cost of sales (excluding depreciation) for AHMSA's
steam coal segment increased 4.1% from Ps.1,431.8 million in 1999 to Ps.1,490.2
million in 2000, but as a percentage of net sales the cost of sales increased
from 62.7% of net sales of steam coal to 69.6% of net sales of steam coal. The
decline in cost of sales in absolute terms was mainly attributable to the
reduction of raw materials and supplies and coal purchases. The increase in the
cost as a percentage of net sales is due to the decrease in net sales discussed
earlier.
Raw materials and supplies costs decreased from Ps.373.8 million (16.4% of
net sales of steam coal segment) in 1999 to Ps.295.2 million (13.8% of net
sales of steam coal segment) in 2000. Purchases of steam coal decreased from
Ps.214.3 million (9.4% of net sales of steam coal) in 1999 to Ps.210.0 million
(9.8% of net sales of steam coal) in 2000.
87
Depreciation charges in this segment decreased by 4.8% from Ps.150.4 million
(6.6% of net sales of steam coal) in 1999 to Ps.143.2 million (6.7% of net
sales of steam coal) in 2000 due to an increase in inventory during 2000.
Reflecting the above factors, AHMSA reported a gross profit with respect to
its steam coal segment of Ps.507.8 million (23.7% of net sales of steam coal)
during 2000, as compared to a gross profit of Ps.701.4 million (30.7% of net
sales of steam coal) during 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for AHMSA represented 6.9% and
6.0% of net sales for 1999 and 2000, respectively, while decreasing in absolute
terms by 17.4% from Ps.927.2 million in 1999 to Ps.766.0 million in 2000. The
decrease in selling, general and administrative expenses is due to the
continuation of a previously implemented cost reduction program.
Steel Segment. Selling, general and administrative expenses for AHMSA's
steel segment decreased by 18.2% from Ps.831.3 million (7.5% of steel segment
net sales) in 1999 to Ps.679.7 million (6.4% of steel segment net sales) in
2000 due to a personnel reduction program and the cost reduction program.
Steam Coal Segment. Selling, general and administrative expenses for
AHMSA's steam coal segment decreased by 10% from Ps.95.9 million in 1999 (4.2%
of net sales of steam coal) to Ps.86.3 million in 2000 (4.0% of net sales of
steam coal) due to a personnel reduction and other items included in the cost
reduction program.
Operating Income
Operating income for AHMSA increased 17.3% from Ps.1,037.5 million (7.8% of
net sales) in 1999 to Ps.1,216.9 million (9.5% of net sales) in 2000 reflecting
the continuation of the cost reduction program.
Steel Segment. Operating income for AHMSA's steel segment increased by
84.2% from Ps.431.7 million in 1999 to Ps.795.3 million in 2000, principally
due to a reduction of cost of sales and an increase in average sales price of
steel.
Steam Coal Segment. Operating income from AHMSA's steam coal segment
decreased by 30.4% from Ps.605.8 million in 1999 to Ps.421.6 million in 2000
due to a lower sales volume. Operating income as a percentage of net sales of
steam coal was 19.7% in 2000, as compared to 26.5% in 1999.
Financing and Related Costs
Pursuant to Mexican GAAP, statements of operations are required to present
all financial effects of operating and financing the business under
inflationary conditions. For presentation purposes, all such effects are
included under "Integral Financing Cost (Income)."
Interest expense decreased to Ps.1,100.5 million in 2000 from Ps.1,947.3
million during 1999, principally due to the fact that interest ceased to accrue
on debt contracts not guaranteed by mortgages and / or pledges upon the
declaration of suspension of payments on May 25 and May 28, 1999. See Note 2 b)
to the Audited Financial Statements.
The gain from monetary position represents the effects of inflation, as
measured by the NCPI, on AHMSA's monetary assets and liabilities at the
beginning of each month. During 1999 and 2000 AHMSA's monetary liabilities
exceeded its monetary assets; consequently, there was a gain from monetary
position in both periods. Gain on monetary position decreased from Ps.2,684.9
million in 1999 to Ps.2,091.7 million in 2000, reflecting lower levels of
inflation in 2000.
Reflecting these factors, the net financing result declined from Ps.2,024.0
million in 1999 to Ps.1,022.6 million in 2000.
88
Other Expenses, Net
AHMSA reported other expenses (net of other income) of Ps.294.5 million for
2000 as compared to Ps.1,573.9 million for 1999. In 1999, as part of a cost
reduction program, AHMSA created a reserve to pay severance expenses that could
result from a reduction of personnel. As a result, other expenses in 1999 and
2000 included a charge of Ps.524.0 million and a credit of Ps.96.0 million,
respectively, relating to retirement, pension plan and seniority premiums
liabilities. See Note 4 b) to the Audited Financial Statements.
Income and Asset Taxes and Employee Profit Sharing
AHMSA recorded pre-tax income of Ps.1,945.0 million in 2000, as compared
with a pre-tax income of Ps.1,419.3 million in 1999.
Corporate taxes are imposed in Mexico both on the basis of corporate income
and assets. The asset tax is computed at an annual rate of 1.8% of the average
value of the majority of restated assets less certain liabilities. The asset
tax is paid only to the extent that it exceeds the income tax for the year. The
statutory rate of income tax in effect in Mexico was 35% in 1999 and 2000.
During each year, the investments being made by AHMSA in new plant and
equipment produced benefits that substantially offset its asset-based tax
liability, while tax loss carry forwards virtually eliminated its income-based
tax liability. Accordingly, in 1999 and 2000, AHMSA reported asset tax of
Ps.14.7 million and income tax of Ps.3.6 million and asset tax of Ps.47.8
million and income tax of Ps.1.0 million, respectively. See Note 19 to the
Audited Financial Statements.
Deferred Taxes
In 2000, AHMSA recorded deferred income taxes of Ps.723.0, after recording
no deferred income tax in 1999, as a result of adhering to a new accounting
principal that became effective in 2000 relating to accounting for income and
asset taxes and employee profit sharing. See Note 7 a) to the Audited Financial
Statements.
Income taxes in Mexico are calculated on a stand-alone basis for AHMSA and
each of its subsidiaries. On a stand-alone basis, AHMSA had Ps.6,062.2 million
in tax loss carry-forwards available at December 31, 2000. MICARE is expected
to begin incurring income tax liability in 2002 when its existing tax loss
carry-forwards (Ps.210.8 million at December 31, 2000) are likely to have been
applied or have expired.
AHMSA reported statutory employee profit-sharing (which is also calculated
on a stand-alone basis for AHMSA and each of its subsidiaries) of Ps.21.0
million in 1999 and Ps.12.8 million in 2000.
Net Income (Loss)
After reflecting the participation in associated companies (which represents
the previous Ryerson joint venture), AHMSA recorded net income of Ps.1,152.1
million in 2000 and net loss of Ps.1,393.4 million in 1999.
Results of Operations for 1999 Compared to 1998
Sales Volume
Steel Segment. Sales of steel products for 1999 totaled 2,899 thousand
tonnes, a 0.4% increase from the 2,889 thousand tonnes of steel products sold
in 1998. Export sales represented 15.4% (447 thousand tonnes) of AHMSA's sales
volume of steel products in 1999, as compared to 9.5% (274 thousand tonnes) for
1998. Export sales volume increased 63.7% in 1999 as compared to 1998.
Steam Coal Segment. In 1999, AHMSA sold 7,678 thousand tonnes of steam
coal, a 3.0% decrease from the 7,913 thousand tonnes sold in 1998.
Net Sales
AHMSA's overall net sales in 1999 were Ps.13,359.9 million, a 17.3% decrease
from AHMSA's overall net sales of Ps.16,159.8 million in 1998.
89
Steel Segment. Despite the modest increase in sales volume of steel
products from 2,889 to 2,899 thousand tonnes, net sales from the steel segment
decreased 19.7% from Ps.13,788.8 million in 1998 to Ps.11,076.3 million in
1999. This decrease reflected a 20.2% decrease (in real terms) in AHMSA's
average sales price per tonne of steel products from Ps.4,692.9 in 1998 to
Ps.3,746.9 in 1999. This decrease was mainly due to the increase in the value
of the peso against the U.S. dollar and the inability to increase prices in
U.S. dollar terms due to excess supply and decrease in demand in Asia. During
1999, the inflation rate in Mexico was 12.3% and the appreciation of the value
of the peso relative to the U.S. dollar was 4.0%. Export sales represented 9.9%
of AHMSA's sales revenues in 1999 (15.4% of sales volume of steel products for
that year) as compared to 7.9% of AHMSA's sales revenue in 1998 (9.5% of sales
volume of steel products for that year).
In 1998 and 1999, AHMSA reported other sales of Ps.230.7 million and
Ps.214.1 million, respectively. Other sales in the steel segment principally
represent sales of by-products of the coke plants and pig iron scrap as well as
the provision of administrative services to affiliates.
Steam Coal Segment. Steam coal sales were Ps.2,283.6 million during 1999
compared to Ps.2,371.1 million reported in 1998, representing a 3.7% decrease.
The price of steam coal per tonne decreased 2.5% in real terms when comparing
1998 to 1999. The average sales price of steam coal for 1999 excludes Ps.39.8
million in revenues from CFE resulting from an upward adjustment to payments
made between January 1, 1997 and December 31, 1998.
Cost of Sales; Depreciation; Gross Profit
AHMSA's overall cost of sales (excluding depreciation) decreased 13.7% from
Ps.11,711.0 million (72.5% of overall net sales) in 1998 to Ps.10,108.8 million
(75.7% of overall net sales) in 1999, reflecting decreases in the cost of sales
in the steel segment. AHMSA's overall depreciation expense decreased by 0.5%
from Ps.1,293.0 million (8.0% of overall net sales) in 1998 to Ps.1,286.4
million (9.6% of overall net sales) in 1999. Overall gross profit for AHMSA
decreased from 19.5% of net sales (Ps.3,155.8 million) during 1998 to 14.7% of
net sales (Ps.1,964.7 million) during 1999.
Steel Segment. Cost of sales (excluding depreciation) for AHMSA's steel
segment decreased from Ps.10,362.4 million in 1998 to Ps.8,677.0 million in
1999, and the cost of sales as a percentage of net sales of AHMSA's steel
products increased from 75.1% of net sales in 1998 to 78.3% of net sales in
1999. The decline in cost of sales in absolute terms was mainly attributable to
the reduced cost of raw materials and supplies, labor and personnel, energy and
fuel. On the other hand the increase in the cost of sales as a percentage of
net sales is due to the greater percentage decrease in net sales mentioned
earlier. Raw materials and supplies costs decreased 27.4% from Ps.4,160.3
million (30.2% of steel segment net sales) in 1998 to Ps.3,018.9 million (27.3%
of steel segment net sales) in 1999. In 1999, AHMSA's requirements for coke and
iron ore pellets were produced internally and AHMSA did not purchase either
coke or iron ore pellets from third parties.
Labor and personnel expenses decreased from Ps.2,422.5 million (17.6% of net
sales of steel segment) in 1998 to Ps.2,211.8 million (20.0% of net sales of
steel segment) in 1999, and energy and fuel costs decreased by 16.1% from
Ps.2,022.7 million (14.7% of net sales of steel segment) in 1998 to Ps.1,696.4
million (15.9% of net sales of steel segment) in 1999. The increase in the cost
as a percentage of net sales is due to the decrease in net sales discussed
earlier.
Depreciation charges in this segment were Ps.1,136.3 million (10.3% of steel
segment net sales) in 1999 and Ps.1,130.8 million (8.2% of steel segment net
sales) in 1998.
Reflecting the above factors, AHMSA reported gross profit for its steel
segment of Ps.1,263.0 million (11.4% of steel segment net sales) during 1999,
as compared to a gross profit of Ps.2,295.5 million (16.6% of steel segment net
sales) during 1998, a decrease of 45.0%.
Steam Coal Segment. Cost of sales (excluding depreciation) for AHMSA's
steam coal segment increased from 56.9% of net sales of steam coal (Ps.1,348.7
million) in 1998 to 62.7% of net sales of steam coal (Ps.1,431.8 million) in
1999 due to the rental of additional equipment for the mines and to an increase
in the maintenance cost of the equipment used at the open pits.
90
Purchases of steam coal decreased 23.5% from Ps.298.7 million (12.6% of net
sales of steam coal) in 1998 to Ps.214.3 million (9.4% of net sales of steam
coal) in 1999 reflecting a reduction in price per tonne. Labor and personnel
expenses for this segment increased 7.2% from Ps.284.6 million (12.0% of net
sales of steam coal) to Ps.305.1 million (13.4% of net sales of steam coal) in
1999 due to a personnel increase related to the restart of Mine V.
Depreciation charges in this segment decreased in absolute terms by 7.3% and
as a percentage of net sales of steam coal, from Ps.162.2 million (6.8% of net
sales of steam coal) in 1998 to Ps.150.4 million (6.6% of net sales of steam
coal) in 1999 due to an increase in inventory during 1999.
Reflecting the above factors, AHMSA reported a gross profit with respect to
its steam coal segment of Ps.701.4 million (30.7% of net sales of steam coal)
during 1999, as compared to a gross profit of Ps.860.3 million (36.3% of net
sales of steam coal) during 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for AHMSA represented 6.3% and
6.9% of net sales for 1998 and 1999, respectively, while decreasing in absolute
terms by 8.7% from Ps.1,015.7 million in 1998 to Ps.927.2 million in 1999. The
increase in selling, general and administrative expenses as a percentage of net
sales is due to a lower level of net sales during 1999 and the reduction in
absolute terms due to the implementation of a cost reduction program called
AHMSA XXI.
Steel Segment. Selling, general and administrative expenses for AHMSA's
steel segment decreased by 8.2% from Ps.905.4 million (6.6% of steel segment
net sales) in 1998 to Ps.831.3 million (7.5% of steel segment net sales) in
1999 due to the cost reduction program. The percentage increase to net sales is
due to a lower level of net sales during 1999.
Steam Coal Segment. Selling, general and administrative expenses for
AHMSA's steam coal segment decreased by 13.1% from Ps.110.3 million in 1998
(4.7% of net sales of steam coal) to Ps.95.9 million in 1999 (4.2% of net sales
of steam coal) due to personnel reduction and other items included in the AHMSA
XXI program.
Operating Income
Operating income for AHMSA decreased 51.5% from Ps.2,140.1 million (13.2% of
net sales) in 1998 to Ps.1,037.5 million (7.8% of net sales) in 1999 reflecting
the decline in operating income in the steel and coal segment.
Steel Segment. Operating income for AHMSA's steel segment decreased by
71.9% from Ps.1,390.2 million in 1998 to Ps.431.7 million in 1999, principally
due to a decline in average sales price of steel products. Operating income as
a percentage of steel segment net sales was 5.0% in 1999, as compared to 10.1%
in 1998.
Steam Coal Segment. Operating income from AHMSA's steam coal segment
decreased by 0.4% from Ps.602.8 million in 1998 to Ps.605.8 million in 1999 due
to a lower sales volume and to an increase in the cost of sales. Operating
income as a percentage of net sales of steam coal was 26.5% in 1999, as
compared to 25.4% in 1998.
Financing and Related Costs
Pursuant to Mexican GAAP, statements of operations are required to present
all financial effects of operating and financing the business under
inflationary conditions. For presentation purposes, all such effects are
included under "Net Financing Result."
91
Interest expense decreased to Ps.1,947.3 million in 1999 from Ps.2,825.1
million during 1998, principally due to the fact that interest ceased to accrue
on debt contracts not guaranteed by mortgages and / or pledges upon the
declaration of suspension of payments on May 25 for AHMSA, MICARE, MIMOSA and
MINOSA and May 28, 1999 for CEMESA. See Note 2 b) to the Audited Financial
Statements.
Interest income decreased to Ps.109.4 million in 1999 from to Ps.241.1
million in 1998, because (i) GAN paid most of the outstanding balance it owed
to AHMSA during the first quarter of 1999, (ii) there were no cash investments
in escrow accounts related to bank loans and (iii) there were no financial
gains related to commodity price instruments.
In addition to the effect of the suspension of payments, during 1999, the
peso experienced a 5.3% appreciation in value relative to the U.S. dollar,
producing during such period a foreign exchange gain of Ps.1,177.0 million, as
compared to a 22.3% devaluation and a loss of Ps.4,287.4 million in 1998.
The gain from monetary position represents the effects of inflation, as
measured by the NCPI, on AHMSA's monetary assets and liabilities at the
beginning of each month. During 1998 and 1999 AHMSA's monetary liabilities
exceeded its monetary assets; consequently, there was a gain from monetary
position in both periods. Gain on monetary position decreased from Ps.3,538.4
million in 1998 to Ps.2,684.9 million in 1999, reflecting lower levels of
inflation in 1999.
Reflecting these factors, the net financing result went from a cost of
Ps.3,333.0 million in 1998 to a gain of Ps.2,024.0 million in 1999.
Other Expenses, Net
AHMSA reported other expenses (net of other income) of Ps.1,573.9 million
for 1999 as compared to Ps.502.0 million for 1998. During the second half of
1998, AHMSA concluded a previously planned reduction of personnel. In 1999, as
part of the AHMSA XXI Program, AHMSA created a reserve to pay severance
expenses that could result from a reduction of personnel. As a result, other
expenses in 1998 and 1999 included Ps.312.7 million and Ps.524.0 million,
respectively, relating to retirement, pension plan and seniority premiums
liabilities. See Note 3 and 4 b) to the Audited Financial Statements. During
1999, other expenses also included Ps.191.0 million relating to debt
restructuring and suspension of payments, Ps.202.0 million relating to a loss
on exchange of shares of Dos Carlos and Ps.139.0 million relating to penalties
and surcharges. See Notes 4 b), 4 d) and 7 n) to the Audited Financial
Statements.
Income and Asset Taxes and Employee Profit Sharing
AHMSA recorded pre-tax income of Ps.1,419.3 million in 1999, as compared
with a pre-tax loss of Ps.1,766.2 million in 1998.
Corporate taxes are imposed in Mexico both on the basis of corporate income
and assets. The asset tax is computed at an annual rate of 1.8% of the average
value of the majority of restated assets less certain liabilities. The asset
tax is paid only to the extent that it exceeds the income tax for the year. The
statutory rate of income tax in effect in Mexico was 34% in 1998 and 35% in
1999. During each year, the investments being made by AHMSA in new plant and
equipment produced benefits that substantially offset its asset-based tax
liability, while tax loss carry forwards virtually eliminated its income-based
tax liability. Accordingly, in 1998 and 1999, AHMSA reported asset tax of
Ps.0.8 million and income tax of Ps.1.6 million and asset tax of Ps.14.7
million and income tax of Ps.3.6 million, respectively. See Note 19 to the
Audited Financial Statements.
Income taxes in Mexico are calculated on a stand-alone basis for AHMSA and
each of its subsidiaries. On a stand-alone basis, AHMSA had Ps.6,242.6 million
in tax loss carry-forwards available at December 31, 1999. MICARE is expected
to begin incurring income tax liability in 2002 when its existing tax loss
carry-forwards (Ps.395.2 million at December 31, 1999) are likely to have been
applied or have expired.
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AHMSA reported statutory employee profit-sharing (which is also calculated
on a stand-alone basis for AHMSA and each of its subsidiaries) of Ps.20.7
million in 1998 and Ps.21.0 million in 1999.
Discontinued Operations
AHMSA reported a Ps.25.6 million net loss due to discontinued operations
during 1999, as compared to Ps.540.0 million during 1998. This loss was the
result of, among other things, a collapse in Mine VI and a loss of reserves in
Mine III of MIMOSA, an abandonment of Site I and Mine II of MICARE which were
offset by the gain on the sale of Galvanizing Plant assets (see Note 5 to the
Audited Financial Statements).
Net Income (Loss)
After reflecting the participation in associated companies (which represents
the previous Ryerson joint venture), AHMSA recorded net income of Ps.1,393.4
million in 1999 and net loss of Ps.2,330.3 million in 1998.
Capital Expenditures
The following table sets forth AHMSA's capital expenditures in connection
with our "Steel and Mining Capital Improvements Plan" for each year in the
three-year period ended December 31, 2000.
Capital Expenditures
Year Ended December 31
(in millions of constant pesos
as of June 30, 2001)
------------------------------------
1998 1999 2000
------------ ----------- -----------
Modernization Plan(l).................................. Ps. 205.8 Ps. 6.8 Ps. 0.0
Optimization Plan...................................... 354.2 195.3 0.0
Permanent Technology Update Plan (1)................... 0.0 0.0 328.1
Mining Capital Improvements Plan(2).................... 822.0 475.5 381.2
Other(3)............................................... 697.8 52.1 80.3
----------- ---------- ----------
Total Steel and Mining Improvements Plan(4)..... Ps. 2,079.8 Ps. 729.7 Ps. 789.5
- --------
(1) Includes Ps.47.8 million of aggregate expenditures from 1998 to 2000 for
environmental projects.
(2) Includes Ps.172.5 million of aggregate expenditures from 1998 to 2000 for
environmental projects.
(3) Includes replacements of assets and other investments for management and
labor housing.
(4) In 1998, Ps.343.9 million of AHMSA's aggregate capital expenditures
resulted from the capitalization of financing costs.
AHMSA has budgeted U.S.$70.8 million for capital expenditures in 2001. Of
this U.S.$70.8 million, U.S.$25.9 million corresponds to the Permanent
Technology Update Plan, which involves continuous investments in major
equipment and processes to update technology, environmental, and major
rehabilitation projects, and U.S.$33.8 million corresponds to the Mining
Capital Improvements Plan, which involves continuous replacement of equipment
with updated technology and environmental projects to allow the exploitation of
existing mines and new mines to maintain the required level of capacity in
metallurgical coal and iron ore. As of June 30, 2001, AHMSA has expended U.S.
$21.3 million.
AHMSA has had, and expects to continue to have, liquidity and capital
resources requirements, to finance capital expenditures programs (including
environmental expenditures under each of these plans) and to provide working
capital. As of December 31, 2000, AHMSA had undertaken contractual commitments
for U.S.$41.6 million. These expenditures are to be funded with financing from
AHMSA's cash flow from operations. As a result of the declaration of the
suspension of payments, AHMSA anticipates that it will not be able to obtain
additional borrowings for the foreseeable future. Therefore, AHMSA intends to
reduce the previously budgeted level of capital expenditures. There can be no
assurance as to what effect this reduced level of capital expenditure
93
will have on AHMSA's business, financial condition, and results of operations
in the future. As a result of our financial difficulties, in the past three
years we have reduced our capital expenditure spending. As a result of this
reduction in spending we have not been able to open new mines or to extract
sufficient additional raw materials from our existing mines to maintain our
current level of production. See "Risk Factors--Risks Arising from the Steel
and Coal Business in Mexico."
Liquidity and Sources of Capital
AHMSA's operating cash requirements consist principally of capital
expenditures, working capital requirements and scheduled payments of principal
and interest on outstanding indebtedness. During 1997 and 1998, AHMSA's
principal sources of liquidity were the incurrence of additional short-term and
long-term indebtedness, advances from customers and cash flow from operations.
At the beginning of 1999, U.S.$624.6 million principal amount of AHMSA's
indebtedness was scheduled for repayment. AHMSA originally intended to
refinance or extend the maturity of substantially all of such indebtedness, and
to repay the balance of such indebtedness with cash flow from operations and
the proceeds of asset sales. However, as a result of the worldwide decline in
steel prices, the decreased willingness of international financial sources to
lend in emerging markets such as Mexico and the economic conditions in Asia and
Eastern Europe, AHMSA was unable to obtain the necessary financing. As a
result, in April 1999, AHMSA commenced a debt restructuring process and in May
1999, AHMSA was declared in suspension of payments. Since May 25, 1999, date on
which AHMSA was declared in suspension of payments, AHMSA's operating cash
requirements have consisted primarily of capital expenditures and working
capital requirements. Since the imposition of the suspension of payments,
AHMSA's principal sources of liquidity have been limited to cash flow from
operations, advances from customers and factoring operations.
AHMSA had a negative working capital of Ps.16,278.0 million as of June 30,
2001, compared to a negative working capital of Ps.15,648.3 million as of
December 31, 2000.
Net resources generated by operations for the six months ended June 30, 2001
and 2000 were Ps.848.0 million and Ps.1,544.0 million, respectively. Net
resources generated by operations for 2000 and 1999 were Ps.2,725.3 million and
Ps.6,024.4 million, respectively. This decrease was primarily due to the sale
of assets in 1999 and the amortization of advances from clients in 2000. The
improvement in net resources generated by operations for 1999, compared to net
resources used in operations of Ps.1,635.3 of 1998, was primarily due to the
sale of assets and the nonaccrual of interest and a noncash gain in foreign
exchange.
For the six months ended June 30, 2001 and 2000, and the years ended
December 31, 2000, 1999 and 1998, net resources used in investing activities
were Ps.98.0 million, Ps.462.0 million, Ps.874.0 million, Ps.587.7 million and
Ps.1,269.3 million, respectively. These amounts were primarily related to
additions to property, plant and equipment. See "--Capital Expenditures."
Net resources used in financing activities were Ps.791.0 million and
Ps.970.0 million, respectively, for the six months ended June 30, 2001 and
2000, Ps.1,782.8 million in 2000 and Ps.5,746.9 million in 1999, as compared to
net resources generated by financing activities of Ps.2,798.4 in 1998. The
increase in net resources used in financing activities in 1999 resulted
primarily from a reduction in borrowings under short-term bank loans in that
year.
As of June 30, 2001, AHMSA's consolidated bank debt totaled
Ps.16,302.9 million, of which Ps.14.141.9 million was indebtedness of AHMSA and
Ps.2,161.0 million was indebtedness of its subsidiaries.
Of AHMSA's total consolidated debt as of May 25, 1999, 99.6% was denominated
in foreign currencies, mainly in U.S. dollars, and 0.4% in Mexican pesos. As of
December 31, 1999, due to the suspension of payments requirements, AHMSA's
total debt was converted into pesos at the exchange rate of Ps.9.359 per U.S.
dollar at May 25, 1999 and Ps.9.672 per U.S. dollar at May 28, 1999. As a
result of the suspension of payments, interest has ceased to accrue on AHMSA
indebtedness (except for secured indebtedness, to the extent the amount of the
security exceeds the amount of the debt). For a description of AHMSA's future
indebtedness as part of the restructuring plan, see "Description of Credit
Agreement" and "Description of New Notes."
94
On December 16, 1996, AHMSA issued the Old Discount Convertible Notes. The
Old Discount Convertible Notes were issued at an original issue discount of
U.S.$11.8 million so as to yield 9% per annum. After deducting the 2.1%
underwriting discount, the net proceeds of U.S.$71.4 million of the Old
Discount Convertible Notes were used to repay short-term debt. At May 25, 1999,
the accreted value of the Old Discount Convertible Notes was approximately
U.S.$80.4 million, including interest accrued from December 16, 1998 to May 25,
1999.
In 1997, AHMSA undertook three significant borrowings in order to extend the
overall maturity of its indebtedness. First, on April 12, 1997, AHMSA entered
into the Old SEN Facility. It is the position of the lenders under the Old SEN
Facility that the Old SEN Facility is to be repaid out of amounts due under
long-term steel supply contracts between AHMSA and each of Thyssen Handelsunion
AG, Ferrostaal AG and Kloeckner & Co. AG, and a cash deposit that, at December
31, 2000, equaled U.S.$4.1 million and which AHMSA may not withdraw. This
deposit is netted against the corresponding liability in the consolidated
balance sheet (which would not be done for U.S. GAAP purposes). The Old SEN
Facility is composed of two tranches with U.S.$303.0 million in principal
amount maturing in 2002 and bearing interest at an annual rate of London
inter-bank offered ("LIBO") rate plus 2.20% and U.S.$27.0 million in principal
amount maturing in 2004 and bearing interest at annual LIBO rate plus 2.40%.
The principal amount of the five-and seven-year tranches is subject to
repayment in 10 and 14 semi-annual installments, respectively. An aggregate of
U.S.$145.0 million of the U.S.$321.7 million approximate net proceeds of the
Old SEN Facility was used to pay amounts outstanding under then outstanding
syndicated loans. The remainder of the proceeds of the Old SEN Facility were
used to repay short-term indebtedness. In January 1998, AHMSA entered into a
LIBO rate swap agreement in respect of the Old SEN Facility. Pursuant to this
agreement, AHMSA is required to make payment to a counterparty based on the
LIBO rate for a basket of currencies, while AHMSA is entitled to receive
interest based on the U.S. dollar LIBO rate. In April 1999, AHMSA did not make
certain payments due under the Old SEN Facility. As a result, the lenders under
the Old SEN Facility used the U.S.$29.9 million original cash deposit to
satisfy a portion of such payment, and the LIBO rate swap agreement with
respect to the Old SEN Facility was terminated. As of December 31, 2000, the
outstanding balance of this loan was Ps.2,109.3 million.
Second, on May 6, 1997, AHMSA issued the Old Senior Notes, consisting of
U.S.$200.0 million of the Old Series A Notes and U.S.$225.0 million of Old
Series B Notes. Before the suspension of payments the Old Series A Notes bore
interest at an annual rate of 11 3/8% and matured on April 30, 2002, and the
Old Series B Notes bore interest at an annual rate of 11 7/8% and matured on
April 30, 2004. The proceeds were used to prepay short- and medium-term
indebtedness to banks and other lenders, including the prepayment on May 8,
1997 of a Santander bridge loan. In April 1999, AHMSA did not make certain
interest payments due under the Old Senior Notes, which enabled the noteholders
to call such failure an event of default under the Old Senior Notes thirty days
later. The indenture pursuant to which the Old Senior Notes were issued
contains certain covenants, including covenants that restrict the ability of
AHMSA and its subsidiaries to (i) incur additional indebtedness and, in the
case of subsidiaries, issue capital stock, (ii) pay dividends or make
distributions in respect of the capital stock of AHMSA or prepay subordinated
obligations or make certain other restricted payments, (iii) create liens, (iv)
dispose of assets, (v) issue subsidiary guarantees, (vi) enter into sale and
leaseback transactions, (vii) enter into transactions with affiliates and
(viii) create limitations on subsidiaries' ability to make payments to AHMSA.
During 1999, AHMSA was not in compliance with certain covenants contained in
the indenture for the Old Senior Notes.
Third, on September 8, 1997, AHMSA obtained a U.S.$108.0 million unsecured
bridge loan from Bank of America that matured in April 1999. The loan bore
interest at rates ranging between the LIBO rate plus 2.3% and the LIBO rate
plus 6.5%. The interest rate from September 8, 1997 until June 8, 1998 was the
LIBO rate plus 2.3%, and the interest rate from June 8, 1998 until July 8, 1998
was the LIBO rate plus 3.5%. The interest rate increased by 0.5% for each
successive month thereafter until it reached a maximum LIBO rate plus 6.5% for
the month beginning on January 8, 1999, and remained at that level for each
month until April 8, 1999, the final maturity date. This loan was principally
used to repay indebtedness with Nacional Financiera S.N.C., Institucion de
Banca de Desarrollo, originally financed by the World Bank to AHMSA. Such loan
is still outstanding. As of December 31, 2000, the outstanding balance of this
loan was Ps.1,032.0.
95
Debt Disbursements and Payments after Suspension of Payments
On May 25, 1999 and May 28, 1999, AHMSA, along with its principal
subsidiaries, obtained a judicial declaration of suspension of payments. As a
result of the suspension of payments order, AHMSA was granted an automatic stay
from collection of any indebtedness arising out of transactions completed prior
to the declaration of suspension of payments. In addition, all debts incurred
by AHMSA prior to the suspension of payments have been deemed due and payable.
See "Description of Restructuring Plan."
Under Mexican law, all proceedings for the collection or enforcement of debt
obligations against AHMSA and its subsidiaries declared in suspension of
payments, including those initiated in foreign jurisdictions, must be joined in
the suspension of payments proceedings. For purposes of recognition and
classification of AHMSA's debt obligations and in order to provide certainty
and equal treatment to all creditors entering into a debt restructuring
agreement with AHMSA, Mexican case law currently provides that all credit
obligations stated in foreign currency must be converted into pesos at the rate
of exchange prevailing on the date of the judicial declaration of suspension of
payments. For AHMSA, MICARE, MIMOSA and MINOSA, which obtained a judicial
declaration of suspension of payments on May 25, 1999, this rate of exchange is
Ps.9.359 per U.S.$1.00, and for CEMESA, which obtained a judicial declaration
of suspension of payments on May 28, 1999, this rate of exchange is Ps.9.672
per U.S.$1.00.
Following the suspension of payments declaration, AHMSA disbursed an
aggregate of U.S.$10.6 million under its Bank One credit facility for certain
payments in connection with the purchase of batch annealing furnaces. These
payments were permitted under the suspension of payments because the promissory
notes were signed before the suspension of payments was declared, a letter of
credit had been issued to Delta Brands, Inc., the supplier, and the loan was
insured by The Export-Import Bank of the United States.
Also following the suspension of payments declaration, AHMSA reimbursed (in
full or in part) the following three of its loan facilities:
. The loan facility with Marubeni Corporation (Marubeni): This facility
had an escrow account to which AHMSA assigned certain letters of credit
(placed before the declaration of suspension of payments) from its
customers. Payments under the letters of credit in the aggregate amount
of U.S.$1.1 million were made to the escrow account following the
suspension of payments, which payments were directed to Marubeni; from
this amount, Marubeni applied U.S.$0.4 million to interest and the
remaining U.S.$0.7 million to the outstanding principal. As of December
31, 2000, the outstanding principal balance of this loan was Ps.391.5
million.
. Loan facilities with Bancomext: These facilities were supported by an
absolute assignment of the account receivables originated by the supply
of steel under certain agreements and the purchase orders between AHMSA
and its customers. As a result of the collection mechanism defined in
such facilities, they are being or will be reimbursed to Bancomext in
full. Payments for an aggregate amount of U.S.$36.4 million were made
between May 26,1999 and December 31, 2000. As of December 31, 2000,
the outstanding principal balance of this loan was U.S.$30.4 million.
Between January 1, 2001 and September 30, 2001 payments under this
facility totaled U.S.$7.6 million. As of September 30, 2001, the amount
owed to Bancomext totaled U.S.$22.8 million.
. One of AHMSA's loan facilities with ECOBAN: This facility was secured by
a supply contract between AHMSA and one of its principal customers and a
payment instruction notice by which the client was required to make the
payments under the supply contract to an escrow account. Payments under
the supply contract in the aggregate amount of U.S.$17.9 million were
made following the suspension of payments until January 2000, when this
facility was fully reimbursed concurrently, with the termination of the
supply contract.
In addition, the judge that granted the suspension of payments declaration
authorized AHMSA and its subsidiaries to comply with payment obligations with
respect to certain capital leases including the capital leases
96
with Caterpillar Arrendora Financiera S.A. de C.V., Arrendadora Bankamerica and
The Capita Corporation, pursuant to each of which AHMSA leases heavy duty
machinery and equipment. As of September 30, 2001, we owe Caterpillar Arrendora
Financiera S.A. de C.V., Arrendadora Bankamerica and the Capita Corporation a
total of U.S.$2.3 million, U.S.$11.3 million and U.S.$2.7 million respectively.
As a consequence of the suspension of payments declaration, all of AHMSA's
indebtedness has been accelerated. The ultimate maturity of AHMSA's
indebtedness will be determined when agreement on a court-approved
reorganization agreement or a restructuring plan has been reached with AHMSA's
creditors.
From time to time, AHMSA receives advance payments for steel sales from its
customers. These advance payments are recorded as payables and are amortized
over the term of the relevant delivery periods. As of December 31, 2000,
AHMSA's current liabilities included Ps.737.2 million of payables and long-term
liabilities, including Ps.367.6 million of payables under these advance payment
arrangements.
U.S. GAAP Reconciliation
AHMSA's financial statements, which are prepared in accordance with Mexican
GAAP, recognize the effects of inflation in accordance with Bulletin B-10 and
B-12. See Note 7 c) to the Audited Financial Statements and 6 b) of the
Unaudited Financial Statements. The reconciliation to U.S. GAAP of AHMSA's
consolidated net income (loss) and total shareholders' equity does not reverse
the effects of such inflation accounting.
The principle differences, other than inflation accounting between Mexican
GAAP and U.S. GAAP, that affect AHMSA's consolidated net income (loss) and
total shareholders' equity relate to the treatment of the following items,
among others: (i) accounting for deferred income taxes prior to January 1,
2000, when revised Bulletin D-4 issued by the Mexican Institute of Public
Accountants went into effect, most of the difference was eliminated, (ii)
employee profit sharing, (iii) accounting for the depreciation effect from the
restatement of machinery and equipment, (iv) accounting for capitalized
interest, and (v) the gain from monetary position relative to items (i) through
(iv) above. See Note 21 to the Audited Financial Statements and Unaudited
Financial Statements for a detailed description of the differences between
Mexican and U.S. GAAP, Note 20 to the Audited Financial Statements and the
Unaudited Financial Statements for a discussion of pension benefit accounting
under U.S. GAAP and Note 21 to the Audited Financial Statements and Unaudited
Financial Statements for a reconciliation of consolidated net income (loss)
under Mexican GAAP to approximate consolidated net income (loss) under U.S.
GAAP, as well as a reconciliation of total shareholders' equity under Mexican
GAAP to approximate total shareholders' equity under U.S. GAAP.
97
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AHMSA is exposed to market risk from changes in currency exchange rates,
interest rates and raw materials commodity prices. AHMSA from time to time
assesses its exposure and monitors opportunities to manage these risks.
However, due to the suspension of payments, AHMSA is unable to use financial
instruments to manage market risk. Prior to its declaration of suspension of
payments, AHMSA utilized certain financial instruments for the purpose of
eliminating and/or minimizing the risk of increases in interest rates
applicable to debt denominated in U.S. dollars.
Interest Rate Risk
Interest rate risk exists principally with respect to AHMSA's indebtedness
that bears interest at floating rates. As a result of the suspension of
payments, interest has ceased to accrue on AHMSA's indebtedness (except for
secured indebtedness, to the extent the security exceeds the amount of the debt
but only up to the amount of the value of the security, Bancomext and certain
capital leases). Therefore, during the suspension of payments, AHMSA is to a
large extent no longer subject to interest rate risk. As of September 30, 2001,
the amount of AHMSA's secured indebtedness amounted to U.S.$131.7 million,
which represents 7.2% of AHMSA's consolidated debt. For these secured loans,
AHMSA has continued to accrue interest.
To AHMSA's knowledge, there is no active market for its Old Notes; although
AHMSA believes that there has been sporadic trading in Old Notes. In light of
AHMSA's suspension of payments, which among other things has resulted in the
conversion of all of its indebtedness to pesos and suspended the accrual of
interest, except to the extent any such debt is over secured, the perceived
uncertainty regarding AHMSA's emergence from suspension of payments, and the
lack of a public market for AHMSA's indebtedness, AHMSA is not able to provide
a meaningful assessment of the fair market value of AHMSA's indebtedness as of
December 31, 2000.
The fair value information presented herein is based on information
available to management as of the above presented dates. Such amounts have not
been comprehensively revalued since those dates, especially in light of AHMSA's
suspension of payments. (See Notes 15 and 16 to the Audited Financial
Statements and Notes 14 and 15 to the Unaudited Financial Statement.)
Foreign Currency Risk
AHMSA's principal foreign exchange rate risk involves changes in the value
of the peso relative to the U.S. dollar.
In 2000, AHMSA estimates that approximately 36.0% of AHMSA's consolidated
revenues were denominated in foreign currencies, substantially all of which was
denominated in U.S. dollars. AHMSA estimates that a majority of its
consolidated costs and expenses are denominated in pesos. Because the
percentage of U.S. dollar denominated revenues is higher than the percentage of
U.S. dollar denominated costs, decreases in the value of the peso relative to
the U.S. dollar will decrease AHMSA's gross profit, as the costs of production
will become more expensive relative to the sales price.
As of December 31, 2000, as a result of our suspension of payments,
approximately 94.0% of AHMSA's consolidated liabilities were denominated in
pesos, with the balance denominated in U.S. dollars or other currencies.
However, upon consummation of the Settlement Agreement, substantially all of
our indebtedness will be denominated in foreign currencies, substantially all
of it in U.S. dollars. Decreases in the value of the peso relative to the U.S.
dollar will increase the cost in pesos of AHMSA's foreign currency denominated
debt service obligations with respect to AHMSA's foreign currency denominated
indebtedness. A depreciation of the peso relative to the U.S. dollar will also
result in foreign exchange losses as the peso value of AHMSA's foreign currency
denominated indebtedness is increased. However, as a result of AHMSA's
suspension of payments proceeding, all of AHMSA's indebtedness has been
converted into pesos and interest has ceased to accrue on AHMSA's indebtedness
(except for secured indebtedness to the extent the value of the collateral
exceeds the amount of the debt but only up to the amount of the value of the
collateral, for obligations to Bancomext and under certain capital leases).
98
AHMSA generally does not hedge or enter into derivative transactions with
respect to its foreign currency exposure as it believes that these risks are
mitigated by the correlation of domestic steel prices to the U.S. dollar.
Commodity Price Risk
Although AHMSA produces a significant portion of the raw materials necessary
for the production of steel, AHMSA is exposed to commodity price risk through
its use of commodities, such as energy, as raw materials. Under normal economic
conditions, AHMSA has been able to adjust its end product prices to reflect
changes in the costs of its main raw materials in a short period of time.
Although AHMSA has not materially been affected by commodity price changes in
the past, there can be no assurance that it will not be materially affected in
the future.
Sensitivity Analysis Disclosure
A hypothetical, instantaneous and unfavorable 10% change in currency
exchange rate would not have resulted in an additional interest expense in 2000
because as a result of AHMSA's suspension of payments proceeding, all of
AHMSA's indebtedness has been converted into pesos and interest has ceased to
accrue on AHMSA's indebtedness (except for secured indebtedness to the extent
the value of the collateral exceeds the amount of the debt but only up to the
amount of the value of the collateral, for obligations to Bancomext and under
certain capital leases). Such a change also would not have resulted in a
foreign exchange loss. However, on a pro-forma basis, such a change would have
resulted in an additional charge of Ps.73.5 million in interest expense and a
foreign exchange loss of Ps.1,130.9 million. This sensitivity analysis assumes
an instantaneous unfavorable 10% fluctuation in exchange rates affecting the
foreign currencies in which AHMSA's indebtedness is denominated.
A hypothetical, instantaneous and unfavorable change of 100 basis points in
the interest rate applicable to floating-rate financial assets and liabilities
held at December 31, 2000 would not have resulted in additional net financing
expense in 2000 because as a result of the suspension of payments, interest has
ceased to accrue on AHMSA's indebtedness (except for secured indebtedness, to
the extent the value of the collateral exceeds the amount of the debt but only
up to the amount of the value of the collateral, for obligations to Bancomext
and under certain capital leases). On a pro-forma basis, such an interest rate
change would have resulted in an additional net financing expense of U.S.$12.0
million. The above sensitivity analysis is based on the assumption of an
unfavorable 100 basis point movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities. A homogeneous
category is defined according to the currency in which financial assets and
liabilities are denominated and assumes the same interest rate movement with
each homogeneous category.
99
AHMSA'S BUSINESS
Overview
AHMSA is the largest integrated steel producer in Mexico, accounting for 23%
of the overall domestic steel market, 41% of the domestic market for flat
products and 6% of Mexican exports of finished steel products in 2000. In 2000,
AHMSA produced 3.4 million tonnes of liquid steel and 2.8 million tonnes of
finished steel products. AHMSA, an integrated steel producer, manufactures a
variety of flat steel products (such as plate, hot rolled coil, cold rolled
coil and tinplate) as well as heavy beams. In the domestic market, AHMSA's
products serve primarily the manufacturing, construction, petroleum, packaging
and home appliance industries. AHMSA's export sales to other countries are
accomplished directly or through steel traders, to a variety of end users.
AHMSA owns its principal raw materials suppliers and steel production and
finishing facilities and has an equity interest in one steel product
distributor and a company that transports raw materials.
AHMSA's principal market historically has been the Mexican market, where it
has long held the leading market share position for flat products, with
deliveries to domestic customers accounting for approximately 95% of AHMSA's
sales volume of finished steel products in 1994. A decline in demand from
domestic customers caused by the Mexican economic crisis in 1995, combined with
the effects of the peso devaluation in Mexico in 1994 and 1995, resulted in
increased competitiveness of AHMSA's steel products in foreign markets and led
AHMSA in 1995 temporarily to focus its marketing efforts on export sales.
Exports in 1995 were 1,022 thousand tonnes, representing 43% of AHMSA's sales
volume of steel products and 42% of its net sales of steel products during that
year. During 1996 and 1997, as the domestic market improved relative to the
international market, and 1998, when the international market became highly
competitive due to the world's steel consumption decline originated by the
crisis in Asia and Eastern Europe, AHMSA redirected its marketing efforts
toward Mexico. In 1999, as a result of the continued growth in the North
American and European economies, AHMSA increased its exports of steel products
to those regions. Export sales in 1997, 1998, 1999 and 2000 were 417 thousand,
274 thousand, 447 thousand and 288 thousand tonnes, respectively, representing
14%, 10%, 15% and 10% of AHMSA's sales volume of steel products and 12%, 8%,
10% and 8% of its net sales of steel products for those years, respectively.
AHMSA continually evaluates the relative attractiveness of the export and
domestic markets and seeks to maintain flexibility to access either market as
conditions change.
AHMSA, through its subsidiary MICARE, is also engaged in the production and
sale of steam coal, a raw material for the electric utility industry. All of
AHMSA's steam coal sales are made to the CFE. In 2000, AHMSA produced 7.4
million tonnes of steam coal and sold 6.9 million tonnes to CFE, with 0.5
million tonnes remaining in inventory.
AHMSA is an operating company that directly owns the assets of its Monclova
steel making facilities. On an unconsolidated basis, as of December 31, 2000,
AHMSA's total assets were Ps.30,841.3 million and for the year ended December
31, 2000, AHMSA generated revenue of Ps.10,607.0 million. AHMSA is a direct
subsidiary of GAN, which is the controlling shareholder. Xavier D. Autrey Maza
and members of the Ancira family are the controlling shareholders of GAN. AHMSA
holds substantially all the equity of its principal direct and indirect
subsidiaries.
AHMSA's main steel making facilities and corporate offices are located in
Monclova, Coahuila, Mexico, approximately 190 kilometers northwest of
Monterrey, Nuevo Leon, Mexico. The facilities are located close to
transportation lines, raw materials supplies, principal points of export and
AHMSA's major domestic markets. AHMSA was incorporated under the laws of Mexico
on July 6, 1942 and all of AHMSA's steel production and mining facilities are
in Mexico. The principal executive offices of AHMSA are located at Prolongacion
Juarez s/n, Monclova, Coahuila, Mexico, 25770, and AHMSA's telephone number is
(52-866) 649-3000.
Suspension of Payments
In the second half of 1998, international steel prices fell sharply due to
the financial crisis in Asia. The decline deepened toward the end of 1998 and
into 1999. This decline in steel prices resulted in a reduction of the profit
margins and operating cash flows of most companies in the steel industry,
including AHMSA. In 1998, AHMSA's management decided to implement a strategy to
respond to these events, including a cost reduction program and the sale of
certain assets in order to increase liquidity.
100
In April 1999, in order to avoid preferring any one creditor over another,
to preserve cash flow, to ensure normal operations and to provide for time to
develop a restructuring plan, AHMSA did not make certain debt payments,
including a scheduled payment of approximately U.S.$39.0 million that was due
on April 16, 1999 with respect to the Old SEN Facility and a scheduled payment
of approximately U.S.$24.7 million of interest that was due on our Old Senior
Notes. The failure to make such scheduled principal and interest payments and
the failure to comply with the convenants contained in the instruments
governing our indebtedness allowed holders of our Old Loans and Old Notes to
claim their indebtedness to be in default, to accelerate maturity of their
indebtedness and to take other enforcement actions against us.
Recent Developments Regarding Operations
Notwithstanding the relief from debt service and collection actions afforded
by the suspension of payments proceeding, AHMSA's financial condition, results
of operations, and cash flow have continued to deteriorate since it obtained
the judicial declarations of suspension of payments on May 25 and May 28, 1999.
These adverse developments have been due, among other things, to general
economic and industry conditions including a general decline in steel prices
and a general increase in energy prices, the effect of suspension of payments,
and other conditions both within and outside of AHMSA's control and include the
following:
. AHMSA has been unable to obtain financing for its operations and capital
expenditures, other than advance payments from customers, accelerated
payments of accounts receivable in exchange for discounted terms and
delayed payments to certain suppliers. These forms of financing are of
limited amounts and contain onerous terms.
. A number of AHMSA's suppliers have for the most part required either
cash on delivery or advance deposit of the purchase price of goods and
services purchased, increasing AHMSA's working capital requirements. As
a result, we have ceased to use these suppliers to the extent
practicable.
. AHMSA has been unable to generate sufficient cash flow to adequately
fund its operations. As a result, AHMSA
(a) as of September 30, 2001 has not made required withholding tax
payments for 2001 in excess of Ps.260.0 million to the Mexican
government, and
(b) has not made necessary capital expenditures to permit the continued
extraction of raw materials necessary for the production of steel,
requiring AHMSA to purchase more costly raw materials from third
party suppliers. AHMSA is no longer able to pay amounts due to such
suppliers in a timely manner and we do not anticipate being able to
do so in the foreseeable future.
. AHMSA has either been unable to obtain necessary performance bonds
required by its customers, or has been able to obtain such bonds at
costs far in excess of historical levels.
. Arrest warrants have been issued for AHMSA's Chairman and AHMSA's Chief
Financial Officer, related to alleged fraud at an affiliated company.
The individuals have obtained a stay of execution of the warrants, and
AHMSA believes that the allegations are unfounded and are being used as
a collection tactic by a creditor of the affiliated company.
. Due to layoffs and resignations, AHMSA's white-collar workforce has been
reduced by 26.0% and AHMSA's blue-collar workforce has been reduced by
5.6%.
Steps Taken to Improve Operations
During the suspension of payments proceeding, AHMSA has taken the steps
outlined below in an effort to improve its business, financial condition,
results of operations, and cash flow. While AHMSA believes that these steps
have in the aggregate reduced the adverse effect on its business, financial
condition, results of operations and cash flow, they nonetheless continue to
deteriorate. Unless either (a) AHMSA obtains additional financing and
experiences an improvement in its results of operations or (b) there is a
general increase in steel prices,
101
AHMSA believes that remaining in suspension of payments will eventually result
in either a shut-down of its operations and a distress sale of its assets not
as a going concern or seizure of its assets by the Mexican government for
nonpayment of taxes.
. AHMSA terminated both union and non-union employees, and have extended
the time period for the payment of severance.
. Since July 2001, AHMSA has been deferring ten percent of the salaries of
substantially all employees with the rank of manager or higher
(approximately 189 employees).
. AHMSA has sold and continues to market for sale assets not directly
related to its steel and coal mining businesses to fund operations, even
though AHMSA had a non-binding agreement-in-principle to use the
proceeds from the sale of certain of those assets to make payments to
its creditors upon emergence from suspension of payments.
. AHMSA has explored merger, sale, and joint venture transactions with
potential strategic partners.
. AHMSA has sought governmental permission to exploit the methane gas
assets contained in its coal mines.
Business Strategy
AHMSA's strategy for its steel segment has been to consolidate its leading
market-share position in the Mexican flat products market, improve capacity
utilization with respect to its existing products, maintain a presence in
export markets and increase its customer base. Operationally, AHMSA is focused
on reducing production costs and improving product and process quality. With
respect to its steam coal segment, AHMSA's strategy is to maintain production,
while reducing costs and increasing productivity, at its various mines. AHMSA
is also exploring other opportunities in related lines of business.
Steel Capital Improvements Plan
From 1992 through 2000, AHMSA invested U.S.$837.7 million under AHMSA's
Steel Capital Improvements Plan and achieved the following goals :
. increased liquid steel production from 2.6 million tonnes in 1993 to 3.4
million tonnes in 2000;
. increased the production of finished steel products from 2.0 million
tonnes in 1993 to 2.8 million tonnes in 2000 (in 1999 we had a
production of finished steel products of 2.9 million tonnes);
. raised the production capacity for continuous casting of flat products
from 76.5% in 1993 to 99.5% in 2000;
. increased the yield of finished steel products to liquid steel consumed
from 77.9% in 1993 to 86.2% in 2000;
. improved productivity from 9.59 employee hours per tonne in 1993 to 6.1
employee hours per tonne in 2000;
. improved product quality;
. produced higher value-added, customized products;
. received ISO 9002 certifications from the International Standards
Organization covering AHMSA's blast furnaces, its steel making, its hot
rolling and cold rolling facilities, its manufacturing of heavy
structural sections and long products, its coke plants, pellet plant and
sinter plant, the auxiliary services of its production department, and
its sales and technical departments; and
. received ISO 14001 certificates from the International Standards
Organization covering certain of AHMSA's hot rolling facilities, cold
rolling facilities, coke plants, basic oxygen furnaces, blast furnaces
and steam coal mining facilities.
102
Mining Capital Improvements Plan
Between January 1, 1992 and December 31, 2000, AHMSA invested approximately
U.S.$432.1 million in capital expenditures under the Mining Capital
Improvements Plan relating to that period and achieved the following goals:
. increased AHMSA's production of iron ore from 2.6 million tonnes in 1992
to 5.0 million tonnes in 1998 (which decreased to 4.4 million tonnes in
1999 and increased to 4.7 in 2000);
. increased steam coal production at MICARE from 5.1 million tonnes in
1992 to 7.0 million tonnes in 1999 (which decreased to 6.6 million
tonnes in 2000); and
. increased metallurgical coal production from 1.5 million tonnes in 1992
to 2.0 million tonnes in 2000. See "--Steel Production and
Sales--Materials Preparation."
Cost of Major Components of Mining Capital Improvements Plan
Capital Expenditures
through December 31,
2000 (millions of U.S.
Projects Dollars)
------------------- ----------------------
MIMOSA........... 88.5
MICARE........... 223.3
MINOSA........... 97.4
La Perla......... 14.1
Cerro de Mercado. 8.8
-----
Total........ 432.1
=====
The Steel and Mining Capital Improvements Plans enhance what management
considers to be AHMSA's competitive advantages as a low-cost steel producer
with access to domestic and international steel markets:
. Focus on the Mexican Market. Mexico is a developing country with
substantial infrastructure needs. Prior to the 1995 economic crisis,
Mexico showed a robust demand for steel products. In 1994, apparent
domestic consumption of steel products was 9.89 million tonnes. In 1995,
apparent domestic consumption of steel products declined to 6.15 million
tonnes, of which 5.32 million tonnes were supplied by domestic
producers. Apparent domestic consumption of steel products in 1996
increased 25% from 1995 to 7.66 million tonnes (of which 6.64 million
tonnes were supplied by domestic producers), reflecting a recovery in
the Mexican steel market. Apparent domestic consumption of steel
products in 1997 increased 15% from 1996 to 8.78 million tonnes (of
which 7.30 million tonnes were supplied by domestic producers),
reflecting the continued recovery in the Mexican steel market. Apparent
domestic consumption of steel products in 1998 increased 8% from 1997 to
9.50 million tonnes (of which 7.48 million tonnes were supplied by
domestic producers). Apparent domestic consumption of steel products in
1999 increased 5% from 1998 to 9.97 million tonnes (of which 8.13
million tonnes were supplied by domestic producers). Apparent domestic
consumption of steel products in 2000 increased 10% from 1999 to 11.02
million tonnes of which 8.92 million tonnes were supplied by domestic
producers. AHMSA believes that domestic demand for steel products will
not continue with this growth pattern since the apparent domestic
consumption will be affected by a global economic slowdown. See
"--Public Sector Spending and the Mexican Economy."
. Access to Ample Mineral Reserves and Economies of Scale. AHMSA has
long-term concessions to mine iron ore and metallurgical coal mines with
proven and probable reserves which AHMSA believes are sufficient to
provide its steel operations with an ample and secure supply of primary
raw materials. In addition, AHMSA mines steam coal reserves for sale to
CFE. The operation of five mining units (consisting of 15 operating
mines) for both steel production and outside sales allows
103
AHMSA to realize economies of scale in its mining operations that AHMSA
believes are sufficient to achieve one of the lowest raw material input
costs in the world. Through the continuation of the Mining Capital
Improvements Plan, AHMSA expects that its mining subsidiaries will
provide most of the iron ore and metallurgical coal required by its
steel making facilities. In 1999, AHMSA did not purchase either
metallurgical coal or iron ore pellet from foreign producers, but in
2000, AHMSA purchased 36,202 tonnes (which represent 1.92% of the total
metallurgical coal used by AHMSA in its steel making facilities during
2000) of metallurgical coal from foreign producers. During the first six
months of 2001, AHMSA purchased 447 thousand tonnes of metallurgical
coal (which represents 36.2% of the total metallurgical coal used by
AHMSA in its steel making facilities during the first six months of
2001).
. Competitive Labor Costs. AHMSA's labor agreements, in combination with
retirements and attrition, and the productivity achievements under the
Modernization Plan have contributed to significant productivity gains.
AHMSA achieved productivity gains notwithstanding the reduction of its
workforce by an aggregate of approximately 4,186 employees in the period
of 1997-1999 and 357 more for 2000 in the steel and steam coal segments.
In addition, AHMSA's average wage and benefit cost for its steel and
mining operations was approximately U.S.$5.83 per hour during 2000,
which AHMSA believes is significantly below that of most of its foreign
and domestic competitors.
. Quality Products For a More Sophisticated Domestic Market and Access to
Foreign Markets. AHMSA emphasizes continual improvements to product
quality. In recent years, AHMSA has obtained ISO 9002 and ISO 14001
certifications from the International Standards Organization covering
many of its facilities. The upgrade helps AHMSA attract clients that
produce high quality products which are shipped to foreign markets.
AHMSA's export sales of steel products decreased from 417 thousand
tonnes in 1997 to 274 thousand tonnes in 1998, but increased to 447
thousand tonnes in 1999. During 2000 export sales decreased from 447
thousand tonnes in 1999 to 288 thousand tonnes. Export sales volume
accounted for 10% of total sales volume of steel products in 2000,
compared to 10% in 1998 and 15% in 1999. See "--Sales and
Marketing--Export Sales."
. Strategic Location. AHMSA's Monclova steelworks are located within 300
kilometers of AHMSA's most important raw material subsidiaries, thereby
substantially reducing transportation costs. In 2000, AHMSA's average
cost of delivery per tonne of raw materials was approximately U.S.$1.23
per tonne of iron ore and approximately U.S.$5.15 per tonne of
metallurgical coal. Similarly, AHMSA's location near its primary
domestic markets and its relative proximity to points of export reduce
finished product delivery costs.
Other Opportunities
From time to time the Company retains brokers, lobbyists, experts and other
consultants in connection with potential projects and ventures. Such unrelated
third parties are typically paid a periodic fee and are reimbursed for their
expenses, and are entitled to receive a success fee based on either a
percentage of the value of the project or a fixed dollar amount which may range
as high as U.S.$15.0 million.
AHMSA and its mining subsidiaries have been authorized since 1997 to make
use of the coal methane gas ("Gas Grisu") attached to the coal within their
mining concessions which has been traditionally released into the atmosphere or
burned away. Such authorization allows AHMSA, its affiliates and subsidiaries
to benefit from the gas through a "self consumption" program, which has not yet
been implemented. AHMSA and its mining subsidiaries have been actively seeking
to implement a program to take advantage of this authorization, and the
potential advantages within the current legal environment in Mexico, which is
very restrictive in the hydrocarbons area.
Steel Production and Sales
Technical Partner
Hoogovens Technical Services HTS ("Hoogovens") was part of the Hoogovens
Group, which operates Hoogovens Iron and Steel Works Ijmuiden, one of the
largest steel producers in Europe. On October 6, 1999,
104
British Steel plc merged with the Hoogovens Group to form a new group named
Corus Group plc. Under a Modernization Agreement among AHMSA, GAN and
Hoogovens, Hoogovens was to provide technical, engineering and operating
assistance to AHMSA for a period of 10 years ending in December 2001 in
exchange for a working hour fee in the form of up to 8,841,765 shares of
AHMSA's common stock. As of December 31, 2000, Hoogovens had received from GAN
7,957,590 shares of AHMSA's Common Stock (2.05% of AHMSA's outstanding common
stock at such date).
On February 3, 1999, AHMSA, GAN and Hoogovens entered into a Memorandum of
Understanding which terminated the Modernization Agreement. Under the
Memorandum of Understanding, AHMSA agreed to pay all of the outstanding amounts
owing to Hoogovens under the Modernization Agreement in equal installments in
1999 and GAN agreed to repurchase all of the shares of AHMSA's common stock
held by Hoogovens. In return, Hoogovens forgave annual fees of U.S.$775,000 for
1999, 2000 and 2001 due to it under the Modernization Agreement. The
forgiveness of the annual fees is conditioned upon the timely completion of all
payments by AHMSA under the Memorandum of Understanding. Currently, all of the
payments to be made by AHMSA are past due and GAN's purchase of AHMSA common
stock has not been consummated.
Production
AHMSA produces all of its steel products, other than the long products that
were produced at ANSA prior to its sale, at an integrated steel making facility
consisting of two plants located in Monclova, 190 kilometers northwest of
Monterrey. AHMSA produces crude steel using the basic oxygen steelmaking method
and casts its liquid steel by the continuous casting and ingot methods. In each
of 1999 and 2000, AHMSA produced 3.4 million tonnes of liquid steel, which
yielded 2.9 million and 2.8 million tonnes of finished steel products,
respectively.
The following description of AHMSA's production process highlights several
major components of the Steel Capital Improvement Plan and Mining Capital
Improvement Plan.
Materials Preparation
The principal raw materials required by AHMSA are iron ore, coal, scrap and
oxygen. AHMSA's iron ore is processed by a pellet plant and a sinter plant. As
a result of the renovations to the pellet plant, nominal capacity at the pellet
plant has increased from 3.0 million tonnes per year in 1993 to 3.8 million
tonnes per year in 1998. Capacity has remained relatively constant between 1998
and 2000. In 1998, 1999 and 2000, the pellet plant operated at a rate of 3.7
million, 3.8 million and 3.7 million tonnes per year, respectively.
Coal is converted to coke by heating coal in sealed ovens. AHMSA owns two
coke plants that perform this function. In order to meet the levels of
production set out by the Steel Capital Improvements Plan and to address
deferred maintenance, significant investments were made in these coke ovens to
reduce unit production costs further through energy savings as well as reducing
emissions. In 1999, AHMSA did not purchase either metallurgical coal or iron
ore pellet; but in 2000, AHMSA purchased 36,202 tons of metallurgical coal.
During the first six months of 2001, AHMSA purchased 447 thousand tonnes of
metallurgical coal (which represents 36.2% of the total metallurgical coal used
by AHMSA in its steel making facilities during the first six months of 2001).
Iron Making
The outputs of the coke plants, the pellet plant and the sinter plant are
fed into blast furnaces, where they are ignited to produce molten pig iron, the
principal feedstock for the steel making process. AHMSA has four blast
furnaces, which have nominal capacities of 5,500, 2,300, 1,750 and 1,000 liquid
tonnes of pig iron per day. Since September 1995, other than as described
below, the two largest blast furnaces have operated on a full-time basis, with
the smallest blast furnaces operating as a backup facility. AHMSA's total iron
making output was 3.4 million, 3.0 million and 3.0 million tonnes in 1998, 1999
and 2000, respectively. AHMSA's iron making capacity is currently approximately
3.7 million tonnes per year.
105
AHMSA completed the installation of a system to inject coal into its largest
blast furnace during the first quarter of 1997. AHMSA installed coal injection
systems at two other blast furnaces and began operating these systems in the
first quarter of 1998. This allowed AHMSA to reduce the amount of coke that is
consumed in the furnace and the amount of natural gas that is used to heat the
blast furnace, thereby lowering operating costs because, for AHMSA, coal is
less expensive to use in iron making than coke or natural gas. See "--Mining
Operations--Coal Mining Operations--Production and Sales."
Steel making
Molten pig iron from the blast furnaces is transferred to the basic oxygen
furnaces (or steel shops) for processing into liquid steel. AHMSA renovated one
of its two steel shops to increase its overall nominal capacity by
approximately 20%. Overall, AHMSA's nominal liquid steel making capacity at its
Monclova facilities increased from 2.6 million tonnes in 1993 to 3.8 million
tonnes in 1998. Capacity has remained constant between 1998 and 2000. In 1998,
1999 and 2000, the steel shops produced 3.7 million, 3.4 million and 3.4
million tonnes, respectively, of liquid steel.
Continuous Casting
Under AHMSA's current production process, the liquid steel leaving the steel
shops is processed in one of two methods: ingot casting or continuous casting.
In ingot casting, the molten steel is first cast into ingots, which are then
reheated and rolled into blooms (a semi-finished product used to produce long
products) in the blooming mill or slabs (a semi-finished product used to
produce flat products) in the slabbing mill. In continuous casting, which
produces higher quality steel, the intermediate ingot step is eliminated, and
the steel is cast directly into slabs in continuous casters. Improvements to
the casters, which permit automatic monitoring of the cooling process, have
increased yield and improved quality. Reduced utilization of ingot casting will
reduce the energy costs associated with reheating ingots. AHMSA's output of
liquid steel used in the production of flat products to be continuously cast in
2000 increased to 99.5% compared to 76.5% of AHMSA's output of flat products in
1993. In 1993, AHMSA's nominal continuous casting capacity was 1.5 million
tonnes of liquid steel per year compared to 2.9 million tonnes and 2.8 million
tonnes in 1999 and 2000, respectively. As of December 31, 2000, AHMSA had a
nominal continuous casting capacity of 3.2 million tonnes of liquid steel,
allowing 99.5% of AHMSA's flat products to be continuously cast through
installation of a new ladle furnace in steel shop number 2. During 2001, AHMSA
suspended the production of ingot casting and now all production is through
continuous casting.
Rolling Mills and Downstream Products
Slabs from the continuous casters are used to produce plate and hot rolled
coil for customers and for further processing in AHMSA's cold rolling
facilities.
Hot rolled coil can be further processed into higher-value added products at
AHMSA's two cold mill plants. One of AHMSA's two cold mill plants, which
currently produces tinplate, tin-free steel and "full hard" cold rolled coil,
is being renovated in order to improve tinplate quality while maintaining
current production capacity of 180 thousand tonnes per year. In the second
quarter of 1996 AHMSA completed construction of a galvanized product line with
a production capacity of approximately 250 thousand tonnes per year which was
subsequently sold in the first quarter of 1999. See "--Restructuring and
Suspension of Payments."
106
Production Efficiency Indicators
The table below provides a breakdown of operating efficiency indicators in
steel production for the periods indicated.
Year Ended December 31,
---------------------------------
1996 1997 1998 1999 2000
----- ----- ----- ----- -----
Operating Efficiency Indicators (Unaudited)
Tonnes Sold (thousands of tonnes)(1).................. 2,734 2,887 2,889 2,899 2,804
Employee Hours per Tonne(2)........................... 7.45 7.28 6.56 6.12 6.09
Union Employees(3).................................... 7,555 7,509 6,409 6,165 6,216
Non-union Employees(3)................................ 3,380 3,520 3,283 2,887 2,741
Coke Rate(4).......................................... 471 469 453 436 460
Energy Consumed(5).................................... 6.5 7.0 6.9 6.9 7.0
Liquid Steel Production Capacity (thousands of tonnes) 3,733 3,700 3,800 3,800 3,800
Capacity Utilization(6)............................... 95.0% 94.7% 96.8% 89.0% 88.2%
Continuous Casting Production(7)...................... 79.7% 86.0% 86.6% 90.2% 92.8%
Steel Segment Operating Income (Loss) per Tonne
(thousands of pesos)................................. 816.9 629.6 532.2 148.9 283.6
Yield(8).............................................. 80.3% 81.9% 83.7% 85.1% 86.2%
First Quality(9)...................................... 95.1% 96.6% 96.8% 98.0% 97.9%
- --------
(1) Excludes the results of operations of the Galvanizing Plant and ANSA which
were sold in 1999.
(2) Number of steel plant employee hours in each period divided by total of
tonnes of liquid steel produced in such period.
(3) Excludes personnel employed in AHMSA's mining operations.
(4) Kilograms of coke per tonne of pig iron. Reductions in the coke rate may
result from improved efficiency or the substitution of coal or natural gas
for coke.
(5) In gigacalories (calories x 109) per tonne of liquid steel.
(6) Actual output of liquid steel as a percentage of maximum nominal capacity
of liquid steel.
(7) Percentage of total output made by the continuous casting method, which is
more efficient and produces higher quality products than the traditional
ingot casting method. See "--Steel Production and
Sales--Production--Continuous Casting."
(8) Percentage of finished products per tonne of liquid steel consumed. Yield
represents the ratio of finished products to raw steel produced.
(9) Percentage of finished products meeting standard industry quality criteria,
for the relevant market. The quality standards of the international steel
market are higher than those of the Mexican steel market.
107
Products
The following table sets forth AHMSA's finished steel sales and production
by product category for the periods indicated.
Sales and Production of Finished Products
(thousands of tonnes)
Year Ended December 31,
---------------------------------------
1996(1) 1997(1) 1998(1) 1999(1) 2000(1)
------- ------- ------- ------- -------
Tonnes Sold(2) (Unaudited)....................
Flat Products................................. 2,275 2,437 2,374 2,547 2,497
Coated Products............................... 98 127 148 110 131
Wire Rod(3)................................... 170 146 174 50 --
Heavy and Light Sections, Billet and Others(4) 191 177 193 192 176
----- ----- ----- ----- -----
Total Tonnes Sold............................. 2,734 2,887 2,889 2,899 2,804
Increase (Decrease) in Inventory.............. 142 29 126 (50) 1
----- ----- ----- ----- -----
Total Production.............................. 2,876 2,916 3,015 2,850 2,803
===== ===== ===== ===== =====
- --------
(1) Excludes the results of operations of the Galvanizing Plant and ANSA which
were sold in 1999.
(2) Includes sales of products that were bought from third-party suppliers and
resold by AHMSA. This purchased steel accounted for 0.3%, 0.2%, 0.1%, 0.0%
and 0.0% of AHMSA's sales volume during 1996, 1997, 1998, 1999 and 2000,
respectively.
(3) The production of wire rod was suspended in April 1999.
(4) The production of light sections and billets was suspended in May 2001.
Flat Products
Plate. Plate is a flat, rigid steel product that generally ranges in
lengths from 96 inches to 480 inches and thicknesses from 0.187 inches to 3.500
inches. AHMSA is the only Mexican producer of plate. AHMSA produces plate at up
to 120 inches in width. AHMSA's major customers for plate include heavy
machinery producers, pipe makers, construction companies and distributors.
Hot Rolled Coil. Hot rolled coil is a thin, semi-rigid or flexible product,
generally ranging in thickness from 0.075 inches to 0.500 inches and delivered
in large rolls. AHMSA produces the widest hot rolled coil (up to 60 inches) in
Mexico. AHMSA's major customers for hot rolled coil include re-rolling
facilities, tubemakers, producers of oil and gas pipeline and producers of
compressed gas cylinders.
Cold Rolled Coil. Cold rolling, a further processing step for hot rolled
products, produces a superior surface finish, improves the physical properties
of steel and reduces its thickness to precise gauges. AHMSA manufactures cold
rolled coil in various specifications and sizes for use in industrial
applications and for further processing. Cold rolled products generally command
higher prices than hot rolled products. AHMSA has increased its output of cold
rolled coil from 427 thousand tonnes in 1993 to 747 thousand tonnes in 2000.
AHMSA's major domestic customers for cold rolled coil include distributors and
service centers, galvanizers, steel processors, home appliance makers and
suppliers to the automotive industry.
Coated Products
Tinplate; Tin-Free Steel. Tinplate is a plate produced from cold rolled
coil that is coated with tin. AHMSA is Mexico's most significant producer of
tinplate, which is principally used in the production of cans. The balance of
the market is principally supplied by imports. AHMSA's major customers for
tinplate are the food and packaging industries.
108
AHMSA operates two tinplate facilities, one with a capacity of 70 thousand
tonnes and the other with a capacity of 130 thousand tonnes. AHMSA installed a
dual line in its larger tinplate facility in the third quarter of 1996, which
allows AHMSA to produce an aggregate of 130 thousand tonnes of tinplate or
tin-free steel. Tin-free steel is chrome-coated sheet that is used to make
bottle caps and food cans.
Galvanized Products. AHMSA began production in a new Galvanizing Plant in
the second quarter of 1996. The Galvanizing Plant was sold to IMSA during the
first quarter of 1999.
Heavy Structural Sections
Under the current production process, slabs are cut for further rolling into
heavy structural sections. AHMSA is the only significant producer of heavy
structural sections in Mexico. AHMSA's major customers for heavy structural
sections include construction distributors and mining companies.
Sales and Marketing
Domestic Sales
The Mexican market is the primary market for AHMSA's steel products. In
1996, 1997, 1998, 1999 and 2000 approximately 72%, 86%, 90%, 85% and 90%,
respectively, of AHMSA's total sales by volume of steel products were
attributable to sales made to customers in Mexico. Domestic customers are
divided into two principal classifications: industrial customers (both
affiliated industrial customers and third-party industrial customers) and
distributors (both affiliated distributors and third-party distributors).
Industrial customers include both actual end users of products and
manufacturers or processors who further process the purchased steel (such as
pipemakers and producers of galvanized steel). Distributors resell to smaller
customers or customers seeking delivery or other terms not available directly
from AHMSA. In 2000, AHMSA supplied approximately 1,570,000 tonnes of steel
products to Mexican industrial customers (representing 56% of AHMSA's sales
volume of steel products), 20 thousand tonnes of which represented sales to
affiliated industrial customers (representing 0.7% of AHMSA's sales volume of
steel products), including customers in the construction and manufacturing
businesses, and approximately 953 thousand tonnes to Mexican distributors
(representing 34% of AHMSA's sales volume of steel products), 114 thousand
tonnes of which represented sales to affiliated distributors (representing 4%
of AHMSA's sales volume of steel products). AHMSA's two largest domestic
customers, Grupo Villacero, an industrial customer and a distributor, and Grupo
IMSA, an industrial customer, accounted for approximately 14% and 9%,
respectively, of AHMSA's total sales volume of steel products in 2000.
Export Sales
AHMSA's export sales are principally made in spot transactions. In 1996,
1997, 1998, 1999 and 2000 exports accounted for 28%, 14%, 10%, 15% and 10% of
AHMSA's overall sales volume of steel products, respectively. AHMSA continually
evaluates the relative attractiveness of the export and domestic markets and
seeks to maintain flexibility to access either market as conditions change.
Management expects exports to represent a relatively important portion of sales
to the extent that the relative value of the peso is weaker as compared to
other currencies. Traditionally, AHMSA's principal export market has been North
America. In 1996, AHMSA's principal export markets were Asia, Europe, and Latin
America because of more advantageous pricing in those markets. See "--Dumping
and Countervailing Duties."
In 1997 and 1998, the economic crisis in Asia resulted in a decline in
international steel prices which has caused AHMSA to redirect sales from Asia
to North America and Latin America. In 1999 and 2000, exports were principally
to North America and Europe as a result of the continued growth in those
economies.
109
The table below sets forth AHMSA's exports in terms of volume of steel by
geographical market for the periods indicated.
AHMSA's Exports of Steel by Geographical Market
(in thousands of tonnes and as a percent of total export sales)
Year Ended December 31
------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Vol. % Vol. % Vol. % Vol. % Vol. %
---- --- ---- --- ---- --- ---- --- ---- ---
Europe................... 84 10 46 11 14 5 103 23 37 13
Far East................. 330 41 31 8 5 2 0 0 0 0
Central and South America 172 21 191 46 78 28 58 13 9 3
North America............ 213 27 148 35 177 65 286 64 242 84
Other.................... 5 1 0 0 0 0 0 0 0 0
--- --- --- --- --- --- --- --- --- ---
804 100% 417 100% 274 100% 447 100% 288 100%
=== === === === === === === === === ===
In addition to its direct export program, AHMSA has joint export
arrangements with certain large customers that further process its steel
products for eventual export. These clients include Caterpillar de Mexico, S.A.
de C.V. (an affiliate of Caterpillar Inc.), Nacional de Aceros, S.A. de C.V.,
Industrias Monterrey, S.A. de C.V., Trinity Industries de Mexico, S.A. de C.V.
and Tuberias PROCARSA, S.A. de C.V. Although sales made to these customers
under these arrangements are domestic sales, the local currency settlement is
indexed to the U.S. dollar. These sales accounted for approximately 14%, 24%,
21%, 28% and 29% of AHMSA's sales volumes of steel products in 1996, 1997,
1998, 1999 and 2000, respectively.
Marketing
AHMSA has five sales offices in Mexico located in Monterrey, Mexico City,
San Luis Potosi, Guadalajara and the central sales office in Monclova. In 2000,
53% and 21% of AHMSA's domestic sales were made by the Monterrey and Mexico
City offices, respectively.
AHMSA's export sales to countries other than the United States are handled
by the sales force in Monclova and are made through international steel
traders. During 1997, 1998, 1999 and 2000, AHMSA targeted and developed a
geographically diverse customer base. See "--Export Sales." AHMSA's export
sales are coordinated by AHMSA's International Operations Manager, who is based
in Monclova. In the fourth quarter of each of 1995 and 1996, AHMSA opened sales
offices in Venezuela and Chile, respectively, which focus on sales to South
America. In November 1999, due to a sales slowdown in South America, AHMSA
closed its sales office in Chile. In August 2000, AHMSA closed its sale offices
in Venezuela. Sales to the United States were made with the support of GANAHMSA
until it closed in December 1999. Sales to the United States are now made
directly through GAN International Trading S.A. de C.V., a wholly owned
subsidiary of AHMSA (see "Related Party Transactions").
In July 1994, AHMSA formed a joint venture, Ryerson de Mexico, S.A. de C.V.
("Ryerson"), with Ryerson Tull, Inc., a subsidiary of Inland Steel Industries,
Inc. ("Inland"), a large integrated steel company in the U.S. The joint venture
operates through the service centers in Mexico located on land leased from
Avios de Acero S.A. de C.V., a subsidiary of AHMSA, and provides materials and
management services. Each of Inland and AHMSA has a 50% equity interest in the
joint venture. In addition, Ryerson decided to diversify its supply sources for
those products previously supplied exclusively by AHMSA. On June 10, 2001, the
parties reached a preliminary agreement to terminate the joint venture through
the withdrawal of Ryerson Tull, Inc.'s participation, which was consummated on
October 26, 2001. As a result, Ryerson is now a wholly owned subsidiary of
AHMSA and has changed its name to Nacional de Acerero S.A. de C.V.
110
The International and Mexican Steel Markets
International Steel Market
In recent years, the world steel industry has been characterized by
overcapacity reflecting generally sluggish demand for steel in western
industrialized countries as well as significantly increased steel production
capacity in a number of developing countries.
After a period of continued growing demand and improved international steel
prices, the economic crisis in Asia adversely affected Mexican sales in the
fourth quarter of 1997 and 1998 as imports to Mexico increased and demand for
steel products in Asia declined. The global excess supply and decrease in
demand in Asia also led to a decrease in international steel prices in 1998,
which limited AHMSA's ability to increase prices in the domestic market. During
the last two quarters of 1999, the demand for steel and international steel
prices began to show some recovery. During the first half of 2000, the steel
market showed a robust demand for steel products; however, higher production
growth caused an excess of supply of steel products and service centers began
to build up high inventory levels. This maintained steel prices under pressure
decreasing close to Asian crisis levels.
The Mexican Steel Industry
The Mexican steel industry is composed of a handful of integrated steel
producers, numerous mini-mills and one rolling mill, which produce various
semifinished and finished products. AHMSA and Hylsamex, S.A. de C.V. ("Hylsa"),
are the two principal manufacturers of finished flat products. See
"--Competition--Domestic."
For many years, steel prices charged by public and private steelmakers in
the Mexican market were controlled by the Mexican government. Although steel
prices were officially deregulated in September 1989, in fact the Mexican
government maintained certain price restrictions until September 1991 as an
inflation reduction measure. Prices of steel in Mexico fell below international
steel prices during the beginning of 1995. By May 1995, however, steel prices
in Mexico had returned to the levels of international steel prices, which also
had increased during this period. In 1996 and 1997, steel prices in Mexico
declined in peso terms (on an inflation adjusted basis), while international
steel prices (in U.S. dollar terms) increased in 1996 and then remained stable
in 1997. In 1998, domestic and international steel prices (in U.S. dollar
terms) decreased as a result of the economic crisis in Asia, which price
decrease resulted in increased imports to Mexico. Domestic and international
steel prices continued to decrease during the first two quarters of 1999, due
to, among other things, lower import prices and higher inventories. During the
third and fourth quarters of 1999, however, domestic and international steel
prices began to recover, which resulted in a decrease of imports to Mexico
during these periods. The oversupply on the global market led to a decrease of
international steel prices during the second half of 2000. This resulted in an
increase of imports to Mexico.
From 1996 to 1997, apparent domestic consumption increased 15% to 8.78
million tonnes, from 1997 to 1998, apparent domestic consumption increased 8%
to 9.50 million tonnes, and from 1998 to 1999, apparent domestic consumption
increased 5% to 9.97 million tonnes. From 1999 to 2000, apparent domestic
consumption increased 10% to 11.02 million tonnes.
In 1998, the market share of imports to Mexico increased to 21% of apparent
domestic consumption. In 1999, the market share of imports to Mexico decreased
to 19% of apparent domestic consumption. In 2000, the market share of imports
to Mexico remained at 19%. Total domestic production of finished steel products
increased by 81% from 1991 to 2000.
111
The following table illustrates apparent domestic consumption of steel in
Mexico for the periods indicated.
Apparent Domestic Consumption of Finished Steel Products(l)
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
(thousands of tonnes)
Flat Products:
Domestic(2)..................................... 3,822 4,582 5,395 5,194 5,539 5,491
Imports(2)...................................... 250 336 642 886 610 814
Exports......................................... (1,089) (1,089) (1,403) (961) (1,058) (602)
------ ------ ------ ------ ------ ------
Apparent Domestic Consumption...................... 2,747 3,829 4,634 5,119 5,090 5,703
AHMSA's Domestic Sales of Flat Products(3)......... 937 1,609 2,158 2,254 2,210 2,340
AHMSA's Percentage of Apparent Domestic Consumption
of Flat Products................................. 34% 42% 47% 44% 43% 41%
Long Products:
Domestic........................................ 4,298 4,665 4,894 5,028 5,402 5,508
Imports(4)...................................... 120 200 298 391 487 514
Exports......................................... (1,262) (883) (905) (682) (736) (683)
------ ------ ------ ------ ------ ------
Apparent Domestic Consumption...................... 3,156 3,982 4,288 4,732 5,154 5,339
AHMSA's Domestic Sales of Long Products(2)......... 259 309 301 354 238 173
AHMSA's Percentage of Apparent Domestic Consumption
of Long Products................................. 8% 8% 7% 7% 5% 3%
Other Steel Products(5):
Domestic........................................ 2,638 3,014 664 620 444 633
Imports......................................... 457 486 541 744 746 767
Exports......................................... (2,846) (3,654) (1,344) (1,713) (1,464) (1,426)
------ ------ ------ ------ ------ ------
Apparent Domestic Consumption...................... 249 (154) (139) (350) (274) (26)
AHMSA's Domestic Sales of Other Steel Products..... 139 12 10 7 4 2.5
AHMSA's Percentage of Apparent Domestic Consumption
of Other Steel Products.......................... 56% NM NM NM NM NM
------ ------ ------ ------ ------ ------
Total:
Total Apparent Domestic Consumption................ 6,152 7,657 8,783 9,501 9,969 11,016
- --------
NM--not meaningful.
Source: AHMSA using data from CANACERO for Mexican figures (figures for 2000
are preliminary); AHMSA for AHMSA's figures in all periods.
(1) Apparent domestic consumption of steel products is defined to be the sum of
Mexican domestic steel production of finished steel products and imports of
finished steel products less exports of finished steel products. "Finished
steel products" refers to steel products, such as hot rolled coil and cold
rolled coil, which are generally the final products of steel manufacturers.
Excluded from this category are products that have been further refined
into such products as automotive components. Using this methodology,
AHMSA's market share may exceed 100% in periods where a significant portion
of Mexican production was exported and AHMSA's sales were made from
inventory.
(2) Excluding imports which are processed and exported.
(3) Including sales of pipe commissioned to tubemakers and manufactured from
plate.
(4) Excludes sales of billets, a semi-finished product, and pipes.
(5) Includes seamless and welded pipes, stainless and alloy steel and scrap. To
avoid double counting, CANACERO classifies further processes of steel of
steel products that go to the export market as "other products". But the
demand of steel to produce such products is classified either as demand of
flat or long products, resulting in a negative apparent domestic
consumption.
The Mexican economy is a developing economy, with relatively low per capita
steel consumption. Based on figures reported by the International Iron and
Steel Institute ("IISI"), management estimates that annual per capita crude
steel consumption in Mexico was 135 kilograms in 1999. Per capita crude steel
consumption in other industrialized and developing countries was as follows:
494 kilograms in the United States, 288 kilograms
112
in the United Kingdom, 567 kilograms in Japan, 143 kilograms in Argentina and
109 kilograms in Brazil. AHMSA believes that as the Mexican economy expands in
the long term, the demand for steel will increase and Mexican producers of
steel will be better positioned to serve this increased demand.
Competition
Domestic
AHMSA is one of two Mexican integrated producers manufacturing finished flat
products. AHMSA is the only Mexican supplier of plate and tinplate products in
Mexico. AHMSA is the largest Mexican supplier of hot rolled coil in Mexico. In
1996, 1997, 1998, 1999 and 2000, the apparent domestic consumption of flat
products represented a 50%, 53%, 54%, 51% and 52% share, respectively, of the
Mexican market for steel products. Apparent domestic consumption of flat
products in 1996 increased to 3.8 million tonnes, a 39% increase from 1995.
This increase led AHMSA to shift its focus from the export market to the
domestic market, increasing its domestic market share for flat products to 42%
in 1996. Apparent domestic consumption of flat products was 4.6 million tonnes
in 1997, a 21% increase from 1996, and AHMSA's market share for flat products
in 1997 increased to 47%. Apparent domestic consumption of flat products was
5.1 million tonnes in 1998, an 11% increase from 1997, and AHMSA's market share
for flat products in 1998 decreased to 44%. Apparent domestic consumption of
flat products was 5.1 million tonnes in 1999, a 0.6% decrease from 1998, and
AHMSA's market share for flat products in 1999 decreased to 43%. Apparent
domestic consumption of flat products was 5.7 million tonnes in 2000, a 12%
increase from 1999. AHMSA's market share for flat products in 2000 decreased
to 41%.
Through 1993, AHMSA's only domestic competitor in flat products was Hylsa, a
subsidiary of Grupo Alfa, S.A. de C.V., which AHMSA estimates held
approximately 26% of the flat products market in 2000. Beginning in 1994,
Aceros Planos Monterrey S.A. de C.V. ("APM"), a finishing facility located in
Monterrey and a subsidiary of Grupo IMSA, also became a domestic competitor in
the flat products market, holding 19% of the domestic flat products market in
2000 according to AHMSA's estimates. Competition with Hylsa is principally
centered on hot rolled coil and cold rolled coil. Hylsa produces small amounts
of tinplate. Imports accounted for approximately 14% of the flat products
market in 2000.
Long products are produced domestically by Hylsa, Siderurgica Lazaro
Cardenas Las Truchas, S.A. de C.V. and various mini-mills. AHMSA has come out
of this market almost completely, except for Heavy Structural Sections. See
"--Heavy Structural Sections."
A number of Mexican steel producers have undergone modernization plans. As
these steel producers become more efficient, AHMSA may experience significantly
increased competition (for both domestic and foreign sales) from
domestically-produced steel manufacturers.
Foreign
The worldwide steel industry is a cyclical business characterized by intense
competition. The financial condition and results of operations of companies in
the steel industry are generally affected by macroeconomic fluctuations in the
world economy and the companies' respective domestic economies. Until 1993,
substantial excess worldwide manufacturing capacity for steel products,
combined with a worldwide economic slowdown, resulted in increased
international competition and downward pressure on world steel prices. There
can be no assurance that fluctuations in the Mexican and world economies will
not have a material adverse effect on AHMSA in the future. As a result of
excess worldwide capacity, particularly in periods of economic slowdown, AHMSA
has experienced significant competition from imports in the past and expects
that it will continue to do so in the future.
Imports historically have represented significant competition. Beginning in
the second half of 1997, imports increased as a result of a decrease in demand
for steel products in Asia following its economic crisis. Mexican
113
steel producers, including AHMSA, traditionally have sought to compete with
imports on price, as domestic producers' prices are approximately equal to
prices for imports, including duties. Recently, competition has also begun to
focus on quality and service. Management believes that AHMSA offers more
competitive prices than foreign suppliers and more competitive service than
most foreign producers by allowing customers to place smaller orders,
permitting greater flexibility in changes to customer orders and providing
weekly delivery, faster settlement of claims and assurance of supply.
In 1996, 1997, 1998, 1999 and 2000, the share of imports of the Mexican
market for flat products was 9%, 14%, 17%, 12% and 14%, respectively. The
market share of imports in the Mexican flat products market was relatively low
from 1995 through the first half of 1997 because domestic steel demand was
depressed and the peso was weak as compared to other currencies. Since the
second half of 1997, the market share of imports of flat products has begun to
increase as a result of an increase in imports from Asia and the countries of
the former Soviet Union. This trend continued in 1998, with the market share of
imports of flat products increasing from 14% to 17%. In 1999, the market share
of imports of flat products decreased from 17% in 1998 to 12% in 1999. In 2000,
the market share of imports of flat products increased to 14% as a result of an
oversupply of steel on the global market and a strong Mexican peso.
North American Free Trade Agreement
The North American Free Trade Agreement, or "NAFTA," became effective on
January 1, 1994. NAFTA provides for the progressive elimination, over a period
of 10 years, of the 10% duties then in effect on most steel products imported
into Mexico from the United States and Canada, including those that compete
with AHMSA's main product lines. NAFTA could result in increased competition
from North American producers in the United States and Canada, with
corresponding pressure on operating margins. Currently, a 2% duty is imposed on
most steel imports into Mexico from the United States and Canada.
European Community Free Trade Agreement
The Mexican-European Free Trade Agreement, or "MEFTA," became effective on
July 1, 2000. MEFTA provides for the progressive elimination of the duties for
the members of the European Union, over a period of 6.5 years, for finished
steel products, including those that compete with AHMSA's products. In July of
2000, the European imports of steel products paid an initial duty of 8% that
will be reduced progressively until reaching a zero duty in the year 2007. An
increase of competition in the Mexican steel market is possible, however, this
agreement provides AHMSA an opportunity to increase its exports to the European
countries which are parties to MEFTA as after July 2000 Mexican steel products
will be subject to a duty of only 1.7%. In 2001, exports of steel products
manufactured by AHMSA to the European Union have been subject to an average
duty of 1.1%.
Other Trade Agreements
In the last several years, Mexico has signed other free trade agreements,
including agreements with Israel (July, 2000) and the following Latin American
countries: Chile (1992); Venezuela and Colombia (1995); Costa Rica (1995);
Bolivia (1995); Nicaragua (1998); Honduras, El Salvador and Guatemala (2001).
AHMSA does not anticipate any significant increase in competition in the
Mexican steel market as a result of the trade agreements with these countries,
because either these countries are not significant steel producers or, in the
case of Venezuela and Chile, these countries do not have a significant share in
the Mexican market.
Dumping and Countervailing Duties
Mexican Imports
Between 1992, when AHMSA and other Mexican steel manufacturers initiated
Mexican antidumping actions against U.S. steel producers, and 1998, there was a
continuous decrease in the volume of U.S. steel
114
imports of flat products into Mexico (U.S. steel imports had a market share of
19% in 1992; in 1997 and 1998, the market share was 4%). However, in 1999, U.S.
steel imports into Mexico increased from 1998 levels (U.S. steel represented
8.5% of the market in 1999). In 2000, U.S. steel imports into Mexico decreased
to 5.3% of the market. From January 1, 2001 to September 30, 2001, U.S. steel
imports into Mexico were 5.5% of the market.
In February 1992, Mexican steel producers, including AHMSA, prevailed in
substantially all of the antidumping claims brought against U.S. producers, and
significant antidumping duties were imposed in April 1993, including duties
from 4.2% to 39.9% for hot rolled plate in coil with thickness equal to or
greater than 4.75 mm and more, from 19.6% to 28.7% for hot rolled coil in
thickness less than 4.75 mm (hot rolled coil), and from 2.7% to 12.9% for cold
rolled coil from the United States. These duties were appealed by U.S.
producers before Mexican tribunals.
On July 13, 1995, a Mexican federal circuit court issued a final,
non-appealable decision upholding the imposition of these duties with respect
to cold rolled coil. On June 24, 1996, the court suspended duties with respect
to hot rolled coil with thicknesses less than 4.75 mm; however, this ruling was
appealed by commerce authorities of Mexico, and in October 1998, the Mexican
government imposed provisional duties of 16.75% on the following U.S.
exporters: Bethlehem Steel Corporation, USX Corporation and Geneva Steel
Company and 28.67% on National Steel Corporation. The duties on other U.S.
producers remained unchanged.
In December 1998, to mark the fifth anniversary of the imposition of the
antidumping duties on U.S. exporters, the Mexican government published a
decision to evaluate the application of the quotas for hot rolled plate in coil
and cold rolled coil. In January 1999, the examination was expanded to hot
rolled coil product. As a consequence of the government's evaluation, in
October 1999, the Mexican government issued a resolution eliminating the
antidumping quotas of U.S. exports of cold rolled coil. On March 9, 2000, the
Mexican government published a similar decision for U.S. exports of hot rolled
plate in coil. On April 17, 2000 the Mexican government issued a resolution
eliminating the antidumping duties of hot rolled coil.
In August 1994, a ruling by the Mexican government resulted in the
imposition of duties on U.S. producers ranging from 3.9% to 78.5% for
cut-to-length plate. In September 1994, two of a number of U.S. exporters
subject to the duties requested, through the filing of an appeal before an
Unfair Trade Practices Panel (the "UTPP") established under NAFTA, a review of
the determinations issued by the Mexican authorities imposing such antidumping
duties. On August 30, 1995, the UTPP instructed the Mexican government to
withdraw such antidumping duties with respect to USX Corporation and Bethlehem
Steel Corporation, and on September 29, 1995, the Mexican government issued a
final decision accepting the decision of the UTPP. On April 8, 1999, the
Mexican commerce authorities issued a decision that extended this benefit to
Geneva Steel Company.
August 1999 marked the fifth anniversary of the imposition of the
antidumping duties on U.S. exporters of cut-to-length-plate. AHMSA requested
that the Mexican commerce authorities conduct a review of this antidumping
case; however, on September 17, 1999, AHMSA withdrew its request. As a result,
on October 21, 1999, the Mexican government issued a resolution eliminating
antidumping duties for this product. Currently, no steel flat products from the
United States have antidumping duties.
In August 1993, AHMSA and other Mexican producers alleged unfair trade
practices (consisting primarily of charges of dumping) against 10 countries,
including allegations that U.S. companies received subsidies. In October 1993,
several of the claims were rejected, but in final decisions issued in December
1995, the Mexican government found that dumping and subsidies alleged in
certain of the claims had occurred. Consequently, the Mexican government
imposed compensatory tariffs ranging from 10.3% to 185.8% on imports of cut to
length plate, plate in coil and on imports of hot rolled and cold rolled coils
from Brazil, Canada, Germany, Netherlands and Venezuela. In January 1996,
Canadian producers requested a review of such duty determinations issued by the
Mexican government for hot rolled plate coil and hot rolled coil, through the
filing of an appeal before the UTPP. In August 1997, the Mexican government,
accepting the decision of the UTPP, withdrew the antidumping duties on the
imports of hot rolled coil from Canada. One year later, in August 1998, the
UTPP issued a final
115
decision concerning the imports of hot rolled plate, instructing the commerce
authorities of Mexico to review its decision. As a result, on November 2, 1998,
the commerce authorities of Mexico issued a final decision imposing quotes of
133.79% on Titan (a U.S. exporter) and 25.45% for the remaining Canadian
producers.
In December 2000, to mark the fifth anniversary of the imposition of these
antidumping duties, none of the Mexican producers presented a request to
evaluate the continuation of antidumping duties. As a consequence, the Mexican
authorities issued in January 2001 a decision eliminating the prevailing duties.
On November 22, 1994, the Mexican government agreed to investigate claims
that manufacturers from the former Soviet Union were dumping in Mexico. As a
result of these investigations, the Mexican government imposed a 29.3% tariff
on imports of hot rolled plate coil in the categories under investigation from
manufacturers from the former Soviet Union beginning June 12, 1995. On June 7,
1996, the Mexican government finalized these tariffs. June 2001 was the fifth
anniversary of the imposition of the anti-dumping duties. AHMSA and the rest of
the Mexican producers requested before commerce authorities the continuation of
these duties. Currently, this petition is being analyzed by the Mexican
government.
On April 4, 1997, AHMSA requested that the Mexican government impose
antidumping duties against Russian and Ukrainian producers of the steel cut to
length plate. On November 13, 1998, the Mexican government issued a final
decision imposing final duties from 49.38% to 54.74% on imports of steel
cut-to-length from Russia and final duties from 61.52% to 67.99% on imports
from Ukraine. These duties were appealed by Russian producers before Mexican
commerce authorities in February 1999; this appeal was denied. As a
consequence, in September 1999 the Russian producers appealed the commerce
authorities' decisions before Mexican administrative tribunals, who invalidated
the commerce authorities' resolutions in November 2000. As a result, on
September 26, 2001, the Mexican commerce authorities withdrew the antidumping
duties for the Russian and Ukrainian producers.
As a consequence of growing imports from the Commonwealth of Independent
States and eastern European countries, in December 1997, AHMSA and other
important cold rolled steel producers in Mexico requested that the Mexican
government impose antidumping duties on imports of cold rolled steel products
from Russia, Kazakhstan and Bulgaria. On November 13, 1998, the Mexican
government issued a preliminary decision imposing duties, and on June 29, 1999
the commerce authorities issued a final determination imposing duties of 83%
and 88% on imports from Russia, 33% and 34% on imports from Kazakhstan and 44%
and 45% on imports from Bulgaria.
Additionally, on October 7, 1998, AHMSA and other important hot rolled coil
producers in Mexico requested that the Mexican government impose antidumping
duties on imports of hot rolled steel products from Russia and the Ukraine. On
August 23, 1999, the Mexican government issued a preliminary determination
imposing preliminary duties, and on March 28, 2000, the Mexican government
issued a final determination imposing final duties of 30.3% on imports from
Russia and 46.7% on imports from Ukraine.
In 1986, Mexico eliminated the need for import licenses for steel products
(thereby removing any quantitative restrictions on imports), while increasing
the general tariff on steel products to 45%. This tariff was reduced to 10% in
1988. In 1999, as a temporary fiscal measure (one year), the general tariff was
increased to 13%. As a consequence of growing imports from Asia and eastern
European countries, by means of ordinance published on September 5, 2001, the
Mexican government increased imports tariffs from 13% and 18% to 25% for 39
steel products of the Mexican market, which includes those steel products
principally produced by AHMSA. The increase in these tariffs was to protect
Mexican producers from unfair imports that could result from the excess
worldwide steel capacity and the 201 ruling established by the United States
that will restrict the access of certain steel products to the U.S. market.
This measure, which is expected to last one year, is not expected to be imposed
on those countries that have signed free trade agreements with Mexico. There
can be no assurance that this additional duty will have a significant effect in
reducing imports and increasing domestic prices.
116
For the main products that AHMSA produces, currently imports from the United
States and Canada are subject to a 2% duty, and imports from the European Union
are subject to a 6% duty. Imports from Argentina, Brazil and Venezuela are
subject to duties ranging from 2% to 20%. Imports from other countries are
subject to a general tariff rate of 25%. Imports of tinplate, regardless of
their source, are currently exempt from duty. Each of these tariffs is in
addition to any duties imposed as a result of trade disputes.
Mexican Exports
On June 30, 1992, AHMSA, along with a large number of other non-U.S. steel
manufacturers, was named in antidumping and countervailing duty complaints
brought before the U.S Department of Commerce (the "DOC") and the U.S.
International Trade Commission (the "ITC") by certain U.S. steel producers. In
August 1993, the DOC issued final antidumping and countervailing duty orders on
all imports of cut-to-length plate from Mexico, directing the U.S. Customs
Service to collect cash deposits of 20.25% ad valorem for estimated
countervailing duties and an additional 49.25% ad valorem for estimated
antidumping duties on imports of that product. Following the imposition of the
duties, AHMSA diminished its plate exports to the United States. The imposition
of these duties has not had a material impact on AHMSA's results of operations.
Plate exports to the United States by AHMSA prior to the imposition of these
duties were not significant (representing 3% of sales revenue in 1992).
However, increasing AHMSA's exports of other products to the United States may
increase the likelihood that countervailing duties will be imposed on AHMSA's
nonplate products. See "--Sales and Marketing--Export Sales."
In its countervailing duty determination, the DOC found that AHMSA had
received subsidies in a number of years from 1979 through 1991, during the
period when AHMSA was state-owned. Under the DOC's normal practice, the value
of most of these subsidies will be amortized over a 15-year period following
the receipt of the subsidy, and consequently, AHMSA's exports of cut-to-length
plate to the United States could be subject to countervailing duties through
the year 2006, even if no subsidies are or were received after 1991. The DOC's
determination was upheld on its initial appeal to the U.S. Court of
International Trade ("CIT"), the Court of Appeals for the Federal Circuit and
on remand to the CIT. In August 1998, AHMSA requested an administrative review
by the DOC of the outstanding countervailing duty order. Since the imposition
of antidumping and countervailing duties, AHMSA has requested annual reviews.
In August 1999, AHMSA requested a review by the DOC of the outstanding
countervailing duty order. The DOC examined AHMSA's information and records
through 1998. On September 7, 2000, the DOC issued a preliminary determination
fixing the countervailing duties at 10.72%. Recently, on March 13, 2001, the
United States authorities issued a final determination imposing a final
countervailing duty of 11.68%.
Although the DOC's countervailing duty order applies only to imports of
cut-to-length plate, almost all of the subsidies involved were found to benefit
all of AHMSA's operations. Accordingly, if future countervailing duty actions
are initiated against other AHMSA products, it is possible that the DOC would
find that AHMSA had received countervailing subsidies with respect to such
products (at least until the end of the 15-year amortization period for the
subsidies found in the investigation of cut-to-length plate).
During 1997, AHMSA exported small quantities of plate, and, in August 1997,
AHMSA requested a review of the outstanding antidumping order imposed by the
United States against Mexican cut-to-length carbon steel plate. The DOC issued
a final determination on this review in January 1999 in which it maintained the
status quo. During 1998, AHMSA again exported small quantities of plate, and,
in August 1998, AHMSA requested a similar review. On September 7, 1999, the DOC
issued a preliminary decision reducing the antidumping duties from 49.25% to
1.77%. On February 18, 2000, the DOC issued a final determination imposing a
final duty of 2.64% for AHMSA's exports of cut-to-length plate, covering the
period of review from August 1, 1997, through July 31, 1998. On November 2,
2000 the DOC published a notice of amended final results of antidumping duty
117
administrative review, increasing the antidumping rate to 21.75% On January 24,
2001, this rate was modified again to 20.34%. Currently, AHMSA is appealing
this last decision.
On October 27, 2000, the DOC issued a "Rescission of antidumping
administrative review" that suspended the antidumping review requested in
August 2000 by AHMSA and the U.S. steel industry for the period from August 1,
1999, through July 31, 2000, thus finalizing the procedure. For the period from
August 1, 2000 through July 31, 2001, AHMSA has again requested a review by the
DOC.
In September 1999 the ITC began a Sunset Review procedure in connection with
the fifth anniversary of the imposition of the antidumping and countervailing
duties on Mexican exporters of cut-to-length plate. AHMSA participated in this
procedure, but finally the ITC determined on December 1, 2000 that the
revocation would lead to the continuation or recurrence of material injury to
U.S. steel producers. As a result, the anti-dumping order stayed in place.
AHMSA or any other party to the proceeding may request reviews by the DOC of
the countervailing duty and antidumping orders each August. Under certain
circumstances, the importer of record of AHMSA's products may receive a partial
or full refund of the estimated duties (plus interest) that had been deposited
on the shipments reviewed or additional duties (plus interest) could be owed
above the cash deposit rate. There can be no assurance that the importer of
record of AHMSA's products will receive any such refund. AHMSA is not currently
subject to antidumping or countervailing duties or deposit requirements in the
United States other than those described herein.
Following a complaint filed on January 14, 1997 by certain Canadian steel
producers, Canadian government authorities initiated an investigation on
February 13, 1997 regarding the alleged dumping of cut-to-length plate
originating in or exported from Mexico and other countries. In October 1997,
the Canadian International Trade Tribunal determined that while Canadian steel
producers had not suffered material injury as a result of the dumping, such
dumping constituted a threat to the Canadian steel industry. In November 1997,
AHMSA requested, through the filing of an appeal before the UTPP established
under NAFTA, a review of the determinations issued by Canadian authorities. In
May 1999, the Canadian authorities decided to exclude the other countries from
its investigation and focus on the exports from Mexico. In December 1999, the
UTPP upheld its determination imposing antidumping duties against AHMSA.
In 1997, approximately 1.7% of the total volume of plate sold by AHMSA was
sold to Canadian customers (0.3% of total sales volume of steel products for
the year). Since 1998, AHMSA ceased all plate exports to Canada.
Other than as described herein, AHMSA is not currently subject to
antidumping or countervailing duties or deposit requirements in Canada, and
management is not aware of any countervailing or antidumping duties leveled
against AHMSA's products in any other jurisdiction. See "--Competition."
However, increases in the volume of AHMSA's exports and the expansion of
AHMSA's export markets may increase the risk of dumping and countervailing
claims against AHMSA.
On June 22, 2001, the United States Trade Representative requested that the
ITC institute an investigation under section 201 of the Trade Act of 1974 (19
U.S.C. 2252) to determine whether certain steel products are being imported
into the United States in such increased quantities as to be a substantial
cause of serious injury, or the threat of serious injury, to the U.S. steel
industry. Under the applicable statute the ITC makes a recommendation to the
President as to whether such serious injury exists, and if so, what remedy is
appropriate. Remedies may be in the form of quotas, tariff-rate quotas, or
increases in tariffs.
On October 22, 2001, the ITC found that there was serious injury caused by
imports of certain flat products. This finding covers all of the flat products
exported by AHMSA to the United States with the exception of tin-mill products.
The ITC must make a recommendation to the President by December 19, 2001, as to
its reasoning
118
for finding injury and as to what remedy should be imposed. The President then
will have 60 days in which to make a determination as to what remedy, if any,
should be imposed on such products from all countries, including Mexico. Under
the NAFTA Implementation Act, the President may choose to exempt Mexican
imports from a finding of injury and a remedy under certain conditions. It is
not clear at this time whether the President will do so in this case. It also
is unknown what remedy the President may impose on Mexico or other countries
exporting flat products to the United States.
Apasco Joint Venture
In 1996, AHMSA and certain members of the Autrey and Ancira families entered
into a joint venture agreement with Apasco, S.A. de C.V., a Mexican cement
producer, to develop a cement plant in Monclova that is expected to have a
capacity of approximately 1.5 million tonnes of cement per year. The principal
raw material to be used in the manufacture of the plant's cement will be slag,
which is a byproduct of AHMSA's production of molten pig iron. Slag is
currently treated as a waste product and disposed of at a cost to AHMSA. As
currently contemplated, the cement plant would purchase slag from AHMSA after
it has been built and becomes operational, thereby reducing disposal costs and
providing revenues to AHMSA. The joint venture's development has been suspended
until the suspension of payments declaration is lifted.
Raw Materials Requirements
AHMSA's principal raw materials requirements for its steel production are
iron ore and metallurgical coal. Since the privatization of AHMSA in 1991,
AHMSA has obtained a substantial portion of its requirements for the supply of
iron ore and metallurgical coal from Minera del Norte, S.A. de C.V. ("MINOSA")
and Minerales Monclova, S.A. de C.V. ("MIMOSA"), respectively. In addition,
AHMSA obtains iron ore from another indirect subsidiary, Cerro de Mercado. Each
of MINOSA, MIMOSA and Cerro de Mercado were subsidiaries of GAN until December
1995, at which time Carbon y Minerales Coahuila, S.A. de C.V., their parent
company, was purchased by AHMSA from GAN. AHMSA believes that its ownership of
these subsidiaries provides it with the opportunity to have a secure, low cost
source of raw materials for the foreseeable future. In November 1997, a new
oxygen plant constructed by AHMSA became operational and has allowed AHMSA to
become self-sufficient with regard to its oxygen requirements.
In 2000, AHMSA derived approximately 98% of its requirements of
metallurgical coal from its subsidiaries, 100% of iron ore pellet from its
subsidiaries, 100% of its oxygen from its own facilities and 42.8% of its
requirements of electricity from its own facilities under a permit from the
Mexican government. The balance of AHMSA's electricity requirements were
provided by CFE at commercial market rates and the balance of its metallurgical
coal requirements were purchased from third parties at market prices. AHMSA
obtains natural gas from Petroleos Mexicanos ("PEMEX") at prevailing market
prices. AHMSA also requires small amounts of limestone, all of which is
supplied by Refractarios Basicos, S.A. de C.V. ("REBASA"). See "Mining
Operations (Iron Ore Mining Operations)" and Note 4 c) to the Audited Financial
Statements and Unaudited Financial Statements.
Historically, AHMSA produced all of its own scrap used in the manufacturing
process. Because of the improvements achieved by AHMSA under the Steel Capital
Improvements Plan, AHMSA has become more efficient in its production of steel.
Consequently, AHMSA's production of scrap has decreased, and since February
1996, AHMSA has purchased scrap from third parties to fulfill its scrap
requirements. In 2000, 25% of AHMSA's scrap requirements was purchased from
third parties.
Being a vertically integrated producer of steel enables AHMSA to be one of
the lowest cost producers in the Western Hemisphere. However, AHMSA's financial
condition, results of operations and cash flow have continued to deteriorate
after the declaration of its suspension of payments on May 25, 1999. See
"--Suspension of Payments" and "Description of Restructuring Plan--Recent
Developments Regarding Operations." AHMSA's inability to make needed capital
expenditures in recent years has reduced AHMSA's ability to extract its own raw
materials, and is increasingly requiring AHMSA to purchase more costly raw
materials from third parties.
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Mining Operations
Through its subsidiaries MINOSA and Cerro de Mercado, AHMSA operates five
iron ore mines that supplied all of its iron ore requirements in 2000. Through
its subsidiary MIMOSA, AHMSA operates five coal mines that supplied most of its
metallurgical coal requirements in 2000. AHMSA's subsidiary MICARE operates
five coal mines that produce steam coal, all of which is sold to CFE. The
business of iron ore and coal mining is generally subject to a number of risks
and hazards, including environmental hazards, industrial accidents, labor
disputes, the encounter of unusual or unexpected geological conditions, slope
failures, changes in the regulatory environment and natural phenomena. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, delays in mining and monetary losses.
Operations were suspended at Mimosa Mine VI in February 1999 because of
problems in land pressure and originating falls in the main canyon of the mine.
This suspension did not materially affect AHMSA's operations or revenues. The
mine resumed operations in January 2000.
Iron Ore Mining Operations
MINOSA and Cerro de Mercado Mines. MINOSA's Hercules Unit currently
operates five open pit iron ore mines, which are located approximately 290
kilometers to the northwest of Monclova in the state of Coahuila. In addition,
MINOSA's Manzanillo Unit, located near the Pacific Ocean, produces lump iron
ore. Cerro de Mercado operates one open pit iron ore mine located in the state
of Durango. All iron ore concentrate produced by MINOSA and Cerro de Mercado is
shipped to AHMSA's steel facilities in Monclova.
Until 1991, AHMSA also obtained iron ore from another subsidiary mine, La
Perla, which is located approximately 385 kilometers to the northwest of
Monclova. In order to extend the life of the Hercules Unit, AHMSA resumed
mining operations at La Perla in January 1997. La Perla's operations include a
stockpile.
A concentrator for processing iron ore is located on the property of each of
MINOSA's Hercules Unit, Cerro de Mercado and La Perla.
Production. The following table summarizes the annual production of iron
ore concentrate at MINOSA (Hercules and Manzanillo units) and Cerro de Mercado
for the periods indicated:
Production of Iron Ore
(millions of tonnes)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Hercules Unit...... 3.52(1) 3.71(2) 3.90(3) 3.90(4) 3.76(5) 3.85(6)
Manzanillo Unit(7). 0.24 0.31 0.39 0.54 0.20 0.28
Cerro de Mercado(8) 0.48 0.54 0.65 0.56 0.39 0.54
---- ---- ---- ---- ---- ----
Total.............. 4.24 4.56 4.94 5.00 4.35 4.67
==== ==== ==== ==== ==== ====
- --------
(1) Of this amount, 3.15 million tonnes represented concentrate and 0.37
million tonnes represented lump iron ore.
(2) Of this amount, 3.42 million tonnes represented concentrate and 0.29
million tonnes represented lump iron ore.
(3) Of this amount, 3.59 million tonnes represented concentrate (including La
Perla iron ore preconcentrate) and 0.31 million tonnes represented lump
iron ore.
(4) Of this amount, 3.61 million tonnes represented concentrate (including La
Perla iron ore preconcentrate) and 0.29 million tonnes represented lump
iron ore.
(5) Of this amount, 3.54 million tonnes represented concentrate (including La
Perla iron ore preconcentrate) and 0.22 million tonnes represented lump
iron ore.
(6) Of this amount, 3.53 million tonnes represented concentrate (including La
Perla) and 0.32 million tonnes represented lump iron ore.
(7) Lump iron ore.
(8) Concentrate and hematite fines.
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On November 1, 1999, MINOSA sold the assets belonging to the lime processing
plant located in Santa Catarina, Nuevo Leon to REBASA for U.S.$19 million. With
this sale, REBASA committed to supply 100% of the lime that AHMSA will require
for its productive processes over the next 10 years. Because MINOSA is under
suspension of payments status, the final sale of the assets is subject to
approval by the suspension of payments court. Pending the closing of the sale,
REBASA is leasing the plant for a monthly rent payment of U.S.$137,500, ending
October 2001, with the possibility of extension upon the agreement of both
parties.
At the concentrator plants, iron ore is crushed and ground. Through a
magnetic separation process, iron ore is separated from waste materials. The
ore is then subjected to an anionic flotation process, after which the water
content of the iron ore is reduced to leave iron ore concentrate slurry. In
addition, a ferrous wheel located at the Hercules Unit processes tailings from
that unit into iron ore concentrate through a magnetic separation process.
Additionally, iron ore from La Perla's mine and stockpile are crushed and
ground in La Perla's preconcentrator and sent by slurry pipeline for further
magnetic processing by the concentrator at the Hercules Unit.
Iron ore concentrate slurry is pumped from the concentrator plant at
MINOSA's Hercules Unit through a 295-kilometer pipeline to AHMSA's Monclova
steelworks. Iron ore concentrate from Cerro de Mercado and lump iron ore from
MINOSA's Hercules and Manzanillo Units are hauled by railroad to AHMSA's
Monclova steel facilities.
Concentrate slurry from MINOSA is fed into a pelletizer at AHMSA's Monclova
facilities, where it is formed into pellets that are fed into AHMSA's blast
furnaces. Concentrate from Cerro de Mercado is processed in AHMSA's sinter
plant. The iron ore deposits at MINOSA's Manzanillo Unit consist of lump iron
ore that is of sufficiently high iron content that it can be sifted for
impurities and fed without further processing into the blast furnaces.
Reserves. The term "reserves" means that part of a mineral deposit which
could be economically and legally extracted as prescribed under Industry Guide
7 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
AHMSA annually updates its estimates of its ore reserves at each of its iron
ore mining properties. Reserves may not conform to geological, metallurgical or
other expectations, and the volume and quality of iron ore recovered may be
below the expected levels. The ore reserve estimates set forth below have been
prepared by AHMSA's engineering staff using evaluation methods generally used
in the international mining industry, including standard methods of mapping,
drilling, sampling, assaying and modeling. AHMSA's estimates of the in site
tonnage and grade of a proven and probable (measured and indicated) geological
reserve involves computerized or manual interpretations and calculations,
according to methods which meet standard industry procedures, based on drilling
and geological mapping data. Periodically, AHMSA hires an external firm to
audit its reserve estimates. Lower market prices, increased cash production
costs, reduced recovery rates and other factors may render proven reserves
uneconomic to exploit and may result in revision of reserve data from time to
time. Reserves are not considered proven unless they are economically and
legally mineable. Geological reserve data are not indicative of future results
of operations.
The following table presents estimated proven and probable geological
reserve and mineable reserve data for MINOSA's Hercules Unit, Cerro de Mercado
and La Perla as of December 31, 2000.
Reserves of Iron Ore at December 31, 2000 (1)
(millions of tonnes, except percentages)
Crude Ore Concentrate
------------------------------------ --------------------------
Average Proven and Average
Iron Grade Probable (2) Mineable (3) Weight Recovered Iron Grade
---------- ------------ ------------ ------ --------- ----------
Hercules Unit... 44.4% 207.5 89.9 55.1% 49.5 64.17%
Cerro de Mercado 46.2% 12.1 10.7 49.1% 5.2 64.66%
La Perla........ 38.3% 36.6 17.6 36.7% 6.5 62.79%
----- ----- ----
Total........... 256.2 118.2 61.2
===== ===== ====
- --------
(1) AHMSA's iron ore reserves at April 30, 1998 have been affirmed and verified
by Midland Standard, Inc., independent consultants, who are experts in
mining, geology and reserve determination. The table shows this information
updated at December 31, 2000.
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(2) Proven and probable reserves are reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings or drill
holes; (b) grade and/or quality are computed from the results of detailed
sampling; and (c) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is sufficiently defined that
size, shape, depth and mineral content of reserves are well established.
(3) Mineable reserves are that part of a proven and probable reserve which can
be removed from its location, less an allowance for that which must be left
in place because of quality, safety, economic, or environmental
constraints. The calculation of what portion of proven and probable
reserves constitute mineable reserves is a function of the mining method,
the equipment utilized and the characteristics of the formation and the ore.
Exploration. AHMSA is currently engaged in exploratory activities and is
undertaking further surveying of existing deposits that it believes may lead to
the discovery and/or confirmation of additional iron ore reserves.
Coal Mining Operations
MIMOSA Mines. MIMOSA currently operates five underground coal mines.
MIMOSA's underground mines are located approximately 130 kilometers by railroad
from AHMSA's Monclova steel producing facilities. In 1996, 1997, 1998, 1999 and
2000, MIMOSA produced 1.66 million, 1.63 million, 1.82 million, 1.94 million
and 1.93 million tonnes of metallurgical coal, respectively, and 0.70 million,
0.64 million, 0.22 million, 0.64 million, and 0.82 million tonnes (including
0.21 million tonnes from La Perla) of steam coal, respectively. Metallurgical
coal is suitable for the production of coke, whereas steam coal is used by
electric power plants to produce electricity. The higher amount of volatile
material in steam coal as compared to metallurgical coal as well as other
qualities of steam coal make it inappropriate for coke production. In 1996,
1997, 1998 and 1999, all of the steam coal produced by MIMOSA was shipped to
MICARE for sale to CFE, and all of the metallurgical coal produced by MIMOSA
was used in AHMSA's Monclova steel production facilities.
In 2000, part of the steam coal produced by MIMOSA was shipped to MICARE for
sale to CFE, and the rest was shipped to La Perla for sale to CFE directly, and
all of the metallurgical coal produced by MIMOSA was used in AHMSA's Monclova
steel production facilities.
MIMOSA operates two coal washing plants that are used to clean coal of
noncombustible materials resulting from the extraction process and to reduce
the ash content of coal. A washer then reduces the ash content of the coal from
an average of 45.0% to an average of 13.5%, the ash content at which AHMSA's
blast furnaces are designed to operate. Metallurgical coal from MIMOSA is
transported by Linea Coahuila-Durango, S.A. de C.V. (50% of which is owned by
AHMSA) at prevailing market freight rates to AHMSA's Monclova steelworks.
During 1996, 1997 and 1998, production of metallurgical coal from one of
MIMOSA's underground mines was adversely affected by the extraction of
metallurgical coal that was not suitable for use in AHMSA's coke ovens due to
its high ash content. This non-coking coal, which is suitable for use as steam
coal, was transferred to MICARE and sold to CFE. As a result, AHMSA was
required to purchase from third parties 104 thousand, 297 thousand and 798
thousand tonnes of metallurgical coal during 1996, 1997 and 1998, respectively.
Since the discovery of this condition, AHMSA has accelerated improvements to
its coal washing plant and the development of other metallurgical coal mines.
During 1999, AHMSA did not purchase metallurgical coal but in 2000, AHMSA
purchased 36,202 tonnes. During the first six months of 2001, AHMSA purchased
447 thousand tonnes of metallurgical coal (which represents 36.2% of the total
metallurgical coal used by AHMSA in its steel making facilities during the
first six months of 2001).
In May 1998, AHMSA experienced a fire in MIMOSA's Underground Mine V, which
resulted in the capping of the mine. In January 1999, MIMOSA successfully
restarted operations at Underground Mine V.
MICARE Mines. MICARE operates two open pit mines and three underground
mines located in the state of Coahuila. In 1996, 1997, 1998, 1999 and 2000,
MICARE produced 7.4 million, 7.3 million, 6.0 million, 7.0
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million and 6.6 million tonnes of steam coal, respectively. In 1996, 1997,
1998, 1999 and 2000, MICARE sold to CFE 8.0 million, 7.5 million, 7.9 million,
7.7 million and 6.9 million tonnes of steam coal, respectively, comprising
steam coal produced by MICARE, steam coal received from MIMOSA (as described
above) and steam coal purchased from various outside producers. In each of
these years, all of the coal produced at MICARE was sold to CFE. In 2000,
MICARE sold to CFE 6.7 million tonnes of steam coal, comprising steam coal
produced by MICARE and steam coal received from MIMOSA. In addition, MIMOSA
through La Perla sold 0.21 million tonnes of steam coal to CFE.
Open pit mines. At its open pit mines, MICARE employs both the conventional
truck and shovel stripping system and the more productive cast blast and
dragline system to remove the waste material covering the coal seam. Cast
blasting, which reduces the cost of removing the overburden, consists of using
powerful explosives to cast as much as 20% of the overburden directly into the
fill area adjacent to the active mining pit, thereby reducing the handling of
overburden by earth-moving equipment. MICARE's walking dragline is then used to
remove the pile of blasted overburden and deposit it in the waste heap. Coal
extraction at MICARE's open pit mines is accomplished by means of bulldozers,
front loaders, back hoes and off-road trucks, which transport the coal from the
pits to the stockpile, from which it is transported to the external belt
conveyor system.
In 1996, 1997, 1998, 1999 and 2000, MICARE's open pit mines produced 3.3
million, 2.7 million, 3.5 million, 4.4 million and 3.8 million tonnes of steam
coal, respectively.
Underground mines. MICARE operates three underground mines to recover coal
from seams located at depths that render open pit mining unfeasible. Access to
the coal seams is through two parallel inclined tunnels, which provide
ventilation and access for personnel, coal removal, electricity, communications
and water. Exploitation of the coal seam is achieved through the use of the
longwall system. In longwall mining, slices of coal 0.8 meters wide and the
full thickness of the coal seam are cut by a shearer loader which moves back
and forth along the face of the seam. As the coal is cut, it falls onto a
conveyor and is then carried through tunnels on conveyor belts to an
above-ground stockpile. A hydraulic roof support system immediately behind the
conveyor provides for controlled subsidence as the longwall block is gradually
shaved away. A tunnel system provides for the set-up of the longwall and
provides for ventilation and access for personnel, equipment and conveyor belts.
In 1996, 1997, 1998, 1999 and 2000, MICARE's underground mines produced
4.1 million, 4.5 million, 2.5 million, 2.6 million and 2.8 million tonnes of
steam coal, respectively.
Steam coal from MIMOSA and from MICARE's different mines containing varying
amounts of ash is blended to achieve an average ash content of 37.0% and an
average moisture content of 8.5%, consistent with CFE's requirements. MICARE
also owns a coal washing plant located adjacent to CFE's Carbon I and Carbon II
generating plants, which it uses on occasion to reduce the ash content of its
coal if CFE's requirements cannot be met through the blending process. MICARE
owns two external belt conveyor systems that transport steam coal produced by
MICARE and MIMOSA approximately ten kilometers to Carbon I and Carbon II, the
two CFE power plants that are MICARE's sole customers.
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Production and Sales. The following table summarizes the annual production
and sales of coal by MIMOSA and MICARE for the periods indicated:
Coal Production and Sales to Third Parties
(millions of tonnes)
1995 1996 1997 1998 1999 2000
---- ----- ----- ---- ----- -----
Production
MIMOSA (1)
Metallurgical Coal..................... 1.71 1.66 1.63 1.82 1.94 1.93
Steam Coal............................. 0.29 0.70 0.64 0.22 0.64 0.61
---- ----- ----- ---- ----- -----
2.00 2.36 2.27 2.04 2.59 2.54
La Perla.................................. 0 0 0 0 0 0.21
MICARE(2)
Steam Coal............................. 6.32 7.42 7.26 6.02 6.98 6.57
Steam Coal Sales
Total AHMSA Steam Coal Production...... 6.61 8.12 7.90 6.24 7.62 7.39
(Increase) Decrease in AHMSA Inventory. 0.02 (0.58) (0.84) 1.00 (0.24) (0.45)
Steam Coal Purchases(3)................ 0.59 0.41 0.42 0.67 0.29 0.00
---- ----- ----- ---- ----- -----
Total Steam Coal Sales(4).............. 7.22 7.95 7.48 7.91 7.68 6.94
- --------
(1) On dry basis.
(2) On as received basis.
(3) These purchases represent steam coal purchased by MIMOSA and MICARE from
small local producers as part of a government effort to promote their
economic development, but in 2000 CFE bought this coal directly.
(4) 100% of AHMSA's steam coal sales are made to CFE.
Steam Coal Sales. MICARE's steam coal is sold to two CFE generating plants,
Carbon I and Carbon II, located approximately 10 kilometers from MICARE. During
2000, MICARE supplied approximately 85% and 50% of the steam coal requirements
of Carbon I and Carbon II, respectively.
Coal is sold to Carbon I under a 10-year contract that expires in 2002,
which obligates MICARE to supply 3.5 million tonnes of steam coal per year. The
amount of coal supplied may be increased or decreased by up to 7.5%, depending
on the demand levels of Carbon I. Under the original contract, the price of
coal was based on U.S. dollar-denominated international steam coal prices, a
composite of Mexican economic indicators and the quality of the coal.
Subsequent to the December 1994 peso devaluation, MICARE and CFE have
renegotiated from time to time the price of coal to be delivered under the
contract. As a result, the average price under the Carbon I sales contract
during 1995 and 1996 was below that which would have resulted under the
original pricing formula. In 1997, AHMSA sold 5,149 thousand tonnes to CFE for
Carbon I (100% of Carbon I requirements); in 1998, AHMSA sold 5,333 thousand
tonnes to CFE for Carbon I (100% of Carbon I requirements); in 1999, AHMSA sold
5,426 thousand tonnes to CFE for Carbon I (100% of Carbon I requirements); and
in 2000, AHMSA sold 4,468 thousand tonnes to CFE for Carbon I (85% of Carbon I
requirements).
On March 12, 1997, AHMSA and CFE agreed to discontinue the practice of
periodically renegotiating the sales price of steam coal purchased by Carbon I,
as had been the case since the December 1994 peso devaluation. Under the
agreement, the parties will follow the pricing formula, as interpreted by an
arbitrator, set forth in the original Carbon I contract expiring in 2002, which
is based on U.S. dollar-denominated international steam coal prices, a
composite of Mexican economic indicators and the quality of the coal. The
independent arbitrator was
124
engaged by AHMSA and CFE to resolve a dispute between the parties concerning
amounts owed under the original contract and the interpretation of the pricing
formula and the cost of mixing services provided by AHMSA. According to the new
agreement, CFE was required to pay AHMSA approximately Ps.65.8 million in
settlement of disputes concerning deliveries before December 31, 1996 (which
amount was paid from November 1997 to May 1998). In addition, effective January
1, 1997, CFE's interpretation of the pricing formula governs sales of steam
coal under the Carbon I contract.
Since Carbon II began operations in 1993, CFE has purchased steam coal from
MICARE on terms substantially similar to the terms applicable to sales to
Carbon I. In August 1996, CFE entered into an 18-month supply contract with a
U.S. supplier for a portion of its requirements for Carbon II. This agreement
was renewed in February 1998 for the supply of 500 thousand tonnes of steam
coal in 1998. Due to increased electricity generating capacity at Carbon II and
delays during the third quarter of 1996 in the delivery of imported steam coal
under this contract with the U.S. supplier, AHMSA's sales to Carbon II during
1996 increased from 2,175 thousand tonnes in 1995 (65% of Carbon II's
requirements) to 2,893 thousand tonnes in 1996 (63% of Carbon II's
requirements). In 1997, AHMSA sold 2,331 thousand tonnes to CFE for Carbon II
(55% of Carbon II's requirements), in 1998, AHMSA sold 2,580 thousand tonnes to
CFE for Carbon II (55% of Carbon II requirements), and in 1999, AHMSA sold
2,251 thousand tonnes to CFE for Carbon II (55% of Carbon II requirements) and
in 2000, AHMSA sold 2,474 thousand tonnes to CFE for Carbon II (50% of Carbon
II requirements). In 2000, AHMSA entered into periodic supply agreements with
CFE to supply steam coal to Carbon II at a 65% Mexican inflation and 35% peso
devaluation adjusted base price. (The sales for 2000 include La Perla sales for
210 thousand tonnes).
The average price per tonne of steam coal sold to CFE in 1996, 1997 1998,
1999 and 2000, on an inflation adjusted basis, was Ps.348.8, Ps.312.2,
Ps.299.7, Ps.292.2 and Ps.308.5, respectively. The average sales price of steam
coal for 1997 excludes Ps.91.8 million in revenues from CFE resulting from a
claim relating to payments made between December 16, 1994 and December 31,
1996, as explained below. The average sales price of steam coal for 1999
excludes Ps.39.8 million in revenues from CFE resulting from an adjustment to
payments made between January 1, 1997 and December 31, 1998. The average sales
price of steam coal for 2000 has two different contracts for the sales on
Carbon II. During the first half of 2000 it was the same as the previous years,
but in the second half of 2000 the coal price was based only on Mexican
inflation and peso-U.S. dollar devaluation.
CFE has alternative sources for steam coal in both local producers (who
produce small quantities of steam coal) and foreign producers. In the event
that CFE were to cease purchasing steam coal from AHMSA, there would be no
immediate alternative outlet for AHMSA to sell steam coal in Mexico.
Under AHMSA's contract with Carbon I, if AHMSA is unable to deliver a base
amount of steam coal required to be delivered under the contract (and AHMSA is
unable to buy coal produced by third parties that is acceptable to CFE), AHMSA
could be subject to significant penalties. AHMSA's periodic supply agreements
with Carbon II also contain a penalty provision and AHMSA expects any future
agreement with Carbon I and Carbon II to contain such a provision.
Until 1999, MICARE sold to CFE small amounts of steam coal that were
purchased from outside producers and blended with steam coal output from MICARE
and MIMOSA. This coal from outside producers generally had a higher BTU content
than the steam coal produced by MICARE and MIMOSA. Prior to 1996, this steam
coal from outside producers was purchased at the same per tonne price obtained
by AHMSA from its sales to CFE. Since January 1996, these local producers have
revised the per tonne price of their steam coal to reflect its higher BTU
content. These purchases result from a program by the Mexican government to
promote the economic development of such outside producers. In 1996, 1997, 1998
and 1999, approximately 4.9%, 5.7%, 8.5% and 3.8%, respectively, of all steam
coal sales revenue from AHMSA to CFE consisted of these purchases from outside
producers. During 2000, the program of purchases from small producers through
AHMSA was suspended; CFE bought steam coal directly from outside producers.
During the first six months of 2001 MICARE purchased steam coal from outside
producers to be resold to CFE. The sales of purchased coal accounted for 8.3%
of the Company's sales volume of steam coal.
125
CFE's operations are subject to Mexican federal and state laws and
regulations relating to the protection of the environment, including
regulations concerning air pollution and hazardous substance discharge from
Carbon I and Carbon II. Should CFE become subject to more restrictive
regulations, CFE may be required to take certain actions that could decrease
the amount of steam coal purchased from AHMSA.
Reserves. AHMSA updates its estimates of its coal reserves at each of its
MIMOSA and MICARE mining properties every six months. Periodically, AHMSA hires
an external firm to audit its reserve estimates. The reserve estimates set
forth below have been prepared by AHMSA's engineering staff using evaluation
methods generally used in the international coal mining industry, including
standard methods of mapping, drilling, sampling, assaying and interpretation.
The term "reserves" means that part of a mineral deposit which could be
economically and legally extracted as prescribed under Industry Guide 7 of the
Exchange Act. A reduction of market price, increased production cost, reduced
recovery rates and other factors may render the reserves uneconomic to exploit
and may result in revision of reserve estimates from time to time. Moreover,
reserves may not conform to geological, metallurgical or other expectations,
and the volume and quality of coal recovered may be below the expected levels.
The term "saleable reserves" means reserves estimated by taking into account
all anticipated losses, such as extraction dilution, coal left in place for
roof support and the coal washing process. Reserves and saleable reserves are
estimates, the tonnage and quality of which may differ from the actual values
for coal that is ultimately extracted. The mined tonnage may not conform to
geological, quality or other expectations, and the tonnage and quality of coal
recovered may be below the expected levels. Reserve estimates are not
indicative of future results of operations.
The following table presents estimated proven and probable reserves,
together with the estimated amount of such reserves that is expected to be
saleable, for MICARE and MIMOSA as of December 31, 2000.
MIMOSA and MICARE
Reserves of Coal at December 31, 2000(1)
(millions of tonnes)
Mine Proven(2) Probable(3) Saleable(4)
---- --------- ----------- -----------
MIMOSA
Metallurgical Coal.... 96.9 1.8 33.1
Unassigned(5)..... 187.2 0.0 137.8
----- ---- -----
Total(6).......... 284.1 1.8 170.9
----- ---- -----
MICARE
Steam Coal............ 102.1 1.8 48.4
Unassigned(5)......... 142.9 10.0 104.9
----- ---- -----
245.0 11.8 153.3
----- ---- -----
Total.................... 529.1 13.6 324.2
===== ==== =====
- --------
(1) AHMSA's coal reserves at December 31, 2000 have been estimated by AHMSA
personnel. The terms "Proven" and "Probable" used here are synonymous with
"Measured" and "Indicated" under the U.S. Geological Survey ("USGS") coal
classification system. Unless otherwise indicated, all reserves are
assigned. Assigned reserves are reserves that can be extracted and
processed with the existing equipment at the mine.
(2) Proven reserves are reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; (b)
quality is computed from the results of detailed sampling; and (c) the
sites for inspection, sampling and measurement are spaced to conform with
the requirements of the USGS coal resource classification system as defined
in USGS Circular 891 for Measured Reserves.
126
(3) Probable reserves are reserves for which quantity and quality are computed
from information similar to that used for proven reserves but the sites for
sampling conform with the requirements of the USGS coal resource
classification system as defined in USGS Circular 891 for Indicated
Reserves.
(4) Saleable reserves are reserves estimated by taking into account all
anticipated losses, such as extraction dilution, coal left in place for
roof support and the coal washing process.
(5) Unassigned reserves are reserves that will require substantial expenditures
for extraction and processing equipment at the mine.
(6) In addition to the metallurgical coal recoverable from MIMOSA's coal
reserves, MIMOSA also produces steam coal as a byproduct of the
metallurgical coal production process. For information regarding historical
production of steam coal at MIMOSA, see "--Steam Coal Sales."
Since December 1995, when the coal mining reserves were affirmed and
verified by its independent mining consultants, AHMSA has conducted additional
exploration in an effort to further verify its existing reserves. AHMSA has
also extracted a significant amount of metallurgical and steam coal since the
reserves were verified in 1995 and has closed MIMOSA Mine I and MICARE Mine I
due to exhaustion of reserves and the commencement of operations at MIMOSA Mine
V and MICARE Open Pit Mine III.
Mexican Regulatory Framework of Mining Concessions
Under Mexican law, mineral resources belong to the Mexican nation and a
concession from the Mexican federal government is required to explore for or
exploit mineral reserves. Pursuant to the Ley Minera ("Mining Law"), mining
concessions may only be granted to Mexican individuals and to legal entities
incorporated under Mexican law. Foreign investors may hold up to 100% of the
shares representing the capital stock of such entities. AHMSA's mineral rights
derive from concessions originally granted by the Secretaria de Energia
(Ministry of Energy) under the Mining Law. As a result of subsequent legal
reforms, the Secretaria de Economia (Ministry of Economy, or "SE") is currently
charged with granting, administrating and supervising mining concessions.
Mining concessions are either granted for exploration or for exploitation.
An exploration concession permits its holder to explore for any mineral
resources on a specified claim for a six-year period, which is nonrenewable and
confers priority with respect to seeking an exploitation concession for the
same claim. An exploitation concession permits its holder to extract minerals
from a specified claim for a renewable period of up to 50 years, provided that
its holder pays a nominal fee and complies with the Mining Law.
Mining concessions grant several specified rights to the concessionaire,
including:
. the right to dispose freely of mineral products obtained as a result of
the exploitation of the concession;
. the right to obtain the expropriation of, or an easement with respect
to, the land where the exploration or exploitation will be conducted; and
. the use of water in the mine to facilitate extraction.
In addition, a concessionaire of a mining concession is obligated, among
other things, to explore or exploit the relevant concession, to pay for any
relevant mining rights, to comply with all environmental and safety standards,
and to provide information to SE and permit inspections by SE. Mining
concessions may be terminated if the obligations of the concessionaire are not
satisfied. As of September 30, 2001, AHMSA has not made required payments for
mining rights in the amount of Ps.15.0 million (see Note 22 of the Unaudited
Financial Statements).
A company that holds a concession must be registered with the Public Mining
Registry. In addition, mining concessions and permits, assignments, transfers
and encumbrances must be recorded with the Public Mining Registry to be
enforceable. AHMSA believes its material mining concessions are duly recorded
with the Public Mining Registry.
127
Public Sector Spending and the Mexican Economy
AHMSA currently conducts all of its steel manufacturing, mining and other
business activities (other than export sales) in Mexico. The level of steel
manufacturing activity in Mexico has in the past been affected by prevailing
conditions in the Mexican economy, and the demand for steel has been, to a
significant extent, vulnerable to economic downturns and changes in government
policies and public spending. AHMSA's business, financial condition, results of
operations or prospects may also be affected by exchange rate movements, price
instability, inflation, interest rates, regulation, taxation, social
instability and other political or economic developments in or affecting Mexico.
During the period from 1982 through 1987, Mexico experienced periods of slow
or negative growth, high inflation, large devaluations of the peso and limited
availability of foreign exchange. In the late 1980s and early 1990s, Mexico's
growth rate increased, the inflation rate declined significantly and the U.S.
dollar/peso exchange rate was relatively stable. In 1994, Mexico experienced an
economic crisis characterized by exchange rate instability and devaluation of
the peso, high inflation, high domestic interest rates, negative economic
growth, reduced consumer purchasing power and high unemployment. The economic
crisis resulted in part from a series of internal disruptions and political
events, including a large current account deficit (7.8% of gross domestic
product in 1994), civil unrest in the southern state of Chiapas and the
assassination of two prominent political figures, which undermined the
confidence of investors in Mexico during 1994, and, combined with an increase
in international interest rates, led to a substantial outflow of capital and
significant devaluation of the peso. Mexico's gross international reserves fell
sharply at the end of 1994 and were U.S.$3.4 billion at January 31, 1995.
These adverse conditions in Mexico resulted in a marked increase in the rate
of inflation to 52% in 1995 (as compared to 7.1% in 1994) and a liquidity
crisis affecting the ability of the Mexican government and the banking system
to refinance or refund maturing debt issues. Mexico also experienced sharply
higher interest rates in 1995, both domestically and externally, on Mexican
public-sector and private-sector debt and sharply reduced opportunities for
refinancing or refunding maturing debt issues. Mexican interest rates, which
reached a low of 8.8% per annum for 28-day Cetes, or Mexican treasury bills, in
February 1994, rose through most of 1994. During 1995, interest rates on 28-day
Cetes averaged 48.6%, as compared with 14.1% during 1994. According to
government estimates, gross domestic product for 1995 was 6.9% lower than gross
domestic product for 1994. As a result of the devaluation of the peso in
December 1994, exports in U.S. dollar terms increased during 1995 by 30.6%,
while imports declined during 1995 by 8.6%, resulting in a net increase in
Mexico's foreign trade balance from a deficit of U.S.$18.5 billion in 1994 to a
surplus of U.S.$7.0 billion in 1995. Mexico's gross international reserves were
U.S.$15.7 billion at December 31, 1995.
In response to these developments, the administration of President Ernesto
Zedillo announced in January 1995 an emergency economic recovery and
stabilization plan and a new accord among the government, business and labor.
In order to reinforce this program, on March 9, 1995, the Mexican government
announced a successor emergency economic plan. Together, these programs sought
to stabilize the exchange rate and maintain the present floating rate exchange
policy, stabilize the Mexican banking sector, increase public-sector revenues
(in part, through increases in the general rate of the value-added tax for
certain goods and services from 10% to 15% and increases in prices of fuel oil,
natural gas and electricity) and increase the minimum wage (minimum wage
increases of 7% and 12% were implemented in the beginning of 1995 and on April
1, 1995, respectively). In addition, the Mexican government sought to minimize
inflation by promoting the gradual implementation of price increases. On May
31, 1995, the Mexican government announced the Plan Nacional de Desarrollo
("National Development Plan") for the period from 1995 to 2000. The National
Development Plan included the implementation of a foreign exchange policy that
maintained a floating exchange regime and a restrictive monetary policy in
order to stabilize the peso and reduce inflation. On October 29, 1995, the
Mexican government announced the establishment of a new accord called the
Alianza para la Recuperacion Economica ("Alliance for Economic Recovery") with
representatives of the business, labor and agricultural sectors of the economy,
which set forth new wage and price policies. On October 26, 1996, the Mexican
government announced a new agreement with representatives of business and labor
that set forth new wage and price policies while maintaining a restrictive
monetary policy intended to stabilize the peso and reduce inflation.
128
Economic conditions in Mexico generally improved in 1997, 1998, 1999 and
2000, with gross domestic product increasing by 7.0% in 1997 as compared to
1996, 4.8% in 1998 as compared to 1997, 3.7% in 1999 as compared to 1998 and
7.5% in 2000 as compared to 1999. The average interest rates on 28-day Cetes
were 19.8%, 24.4%, 21.5% and 15.2% in 1997, 1998, 1999 and 2000, respectively.
Inflation during 1997, 1998, 1999 and 2000 was 15.7%, 18.6%, 12.3% and 8.9%,
respectively. In 1996 as compared to 1995, exports increased by 25.5% and
imports increased by 27.1% in U.S. dollar terms, resulting in a net decrease in
Mexico's foreign trade balance of 4.4%. In 1997 as compared to 1996, exports
increased by 16.0% and imports increased by 32.5% in U.S. dollar terms,
resulting in a net decrease in Mexico's foreign trade balance of 243.7%. In
1998 as compared to 1997, exports increased by 4.9% and imports increased by
15.5% in U.S. dollar terms, resulting in a net decrease in Mexico's foreign
trade balance of 13.5%. In 1999 as compared to 1998, exports increased by 17.6%
and imports increased by 17.6% in U.S. dollar terms, resulting in a net
decrease in Mexico's foreign trade balance of 21.8%. In 2000, as compared to
1999, exports increased by 11.5% and imports increased by 14.4% in US dollar
terms, resulting in a net decrease in Mexico's foreign trade balance of 49.1%.
Mexico's gross international reserves, which were U.S.$17.5 billion on December
31, 1996, increased to U.S.$30.1 billion as of December 31, 1998, U.S.$30.7
billion as of December 31, 1999 and U.S.$33.6 billion as of December 31, 2000.
A reversal of the recent general improvements in Mexico's economic
conditions, as well as civil unrest (which Mexico continues to experience
despite the general improvement in its economic conditions) or other adverse
social, political or economic developments in or affecting Mexico, could
adversely affect AHMSA's business, results of operations, financial condition,
ability to obtain financing and prospects.
On July 6, 1997, national elections were held in Mexico in which parties
opposed to the ruling PRI increased their representation in the Mexican
legislature, and the PRI lost its Congressional majority for the first time in
over 60 years. Opposing parties also captured the mayoralty of Mexico City and
the governorships of several states of Mexico. Mexican presidential and
congressional elections took place on July 2, 2000, and power was transferred
in December 2000, at which time Vicente Fox Quesada, a member of the National
Action Party, or "PAN", became the President of Mexico. PAN is the party with
the most members in Congress, although it does not have a majority position.
This is the first time in 71 years that the President is not a member of the
Institutional Revolutionary Party, or "PRI". While in the recent past, the
transfer of power after presidential elections has been accompanied by a
significant deterioration of the Mexican economy, AHMSA believes the transfer
of power to PAN has taken place without any significant effect on the Mexican
economy or on AHMSA's business and results of operations beyond those
experienced as a result of global economic conditions and the decline in
worldwide steel prices. However, future transfers of power could trigger, among
other events, currency instability. A change in economic policy, as well as
currency instability, could have a material adverse effect on our business,
financial condition, prospects and results of operation.
Adverse economic conditions in Mexico, such as those experienced from 1982
to 1987 and since December 1994, as well as social instability (which Mexico
continues to experience despite general improvements in economic conditions) or
other adverse social, political or economic developments in or affecting
Mexico, could adversely affect AHMSA's business, results of operations,
financial condition, ability to obtain financing and prospects. In addition,
the Mexican government has exercised, and continues to exercise, significant
influence over the Mexican economy. Accordingly, Mexican governmental actions
could have a significant adverse effect on Mexican companies (including AHMSA),
market conditions, prices and returns on Mexican securities (including those of
AHMSA).
The Mexican economy and financial and securities markets are, to varying
degrees, influenced by economic conditions in other countries. Furthermore,
economic or financial conditions in one country or region may undermine
investors' confidence in other countries, such as Mexico, and decrease the
attractiveness of securities investments in such countries.
Environmental Matters
AHMSA's operations are subject to Mexican federal and state laws and
regulations relating to the protection of the environment, including
regulations concerning water pollution, air pollution, noise pollution and
hazardous
129
substance discharge. The principal legislation is the federal General Law of
Ecological Balance and Environmental Protection (the "Ecological Law"). The
Procuraduria Federal de Proteccion al Ambiente (Federal Bureau of Environmental
Protection), or "PROFEPA", monitors compliance with and enforces Mexican
environmental laws. Under the Ecological Law, rules have been promulgated
concerning, among other matters, water pollution, air pollution, noise
pollution, environmental protection and hazardous substances. PROFEPA can bring
administrative and criminal proceedings against companies that violate
environmental laws, and it also has the power to close noncomplying facilities,
to revoke operating licenses required to operate such facilities and to impose
sanctions and fines.
In November 1994, AHMSA entered into an environmental agreement with PROFEPA
covering AHMSA's Monclova steelmaking facilities (the "Environmental
Agreement"). Under the Environmental Agreement, AHMSA's steel operations are
required to comply with an environmental action plan. In connection with
AHMSA's acquisition of MIMOSA, MINOSA and Cerro de Mercado from GAN, the
environmental action plan was extended to these facilities as well. Currently,
AHMSA believes it is in substantial compliance with the Environmental
Agreement. The Environmental Agreement expires in 2003.
Under the self-audit program required by a November 1994 agreement between
GAN and PROFEPA, AHMSA's mining subsidiaries were required to conduct an audit
of their current effluent discharge practices and the resulting environmental
impact. Following completion of the audit in the first quarter of 1996, AHMSA's
proposed action plan to bring AHMSA's mining facilities into compliance with
Mexican environmental law was approved by PROFEPA, and each of AHMSA's mining
subsidiaries entered into an environmental agreement with PROFEPA implementing
the applicable procedures and activities proposed in the action plan.
Currently, AHMSA believes its mining subsidiaries are in substantial compliance
with these agreements.
If AHMSA or any of such mining subsidiaries fails to comply with the
Environmental Agreement or such other environmental agreements entered into by
AHMSA's mining subsidiaries, the Mexican government has the right to terminate
the Environmental Agreement and then bring administrative actions, which could
result in the imposition of fines and the closing of noncomplying facilities.
PROFEPA has awarded its Industria Limpia (Clean Factory) certification to
AHMSA's operations that have completed the environmental action plan, as well
as MICARE and MIMOSA.
As part of the Steel Capital and Mining Capital Improvements Plan, between
1992 and December 31, 2000, AHMSA invested U.S.$48.3 million in environmental
projects, including U.S.$30.2 million to renovate two pickling lines in the
cold rolling mill to eliminate the discharge of sulfuric acid, iron and heavy
metals. As part of AHMSA's capital expenditure program, AHMSA has budgeted an
aggregate of U.S.$3.5 million from January 1, 2001 through December 31, 2003
for environmental projects, including projects required to comply with the
Environmental Agreement, the proposed action plan relating to the mining
subsidiaries and existing Mexican environmental laws and otherwise to address
environmental concerns. There can be no assurance that AHMSA will not be
required to make significant additional environmental expenditures in order to
comply with new environmental orders, rules or regulations.
In addition to the expenditures budgeted for environmental projects, certain
of AHMSA's investments pursuant to the Modernization Plan provide environmental
benefits. For example, the renovations to one of AHMSA's coke plants in
connection with the Modernization Plan, which were principally designed to
improve efficiency, are expected to reduce emissions and discharges from the
plant.
As in other industrialized countries, environmental regulations and laws in
Mexico have become increasingly stringent over the last decade. This trend is
likely to continue and may be influenced by the environmental agreement entered
into by Mexico, the United States and Canada in connection with NAFTA.
130
Accordingly, there can be no assurance that AHMSA and its operations will not
be subject to stricter Mexican federal or state environmental laws in the
future.
There are currently no material legal or administrative proceedings pending
against AHMSA with respect to any environmental matter. Until relatively
recently, Mexican laws contained little or no restriction on the release of
hazardous substances into the environment. Current Mexican law imposes no
remediation (i.e., clean-up) obligations on AHMSA, although AHMSA could be held
liable to any party injured by the environmental conditions caused by AHMSA.
Moreover, there can be no assurance that such obligations will not arise in the
future or that AHMSA will not be required to devote significant expenditures to
environmental remediation. AHMSA has no reserves in respect of potential
environmental remediation obligations. Any obligation to remediate any
environmental damage caused by AHMSA could be material and adverse to AHMSA's
financial condition and results of operations.
On January 31, 1997, AHMSA obtained the certification of ISO 14001, which
specifies requirements for effective environmental management systems, from the
International Standards Organization for its largest blast furnace and hot
rolling mill, and later in the year for its cold rolling mill II, coke plant
II, auxiliary services, BOF (basic oxygen furnaces) I, and continuous casting,
MICARE, MIMOSA and all the support departments. As of December 31, 2000, all of
AHMSA's steelmaking processes were ISO 14001 certified.
The action plan pursuant to the Environmental Agreement has concluded,
except with respect to the sinter plant, the pellet plant, two coke plants,
basic oxygen furnace one, basic oxygen furnace two and two blast furnaces,
representing an investment of U.S.$9.9 million. AHMSA has initiated an audit
performed by the Instituto Tecnologico y de Estudios Superiores de Monterrey
with respect to these facilities. The first phase of these audits was completed
in December 2000, and the remainder of the audits will be completed in 2003.
131
MANAGEMENT AND EMPLOYEES
Directors
Management of the business of AHMSA is vested in the Board of Directors.
AHMSA's Estatutos provide that the Board of Directors will consist of the
number of directors and alternate directors elected by AHMSA's shareholders at
the annual ordinary general meeting, each of whom is elected for a term of one
year.
Under the terms of the new Estatutos, so long as the debt issued under the
restructuring plan is outstanding or the right of first refusal over the AHMSA
common stock in favor of the special purpose vehicle created by GAN has not
expired or been waived, our board of directors will be comprised of 12
individuals, at least three of whom must be "Independent Directors" as defined
in the new Estatutos. In accordance with the new Estatutos,
. shareholders holding at least 50% of our outstanding voting capital stock,
or, in their absence, shareholders holding a plurality of the shares
present or represented at an ordinary shareholders' meeting, are entitled
to elect six directors; and
. The remaining directors are elected by the other stockholders.
As a matter of Mexican law, each shareholder owning 10% or more of our
voting capital stock is entitled to elect one director for each 10% owned. See
"Description of Common Stock--Shareholders' Meetings and Voting Rights."
Under the Estatutos and the new Estatutos, alternate directors are
authorized to serve on the Board of Directors in place of directors who are
unable to attend meetings or otherwise participate in the activities of the
Board of Directors.
The current members of the Board of Directors of AHMSA are as follows:
Name Position
---- --------
Xavier D. Autrey Maza................................. Chairman of the Board
Alonso Ancira Elizondo................................ Vice Chairman of the Board
Manuel Ancira Elizondo................................ Director
Jorge Ancira Elizondo................................. Director
Juan Carlos Carredano Perez*.......................... Director
Sandra Lopez Benavides*............................... Director
Juan Orozco Carrera*.................................. Director
Javier Reyna Rodriguez*............................... Director
Alternate Directors for Messrs. Alonso Ancira Elizondo, Manuel Ancira Elizondo, Jorge Ancira Elizondo and
Javier Reyna Rodriguez:
Jose Eduardo Ancira Elizondo
Guillermo Ancira Elizondo
Jorge Ordonez Cortes
Alternate Directors for Messrs. Xavier D. Autrey Maza, Juan Orozco Carrera, Sandra Lopez Benavides and Juan
Carlos Carredano Perez:
Telbert Gustafson Ceder
Rafael Fernandez McGregor
James Pignatelli
- --------
* Outside directors (i.e., unrelated to the Autrey or Ancira families).
Xavier Autrey Maza, Alonso Ancira Elizondo, Manuel Ancira Elizondo, and
Jorge Ancira Elizondo became board members in December 1991. Sandra Lopez
Benavides became a board member in December 1993. Juan Carlos Carredano Perez,
Juan Orozco Carrera and Javier Reyna Rodriguez became board members in April
1999.
132
Alonso Ancira Elizondo, Manuel Ancira Elizondo, Jose Eduardo Ancira
Elizondo, Guillermo Ancira Elizondo and Jorge Ancira Elizondo are brothers, and
Miguel Elizondo Elizondo (director of sales and marketing of AHMSA) is their
cousin.
The principal occupation of all of AHMSA's directors is with AHMSA, except
for Sandra Lopez Benavides, who is an independent business consultant, Javier
Reyna Rodriguez, who is general manager and CEO of AFORTEX, S.A. de C.V., a
construction company in Monterrey, Nuevo Leon, Mexico, Juan Carlos Carredano
Perez, who is engaged in the construction and development of shopping centers,
and Juan Orozco Carrera, who is treasurer at Grupo Vitro, S.A. de C.V., a glass
manufacturing company.
Executive Officers
The principal officers of AHMSA are as follows:
Name Position
---- --------
Alonso Ancira Elizondo...... Chief Executive Officer
Manuel Ancira Elizondo...... Chief Operating Officer
Jorge Ancira Elizondo....... Chief Financial Officer
Jose Eduardo Ancira Elizondo Legal Director
Miguel Elizondo Elizondo.... Director of Sales and Marketing
Carlos de Luna Valdes....... Director of Finance
Ariel Martinez Cruz......... Controller
Fernando Monroy Guajardo.... General Manager of Personnel (non-union)
Enrique Rivera Gomez........ Director of Personnel (union employees)
Carlos Guajardo Elizondo.... Director of Purchasing and Supply Contracts
Armando Ferriz Dominguez.... Technical Director and Director of Steel Production
Luis Zamudio Michelson...... Director of Lamination
Guillermo Ancira Elizondo... Chief Operating Officer, Nacional de Acero,
S.A. de C.V. (subsidiary of AHMSA)
Jorge Ordonez Cortes........ Director of Raw Materials
Jose Guadalupe Duron Candela Director of Raw Materials Operations
Abel Ayala Flores........... Director of Raw Materials Administration
Alonso Ancira Elizondo, Manuel Ancira Elizondo, Jorge Ancira Elizondo and
Carlos de Luna Valdes have been officers for nine years. Jose Eduardo Ancira
Elizondo and Armando Ferriz Dominguez have been officers for eight years. Jorge
Ordonez Cortes has been an officer of AHMSA for five years. Fernando Monroy
Guajardo has been an officer of AHMSA for two years. Carlos Guajardo Elizondo,
Ariel Martinez Cruz, Enrique Rivera Gomez, Jose Guadalupe Duron Candela, Abel
Ayala Flores and Miguel Elizondo Elizondo have been officers for less than one
year.
Statutory Auditor
The statutory auditor reports to the shareholders at the annual ordinary
general meeting regarding the accuracy of the financial information presented
to such holders by the Board of Directors and generally reviews the affairs of
AHMSA. The statutory auditor is also authorized to
. call ordinary and extraordinary shareholders' meetings;
. place items on the agenda for meetings of shareholders or the Board of
Directors; and
. attend meetings of shareholders or the Board of Directors (without the
right to vote).
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The statutory auditor also receives monthly reports from the Board of
Directors regarding material aspects of AHMSA's affairs, including AHMSA's
financial condition. The current statutory auditor is Manuel Gutierrez Garcia,
and the alternate statutory auditors are Ernesto Cruz Velazquez de Leon and
Gerardo de Jesus Aguila Garcia. Under AHMSA's new Estatutos, the AHMSA
directors nominated by the AHMSA Creditor Voting Trust have the right to
appoint the statutory auditor.
Compensation of Directors and Officers
For the year ended December 31, 2000, the aggregate compensation of the
directors and executive officers of AHMSA paid or accrued in that year for
services in all capacities was approximately Ps.84.3 million. The aggregate
amount accrued for directors and executive officers in 2000 pursuant to AHMSA's
retirement plan was Ps.10.5 million.
CONTROL OF AHMSA
As of June 30, 2001, GAN controlled approximately 283,267,570 shares, or
72.94% of the Common Stock of AHMSA (including Common Stock held in escrow for
the benefit of Hoogovens, as discussed below). The shares of Common Stock
controlled by GAN includes 10.0 million shares which are subject to a put right
back to GAN, which has been exercised but with respect to which shares have not
been delivered. In addition, Xavier Autrey and members of the Ancira family,
the beneficial shareholders of GAN, also owned directly 13,738,291 shares of
the Common Stock of AHMSA as of December 31, 2000.
As of June 30, 2001, members of the Ancira family and Xavier Autrey owned
GAN in equal parts. In April 1999, Xavier Autrey acquired all of the GAN shares
owned by the Autrey family. Historically, Xavier Autrey has been the sole
family member actively involved in the operations of AHMSA. Additionally, in
April 1999, Xavier Autrey and the members of the Ancira family entered into a
shareholders agreement with respect to their participation in GAN. The
shareholders agreement provides for supermajority voting requirements at the
shareholder and board levels in connection with certain decisions as specified
in the shareholders agreement. According to the shareholders agreement, each
party holds call and put options to acquire from or sell to the other party its
participation in GAN in case Mr. Xavier Autrey and the Ancira family reach a
deadlock on certain decisions related to the issues requiring a supermajority
vote. The bylaws of GAN also require the approval of a majority of the
shareholders or the majority of the Board of Directors of GAN for a transfer of
shares and grant the remaining shareholders a right of first refusal.
On May 24, 1999, GAN was judicially declared in suspension of payments.
Prior to such date, on April 21, 1999, GAN had initiated legal proceedings to
contest the validity of certain security agreements executed between GAN and
certain of its creditors. Such agreements purported to create a security
interest on substantially all of AHMSA's outstanding shares owned by GAN. Most
of the security agreements mentioned above have been structured as margin loans
where the creditor purported to obtain a security interest on AHMSA's shares
owned by GAN. If GAN defaulted in payment or failed to meet the margin calls,
then the creditor typically would have had the ability to foreclose on the
shares by selling them through the Mexican Stock Exchange.
As a result of the litigation initiated by GAN to challenge the validity of
the security interests granted in connection with the margin loans and a
certain security trust, on April 23, 1999, the Fifth Civil Court of Mexico City
issued a restraining order preventing GAN creditors from engaging in any
transaction with AHMSA's stock until a final decision on the disputed issue is
reached. The Fifth Civil Court of Mexico City also issued another order to the
CNBV, the Mexican Stock Exchange and S.D. Indeval, S.A. de C.V. to halt the
trading of such shares on the Mexican Stock Exchange.
Despite such court order, on May 24, 1999, the date GAN was declared to be
in suspension of payments, Banamex, a creditor of GAN for an amount equivalent
to approximately U.S.$20.0 million, foreclosed its
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security interest on certain of GAN's shares in AHMSA and sold such shares to
Acciones y Valores, S.A. de C.V. ("Accival") (Banamex's affiliated stock
trader) for approximately U.S.$16.5 million on the Mexican Stock Exchange.
Banamex sold shares equivalent to approximately 15.91% of AHMSA's outstanding
shares, which was approximately 22.00% of the shares held by GAN. If AHMSA
recognized the transaction, GAN's shareholding in AHMSA would be reduced to
approximately 57.03%. GAN's legal advisors believe that Banamex's actions were
in violation of Mexican law and the court order mentioned above, and therefore
are null and void.
In addition, notwithstanding the declaration of suspension of payments for
GAN, on September 23, 1999, according to filings by Casa de Bolsa Inverlat,
S.A. de C.V. ("Inverlat") with the applicable court, Inverlat, a creditor of
GAN for an amount equivalent to approximately U.S.$8.0 million, foreclosed its
security interest on certain of GAN's shares in AHMSA and sold such shares to
Inverlat International BVI, Inc. (an affiliate of Inverlat) for approximately
U.S.$1.5 million. Such shares represented approximately 3.6% of AHMSA's
outstanding shares. GAN's legal advisors believe that Inverlat's actions were
in violation of Mexican law and the court order mentioned above, and therefore
are null and void. GAN has commenced legal proceedings to recover such shares.
In June 2000, a federal court in Mexico City ruled that the petition for
suspension of payments filed by GAN was void because GAN did not hold a proper
shareholders meeting to approve the petition. This ruling was reversed on
appeal on December 13, 2000.
As a result of a court order issued in the GAN suspension of payments
proceeding, on May 26, 1999, the Bolsa Mexicana de Valores suspended trading of
our common stock on the Mexican Stock Exchange and the Comision Nacional
Bancaria y de Valores ordered the suspension of the effects of the registration
of our common stock at the National Registry of Securities and Dealers, thereby
preventing the trading of the common stock on the Mexican Stock Exchange. In
response, the New York Stock Exchange halted the trading of our American
Depositary Shares and outstanding Discount Convertible Notes and our securities
were delisted from the New York Stock Exchange on September 8, 2000. On October
16, 2000, we filed a Certification and Notification of Termination of
Registration on Form 15 with the United States Securities and Exchange
Commission, terminating our public reporting obligations in the United States.
On July 2, 1999, after AHMSA's announcement of its suspension of payments,
CNBV ordered the suspension of the registration of AHMSA's shares at the
National Registry of Securities and Dealers (Registro Nacional de Valores e
Intermediarios) maintained by CNBV. Such suspension prevents any trading on
AHMSA's shares in the Mexican Stock Exchange. In response to the suspension on
the CNBV, the New York Stock Exchange halted trading of AHMSA's ADSs and Old
Discount Convertible Notes.
Pursuant to the Modernization Agreement originally negotiated with Hoogovens
in 1991, GAN deposited 13,262,647 shares, or 4.5% of the shares of Common Stock
of AHMSA outstanding at that time, into an escrow account. Under the terms of
such escrow agreement, one-ninth of these shares were released to Hoogovens at
the end of each year of the agreement through 1995, at which date Hoogovens
held a total of 5,894,510 shares. The initial term of the Modernization
Agreement was scheduled to expire in December 1996. Upon renewal and amendment
of the Modernization Agreement, effective January 1996, 4,420,882 of the shares
originally placed in escrow were returned to GAN. As of December 31, 2000,
Hoogovens had received from GAN 7,957,590 shares of AHMSA's Common Stock (2.05%
of the outstanding Common Stock at such date). On February 3, 1999, AHMSA, GAN
and Hoogovens entered into a Memorandum of Understanding under which GAN agreed
to purchase all shares of AHMSA currently held by Hoogovens. See "AHMSA's
Business--Steel Production and Sales--Technical Partner." GAN has not
consummated this purchase.
The table below sets forth certain information, as of June 30, 2001,
regarding the ownership by GAN and the officers and directors of AHMSA, as a
group, of outstanding shares of AHMSA common stock. The table
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does not reflect the sale of AHMSA's shares by Banamex and Inverlat.
Recognizing the sale would materially change the percentage ownership of AHMSA.
Shares Percentage(1)
------ -------------
GAN(2)................... 283,267,570 72.94%
Officers and Directors(3) 13,738,291 3.53%
- --------
(1) Percentages are based on 388,375,502 shares of Common Stock outstanding,
the number of shares of Common Stock outstanding and subscribed at June 30,
2001, which number includes 30,503,000 of treasury shares which will be
cancelled upon the closing of the restructuring plan.
(2) Includes (a) 884,175 shares of Common Stock held in an escrow account for
the benefit of Hoogovens pursuant to the Modernization Agreement, (b)
61,810,500 shares of Common Stock that GAN believes were illegally
foreclosed upon and sold by Banamex, and (c) 14,098,388 shares of Common
Stock that GAN believes was illegally foreclosed upon and sold by Inverlat.
The shares foreclosed upon and sold by Inverlat represent approximately
3.6% of AHMSA's outstanding shares. If AHMSA recognized the sale of AHMSA's
shares held by GAN and sold by Accival, then the percentage ownership of
AHMSA would change such that GAN would own 221,457,070 or 57.0% of the
outstanding shares of AHMSA and Accival would own 61,810,500 or 15.9% of
the outstanding shares of AHMSA. Accival's transfer of such shares is being
challenged by GAN.
(3) Includes shares held by all officers and directors of AHMSA, including
those that are members of the Ancira family and the Autrey family; however,
does not include shares held by GAN.
RELATED PARTY TRANSACTIONS
AHMSA engages in the ordinary course of its business in a variety of
trade-related transactions with GAN and its subsidiaries. In the past, AHMSA
also engaged in a variety of financing transactions with GAN and its
subsidiaries outside of the ordinary course of AHMSA's business. See Note 14 to
Audited Financial Statements and Note 13 to the Unaudited Financial Statements.
LPM Transaction
On April 16, 1998, AHMSA granted GAN a mandate for a period of 12 months for
the purpose of negotiating the acquisition, on AHMSA's behalf, of up to 49% of
the shares of Lamina y Placa de Monterrey, S.A. de C.V. ("LPM") at a price not
to exceed U.S.$45.0 million (such acquisition referred to below as the "LPM
Investment"). The mandate also authorized GAN to establish a joint venture with
LPM's shareholders for the processing and distribution of steel products.
Under the mandate, AHMSA was obligated to advance funds to GAN from time to
time. On April 23, 1998, AHMSA advanced funds to GAN, pursuant to the mandate,
in the aggregate amount of U.S.$42.0 million.
On December 31, 1998, GAN, acting on its own behalf and on behalf of AHMSA
pursuant to the mandate, entered into an Association and Stock Purchase
Agreement with the shareholders of LPM. Under the Association and Stock
Purchase Agreement, AHMSA and GAN agreed to collectively acquire up to 49% of
LPM's shares for a maximum of U.S.$50.4 million. The Association and Stock
Purchase Agreement limited AHMSA's investment in LPM to U.S.$42.0 million
dollars, and allocated to GAN an investment in LPM of U.S.$8.4 million. The
Association and Stock Purchase Agreement provided that prior to the
consummation of the LPM Investment, LPM would spin-off or divest itself of
certain of its assets or businesses in order to reach a net worth of
approximately U.S.$102.0 million. The Association and Stock Purchase Agreement
provided that the LPM Investment was subject to certain conditions, including
board approval and the authorization of the Federal Competition Commission of
Mexico.
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On March 9, 1999, the Association and Stock Purchase Agreement was amended
to provide that:
. the shareholders of LPM would form Lamina y Placa Comercial, S.A. de
C.V. ("LPC"), a new corporation to be formed under the laws of Mexico;
. the shareholders of LPM would contribute to LPC certain assets related
to the preparation and distribution of steel products with an aggregate
value of approximately U.S.$69.0 million; and
. subject to certain conditions, the shareholders of LPM would deliver to
AHMSA fully paid, non-assessable shares representing 49% of LPC.
The amended Association and Stock Purchase Agreement also provided that
until the shareholders of LPM complied with their obligations described in the
three points listed above, they would deposit with a third party fully paid,
non-assessable shares representing 25% of LPM, in order to guarantee to AHMSA
the performance of the obligations of LPM's shareholders, on the understanding
that if LPM's shareholders or LPM did not comply with the obligations, such
shares representing 25% of LPM would be delivered to AHMSA, or, at the election
of AHMSA, the LPM shareholders would refund U.S.$42.0 million to AHMSA. Under
the Association and Stock Purchase Agreement, as amended, GAN would not
participate in LPM or LPC, and would be relieved of its obligation to fund the
U.S.$8.4 million investment in LPM originally allocated to GAN.
On September 9, 1999, the parties entered into the Termination Agreement for
the purpose of terminating the Association and Stock Purchase Agreement, as
amended. Pursuant to the Termination Agreement, AHMSA and LPM executed a Stock
Sale and Purchase Agreement under which AHMSA delivered to LPM its shares of
LPC. In exchange for the shares of LPC, LPM surrendered to AHMSA its non-voting
shares of the capital stock of Inmobiliaria Dos Carlos, S.A. de C.V. ("Dos
Carlos"), representing 60% of the capital stock of Dos Carlos and AHMSA paid a
U.S.$3.6 million termination fee. The value of the Dos Carlos shares received
by AHMSA was equivalent to the value of AHMSA's 49% interest in LPC. The
Termination Agreement also provided for the termination of the commercial
agreements and a release by AHMSA of all claims against LPM and LPC in
connection with the transactions described above.
Dos Carlos was formed to develop a residential area that includes a golf
course in the suburbs of the city of Monterrey. Such development is subject to
authorization by the Secretariat of Urban Development of the State of Nuevo
Leon, which has not yet been obtained. See Note 4 d) of the Audited Financial
Statements.
Open Period (January 1, 1998 through March 31, 1999) Loans
During the open period from January 1, 1998 through March 31, 1999 (the
"Open Period"), AHMSA and GAN engaged in the Open Period Intercompany Loans
described below. As a result of the Open Period Intercompany Loans, at times
GAN had a net amount due to AHMSA, and at other times, AHMSA had a net amount
due to GAN.
During the Open Period, AHMSA extended loans to, sold assets to, provided
services to or made payments on behalf of GAN and made advances to GAN against
payment of the Guaranty Fees (as defined below) due to GAN. During the Open
Period, GAN extended loans to AHMSA, was reimbursed for costs incurred on
behalf of a subsidiary that was sold to AHMSA, made payments on behalf of
AHMSA, and made payments to AHMSA for services.
All of such Open Period Intercompany Loans have been repaid, including
through the delivery of the LPM Investment, as described above. No further
loans have been made since the conclusion of the Open Period.
Sales of Businesses
During the Open Period, GAN sold several of its subsidiaries and investments
to AHMSA. Except in the case of Avios de Acero, S.A. de C.V., GAN used the
proceeds of such sales to repay Open Period Intercompany Loans to AHMSA.
On January 2, 1998, GAN sold all of the outstanding shares of GAN
International Trading, S.A. de C.V. to AHMSA for approximately U.S.$187,000.
GAN International Trading, S.A. de C.V. is engaged in the business of steel
product marketing, which business is related, ancillary or complementary to the
business of AHMSA.
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On January 2, 1998, GAN sold all of its interest in Hojalata Mexicana, S.A.
de C.V. to AHMSA for approximately U.S.$2.2 million. Hojalata Mexicana, S.A. de
C.V. is engaged in the processing of secondary tin plate, which business is
related, ancillary or complementary to the business of AHMSA.
On January 2, 1998, GAN sold all of the outstanding shares of Forjacero,
S.A. de C.V. to AHMSA for approximately U.S.$4.7 million. Forjacero, S.A. de
C.V. is engaged in the manufacture of grinding balls for the mining industry,
which business is related, ancillary or complementary to the business of AHMSA.
On December 31, 1998, GAN sold all of its interest in Linea
Coahuila-Durango, S.A. de C.V. to AHMSA for approximately U.S.$2.7 million.
Linea Coahuila-Durango, S.A. de C.V. is a subsidiary of AHMSA engaged in the
business of operating a railroad, which among other things transports raw
materials for AHMSA, which business is related, ancillary or complementary to
the business of AHMSA.
On December 31, 1998, Carboelectrica Sabinas, S. de R.L. de C.V. issued
capital stock to AHMSA in exchange for approximately U.S.$4.1 million of
payables due to AHMSA. Carboelectrica Sabinas, S. de R.L. de C.V. is a
subsidiary of AHMSA engaged in the business of power generation for AHMSA's
steel and mining operations, which business is related, ancillary or
complementary to the business of AHMSA.
On December 31, 1998, Ediciones Vulcano, S.A. de C.V. issued capital stock
to AHMSA in exchange for approximately U.S.$200,000 of payables due to AHMSA.
Ediciones Vulcano, S.A. de C.V. is a subsidiary of AHMSA engaged in the
business of publishing information related to the steel industry, which
business is related, ancillary or complementary to the business of AHMSA.
On March 31, 1999, AHMSA's subsidiary MICARE agreed to purchase an airplane
from GAN for Ps.65.6 million. The purchase contract established certain
negative covenants, such as a prohibition of liens, which were not complied
with. As a result, Antair, S.A. de C.V. (a direct subsidiary of GAN) sold the
airplane to a third-party and delivered the proceeds to MICARE. This operation
was carried out on September 30, 1999, giving MICARE U.S.$4.2 million.
Share Repurchase
Between March 2 and March 31, 1999, AHMSA repurchased 20,000,000 shares of
its common stock from GAN for Ps.190.1 million, pursuant to the terms of
AHMSA's share repurchase program.
Service and Trade-Related Transactions
In the ordinary course of its day-to-day activities, AHMSA engages in a
variety of transactions with GAN and its subsidiaries, including:
. the purchase by AHMSA of spare parts, maintenance supplies and other
miscellaneous products from GAN subsidiaries;
. the sale (prior to 2000) through a GAN subsidiary of AHMSA's exports to
the United States; and
. the purchase from (prior to 1994) and the sale to GAN and its
subsidiaries of administrative services.
Materials and Other Purchases
AHMSA purchased materials from GANAHMSA at cost plus a margin of 1.5% during
the first five months of 1996. On June 1, 1996, this margin increased to 2.0%
and on July 1, 1997, this margin increased to 2.1%. These purchases included
spare parts, maintenance, supplies, and other miscellaneous products, many of
which are imported from the United States. In December 1999, GANAHMSA
terminated its operations and, since that time, AHMSA has purchased materials
that it formerly purchased from GANAHMSA directly from the suppliers. AHMSA
believes that these arrangements were on terms generally comparable to those
that would be available from unaffiliated suppliers.
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Export Sales to the United States
AHMSA's steel sales to the United States have generally been made through
GANAHMSA at a discount of 1.5% during the first five months of 1996. On June 1,
1996, this margin increased to 2%, and from July 1, 1997 to the date of
termination of GANAHMSA's operations in December 1999, such sales have been
made at a discount of 2.1%. AHMSA believes that this discount is comparable to
the commission that would be payable to an unaffiliated third party providing
similar services. GANAHMSA provided marketing and sales services in the United
States, including the employment of sales and marketing personnel dedicated to
AHMSA's products, as well as taking responsibility for export and customs
clearance processing. Since the termination of GANAHMSA's operations in
December 1999, GAN International Trading S.A. de C.V. ("GAN International
Trading"), a wholly owned subsidiary of AHMSA, has provided these services to
AHMSA.
Administrative, Technical and Other Services
AHMSA receives travel services from Antair, S.A. de C.V., a GAN subsidiary,
with respect to which it paid Ps.97.0 million, Ps.63.3 million and Ps.35.7
million in 1998, 1999 and 2000, respectively. AHMSA believes that rental
payments to Antair are on terms generally comparable to those that would be
available from unaffiliated parties.
AHMSA has provided various administrative services to its affiliates since
1991. AHMSA charges the actual cost of salaries and benefits plus a profit
margin of approximately 35% for these services. During 1998, 1999 and 2000,
AHMSA charged affiliated companies, Ps.45.4 million, Ps.20.4 million and Ps.6.1
million for these administrative services. These amounts have been reported as
sales.
Affiliated Customers
Approximately 13%, 6% and 3% of AHMSA's total sales were derived from sales
to affiliates during 1998, 1999 and 2000, respectively.
Financing Transactions
In the past, AHMSA provided loans to and guaranteed loans of GAN and its
subsidiaries, as well as extended credit on steel purchases by AHMSA's
affiliates. The aggregate outstanding balance of loans and accounts receivable
from GAN and its subsidiaries was Ps.345.3 at December 31, 1998, Ps.279.4
million at December 31, 1999 and Ps.408.0 million at December 31, 2000.
Since April 1, 1996, non-trade receivables from affiliates bore interest at
a rate equal to the 28-day Cetes rate multiplied by 1.2. Substantially all such
amounts of interest income were capitalized (i.e., added to the outstanding
receivables balances), adversely affecting AHMSA's liquidity and causing an
increase in its short-term borrowings.
In consideration for the guarantee by GAN of certain debt obligations of
AHMSA and its subsidiaries, AHMSA agreed, effective January 1, 1997, to pay GAN
an annual guarantee fee ("Guaranty Fees") of 2.5% of the average amount of
these obligations outstanding. The guarantee fee rate was determined by AHMSA
based on the market rate for third-party guarantees in Mexico. AHMSA incurred
Ps.65.4 million (nominal) in Guarantee Fees to GAN during 2000.
GAN and certain of its subsidiaries obtained loans which are guaranteed by
AHMSA or AHMSA has guaranteed their performance for a total amount of Ps.501.0
million (nominal value).
AHMSA's current Estatutos prohibit future extensions of credit by AHMSA to
related parties (other than extensions of trade credit) and regulate all other
related party transactions. Under the Estatutos, AHMSA may not enter into any
transaction with a related party unless the transaction is on terms that are
commercially reasonable and substantially similar to those that could be
obtained in a comparable arm's-length transaction with a person that is not a
related party.
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Under the current Estatutos, for any transaction with a related party in
excess of Ps.15.0 million, in pesos with purchasing power as of December 1994
(equivalent to Ps.49.9 million as of June 30, 2001), or outside of the ordinary
course of AHMSA's business, a majority of the disinterested members of AHMSA's
Board of Directors must determine that the transaction satisfies the above
criteria. Amendment of this provision of the by-laws requires the vote of a
majority of the outstanding Common Stock and a majority of the Common Stock not
held by GAN and its affiliates.
Under the terms of the new Estatutos, so long as the debt issued under the
restructuring agreement is outstanding or the right of first refusal over the
AHMSA common stock in favor of the special purpose vehicle created by GAN has
not expired or been waived, the favorable vote of a majority of the Board of
Directors, including at least three of the Directors elected by the AHMSA
Creditor Voting Trust, and a favorable vote of our shareholders holding 61% of
our shares outstanding are required to approve transactions with GAN, its
successors or shareholders or our affiliates except for: (i) transactions which
as a whole do not exceed U.S.$2,500,000.00 per year, (ii) payment of a
management fee to GAN subject to the restrictions provided for under the
documents governing AHMSA's indebtedness, (iii) purchase of magnetite supplies
from Compania Minera el Baztan, S.A. de C.V. pursuant to the Supply Agreement
dated November 1, 1999, (iv) consideration payable to officers of AHMSA in the
ordinary course of business permitted by the new Estatutos, and (v) the
reimbursement to GAN of fees for services rendered to GAN by independent
advisors in the ordinary course of business up to U.S.$400,000.00 per year
provided that such reimbursement is permitted under the documents governing
AHMSA's indebtedness.
Transaction Pursuant to the Restructuring Plan
Guarantee Fee and Converted Interest
Pursuant to the terms of the restructuring plan, GAN will be guaranteeing
our new indebtedness under the New Indenture and the New Credit Agreement, by
transferring title to a portion of its common stock in AHMSA to the
Supplemental Share Trust to secure such indebtedness, and at our election, will
pay a portion of our interest on such indebtedness by directing the trustee of
the Supplemental Share Trust to reclassify shares held in trust as "Converted
Interest Shares." See "Description of Credit Agreement--Payment of Principal
and Interest" and "Description of New Notes--General." In exchange for such
agreements, we will pay to GAN an annual guarantee fee of U.S.$20 million, of
which U.S.$17.8 million will be paid directly to GAN, which amount is required
to be used by GAN to pay principal and interest on its indebtedness, and
U.S.$2.2 million will be paid to a designee of GAN. If we elect to have GAN pay
interest in stock on our behalf, we will issue a subordinated promissory note
to GAN in the amount of such interest.
Mandatory Sale of Certain Supplier Claims to Affiliated Shareholders
Under the terms of the restructuring plan, we are requiring suppliers with a
claim for pre-May 25, 1999 obligations of Ps.2.0 million or more, to sell a pro
rata portion of U.S.$40.0 million of claims to certain individual shareholders
of the Company (who are also affiliates of the Company) in exchange for a pro
rata portion of 22,108,346 shares of Common Stock owned by such shareholders,
which will represent approximately 2.93% of the Common Stock outstanding
following consummation of the restructuring plan. Those claims will then be
exchanged for non-interest bearing, non-amortizing promissory notes denominated
in dollars with a maturity of .
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DESCRIPTION OF NEW CREDIT AGREEMENT
General
The New Loans are to be issued under the New Credit Agreement, which will be
dated as of the closing date of the restructuring plan, between AHMSA, as
borrower, AHMSA's creditors that hold indebtedness for borrowed money (other
than Old Notes), as lenders, and , as administrative agent (the
"Administrative Agent").
The following statements relating to the New Loans and the New Credit
Agreement are summaries and are subject to the detailed provisions of the New
Credit Agreement, to which reference is hereby made for a complete statement of
those provisions. Unless otherwise indicated, references under this caption to
sections or articles are references to the New Credit Agreement.
Assuming that all holders of Old Loans elect to receive New Loans (rather
than New Notes) pursuant to the restructuring plan, that all holders of Old
Loans consent to the restructuring plan, and that no MICARE Creditor makes a
MICARE A/B Election, the aggregate principal amount of New Class A Loans will
be as follows:
. the Tranche AHMSA-A Loans will be issued in an aggregate principal
amount equal to U.S.$561.5;
. the Tranche MICARE-A Loans will be issued in an aggregate principal
amount equal to U.S.$95.9 (assuming that no holders of Tranche MICARE
Loans elect to receive only Tranche MICARE-A Loans);
. the Tranche SEN-A Loans will be issued in an aggregate principal amount
equal to U.S.$139.1.
Each Lender's New Class A Loan will be evidenced by one or more promissory
notes in an aggregate principal amount equal to such loan.
Assuming that all holders of Old Loans elect to receive New Loans (rather
than New Notes) pursuant to the restructuring plan, that all holders of Old
Loans consent to the restructuring plan, that no Subject Asset Sale Proceeds
will be paid to AHMSA's creditors upon the closing of the restructuring plan,
and that no MICARE Creditor makes a MICARE A/B Election, the aggregate
principal amount of New Class B Loans will be as follows:
. the Tranche AHMSA-B Loans will be issued in an aggregate principal
amount equal to U.S.$90.6;
. the Tranche MICARE-B Loans will be issued in an aggregate principal
amount equal to U.S.$15.5 (assuming that no holders of Tranche MICARE
Loans elect to receive only Tranche MICARE-A Loans);
. the Tranche SEN-B Loans will be issued in an aggregate principal amount
equal to U.S.$22.5.
Each Lender's New Class B Loan will be evidenced by one or more promissory
notes in an aggregate principal amount equal to such loan.
After the six-month anniversary of the closing date of the restructuring
plan (the "Consolidation Date"), there will be no distinction between the New
Class A Loans and the New Class B Loans. The holders of the New Loans may
request that we issue a new promissory note (without any designation regarding
whether such note evidences New Class A Loans or New Class B Loans), in
exchange for the principal amount of the New Class A Loans and the remaining
principal amount, if any, of the New Class B Loans. Each promissory note issued
by us will be governed by Mexican law and will be endorsed by each subsidiary
guarantor.
Payment of Principal and Interest
The New Loans mature on September 30, 2009. The outstanding principal of New
Loans will be paid in 13 installments on the last business day of March and
September of each year commencing September 30, 2003. Payments on each of the
first 12 principal payment dates will be in an amount equal to 5.42% of the
amount of the New Loans outstanding on the closing date of the restructuring
plan, and the payment on the thirteenth payment date will be in an amount equal
to the unpaid principal amount of the New Loans on such date.
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Interest on the New Loans will be payable in arrears on the last business
day of March, June, September and December of each year (each a "Payment Date")
and will be computed on the basis of the actual number of days elapsed and a
360-day year. Interest on the New Class A Loans will accrue from the closing
date of the restructuring plan, or from the most recent Payment Date, at an
annual rate equal to the LIBO Rate plus an applicable margin as follows:
Period Applicable Margin
------ -----------------
From the closing date of the restructuring plan to the first anniversary
of the closing date............................................................. 3.00%
From the first anniversary of the closing date of the restructuring plan to the
second anniversary of the closing date.......................................... 4.00%
From the second anniversary of the closing date of the restructuring plan to the
fourth anniversary of the closing date.......................................... 4.50%
From the fourth anniversary of the closing date of the restructuring plan to the
seventh anniversary of the closing date......................................... 5.00%
From the seventh anniversary of the closing date of the restructuring plan
and at all times thereafter..................................................... 5.50%
Interest on the New Class B Loans will accrue at the rate per annum of 4%
from the closing date of the restructuring plan, or from the most recent
Payment Date; provided that after the Consolidation Date, the New Class B Loans
will accrue interest at a rate equal to the rate applicable to the New Class A
Loans.
Upon the occurrence and during the continuance of any Event of Default:
. we will pay interest on the principal amount of all outstanding New Loans
at a rate per annum equal to 2% in excess of the otherwise applicable
rate; and
. all such interest will be payable on demand of the Administrative Agent or
the person or entity to whom such payment is due.
Instead of paying interest in cash on the New Loans on the first three
Payment Dates, AHMSA may satisfy its obligation to pay all or a portion of such
interest by causing GAN to pay the holders of New Notes with shares of AHMSA
common stock ("Converted Interest") in an amount equal to 1% of the issued and
outstanding capital stock of AHMSA for each U.S.$6.73 million in Converted
Interest (and a ratable fraction of 1% for any Converted Interest amount that
is less than U.S.$6.73 million). This will be accomplished through the
execution of an exchange agreement among AHMSA, GAN, the Administrative Agent
and the trustee with respect to the Supplemental Share Trust (the "Supplemental
Share Trustee"), pursuant to which GAN will instruct the Supplemental Share
Trustee to classify shares of common stock contained in the Supplemental Share
Trust as "Converted Interest Supplemental Shares." As compensation to GAN for
the payment of Converted Interest, AHMSA will issue a subordinated promissory
note to GAN in the amount of the Converted Interest (a "Subordinated Converted
Interest Note"). GAN will have the right to repurchase the Converted Interest
Supplemental Shares during the four-year period beginning on any Payment Date
on which Converted Interest was paid for a purchase price equal to the
aggregate Converted Interest amount at a rate per annum equal to the interest
rate on the New Loans for the twelve-month period following the first such
Payment Date on which Converted Interest was paid, and thereafter, 20%.
Repurchases will be accomplished by GAN instructing the Supplemental Share
Trustee to terminate the classification of Converted Interest Supplemental
Shares as such.
AHMSA may only elect to pay all or any part of the interest due on any of
the first three Payment Dates in this manner if:
. no Default is continuing on the Payment Date;
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. AHMSA has not paid any management fees, guarantee fees or similar fees to
GAN and its affiliates, unless all previously issued Converted Interest
Supplemental Shares have been converted back into Supplemental Shares;
. AHMSA is paying interest due on the New Notes in this manner on a pro rata
basis; and
. AHMSA has not previously voluntarily prepaid the New Loans or redeemed the
New Notes.
The shares used to pay converted interest on the New Loans will be
transferred to the AHMSA Creditor Voting Trust (which will in turn issue
Converted Interest Series trust interests to the holders of new loans and new
notes at such time representing such shares) upon the earlier of (a) a payment
default on the new loans or the new notes or (b) the expiration of GAN's option
to repurchase such shares used to pay converted interest.
Optional Prepayment
AHMSA may prepay principal of the New Loans, at any time from time to time,
pro rata among the New Loans of each tranche upon written notice to the
Administrative Agent in an aggregate minimum amount of U.S.$5.0 million and
integral multiples of U.S.$1.0 million.
Mandatory Prepayment
AHMSA is required to make the following mandatory prepayments:
MICARE Sale Proceeds. On the next Payment Date after AHMSA or any of its
Subsidiaries receives any MICARE Sale Proceeds, AHMSA must apply such proceeds
to the prepayment of the Tranche MICARE-A Loans. After the Tranche MICARE-A
Loans have been paid in full, AHMSA will prepay the New Loans in an amount
equal to the sum of the Bank Percentage of the aggregate amount of such
proceeds less the amount of Tranche MICARE-A Loans. To the extent that the
aggregate amount of all such proceeds is greater than or equal to U.S.$300.0
million, but less than U.S.$330.0 million, the principal amount of New Loans
that will be deemed to have been prepaid will be equal to the sum of:
. the amount of the New Loans prepaid in cash from such proceeds; plus
. the Bank Percentage of the excess of U.S.$330.0 million over the aggregate
amount of such proceeds.
Subject Asset Sale Proceeds. On the next Payment Date after AHMSA or any of
its Subsidiaries receives any Subject Asset Sale Proceeds, AHMSA will prepay
the New Loans in an aggregate amount equal to the Bank Percentage of the
aggregate amount of such proceeds, each such prepayment to be applied first, to
redeem the New Class B Loans and, second, after the payment in full of the New
Class B Loans, to prepay the New Class A Loans.
If each of the following conditions is met at the time that a prepayment
would otherwise be required to be made pursuant to the preceding paragraph:
. such prepayment would be required to be made on or prior to the first
anniversary of the closing date of the restructuring plan,
. the aggregate amount of Subject Asset Sale Proceeds theretofore received
by AHMSA and its Subsidiaries is at least equal to U.S.$120.0 million,
. all prepayments theretofore required to be made with respect to Subject
Asset Sale Proceeds have been made, and
. notice of a cash flow deficit for the first year following the closing
date of the restructuring plan has theretofore been given;
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then, AHMSA may, by at least ten business days' prior notice to the
Administrative Agent:
. defer the prepayment of up to the Bank Percentage of U.S.$60.0 million
in mandatory prepayments otherwise required to be made with respect to
Subject Asset Sale Proceeds (the "Deferred Mandatory Prepayments") until
the first Payment Date following the first anniversary of the closing
date of the restructuring plan; and
. reduce the amount of such Deferred Mandatory Prepayments by an amount
equal to the cash flow deficit.
In such case, we will on the first Payment Date following the first anniversary
of the closing date of the restructuring plan prepay a principal amount of New
Class A Loans in an aggregate amount equal to the Deferred Mandatory
Prepayments less the amount of the cash flow deficit.
To the extent that the aggregate amount of Subject Asset Sale Proceeds
available for prepayment, together with the aggregate amount of the Subject
Asset Sale Proceeds paid to creditors at the closing of the restructuring plan
(which amount is expected to be U.S.$0.0), is less than or equal to U.S.$120.0
million, the redemption price for the New Class B Loans on or prior to the
six-month anniversary of the closing date of the restructuring plan shall be
66 2/3% of the principal amount thereof.
Other Asset Sales. On the next Payment Date after AHMSA or any of its
Subsidiaries receives any Other Asset Sale Proceeds which are in an aggregate
amount equal to U.S.$2.5 million or more, AHMSA will either reinvest the
proceeds within certain time periods or prepay the New Loans in an amount equal
to the Bank Percentage of such proceeds; provided that Other Asset Sale
Proceeds generated from the sale of assets subject to liens recognized by the
Mexican Bankruptcy Court will be applied first to the holders of such liens to
the extent that such liens are recognized by the Mexican Bankruptcy Court.
Insurance Proceeds. On the next Payment Date after AHMSA or any of its
Subsidiaries receives any Insurance Proceeds which are in an aggregate amount
equal to U.S.$2.5 million or more, AHMSA will either reinvest the proceeds
within certain time periods or prepay the New Loans in an amount equal to the
Bank Percentage of such proceeds.
Permitted Refinancing Indebtedness Proceeds. On the next Payment Date after
AHMSA or any of its Subsidiaries receives any Permitted Refinancing
Indebtedness Proceeds, AHMSA will prepay the New Loans in an amount equal to
the Bank Percentage of such proceeds.
Equity Proceeds. On the next Payment Date after AHMSA or any of its
Subsidiaries receives any Eqity Proceeds, AHMSA will prepay the Loans in an
amount equal to the Bank Percentage of the aggregate amount of such Equity
Proceeds.
Excess Cash Flow. On the first Payment Date occurring at least 120 days
after the last day of each fiscal year of AHMSA, AHMSA will prepay the New
Loans with an aggregate redemption price equal to the following:
. if such fiscal year is 2002 or 2003, an amount equal to the Bank
Percentage of the Excess Cash Flow for such fiscal year minus the
aggregate amount of payments made (or concurrently being made) by AHMSA
to GAN as a mandatory repayment of Subordinated Converted Interest Notes
in respect of Excess Cash Flow for such fiscal year (but only to the
extent that such payments are used by GAN to repurchase shares of
capital stock of AHMSA paid to the creditors as Converted Interest); and
. for any other fiscal year, an amount equal to 70% of the Bank Percentage
of the Excess Cash Flow for such fiscal year minus the aggregate amount
of payments made (or concurrently being made) by AHMSA to GAN as a
mandatory repayment of Subordinated Converted Interest Notes in respect
of Excess Cash Flow for such fiscal year (but only to the extent that
such payments are used by GAN to repurchase shares of capital stock of
AHMSA paid to the creditors as Converted Interest).
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Fees
We have agreed to pay to the Administrative Agent, for our own account, fees
set forth in a fee letter dated as of the date of the New Credit Agreement. We
have agreed to pay to the Administrative Agent a fee in an aggregate amount
equal to the lesser of the aggregate amount of Financial Advisor Expenses and
U.S.$3.0 million. The balance (if any) of the Financial Advisor Expenses will
be paid by us in three equal installments on the first three Payment Dates
following the closing date. We have agreed to pay to all holders of New Loans
and New Notes an Aggregate Restructuring Fee in an amount equal to the sum of
U.S.$20.0 million plus the amount of Specified Post-April 1 Committee Expense,
that will be used first to pay certain expenses of the steering committees and
to fund a U.S.$2.0 million indemnification holdback for the AHMSA Creditor
Voting Trust trustee and then to pay a pro rata fee to all creditors. We have
agreed to pay to the Administrative Agent, for the account of holders of the
New Loans, the Bank Percentage of the Three-Month Interest Fee.
SEN Account and Payments
Under the New Credit Agreement, a special cash collection, in the name and
under the control of the collateral agent in connection with the New Loans and
the New Notes (the "Collateral Agent") will be designated as the "SEN
Collection Account." The Collateral Agent will deposit into the SEN Collection
Account
. all moneys received upon the drawing by the Collateral Agent under any
letter of credit of AHMSA in connection with a Steel Supply Contract,
. each payment received by the Collateral Agent for the account of a
holder of Tranche SEN Loans and each payment by us to the Tranche SEN
Loan, and
. all cash proceeds of any collection or other realization of all or any
part of the collateral with respect to the Tranche SEN Loans.
AHMSA will have no right or power of withdrawal over the SEN Collection
Account, which will be subject to withdrawal solely by the Administrative
Agent. On each Payment Date (or, if an Event of Default has occurred and is
continuing, on any business day as may be specified to the Administrative Agent
by the holders of at least 51% of the outstanding New Loans), or as soon
thereafter as the Administrative Agent in accordance with its normal lending
practice is able (and, in any event, within five business days after such
Payment Date), the Administrative Agent will apply all of the funds contained
in the SEN Collection Account to the payment of amounts due and payable in
respect of the Tranche SEN Loans on such Payment Date. If, on any business day,
no Event of Default has occurred and is continuing and the balance of the SEN
Collection Account exceeds an amount equal to the amounts due and payable with
respect to the Tranche SEN Loans on the next succeeding Payment Date, the
Administrative Agent will release (as AHMSA instructs) funds on deposit in the
SEN Collection Account in an amount equal to such excess. Upon satisfaction in
full of all of the obligations with respect to the Tranche SEN Loans, the
Administrative Agent will, so long as no Event of Default is continuing,
promptly remit any amounts held in the SEN Collection Account to AHMSA, its
successors or assigns, or as a court of competent jurisdiction may direct.
Under the Old SEN Facility, we entered into supply contract with three
German steel buyers. The facility was designed to produce cash flow sufficient
to fund payments under the facility. These cash flow levels will be reset to
the new schedule of interest and amortization of the Tranche SEN Loans.
JPMorgan Chase Bank is obligated to obtain the appropriate consents of the
German steel buyers to these adjustments on the closing date for the
restructuring plans. If the buyers do to not agree to enter into a new
arrangement with AHMSA, it is not a default on AHMSA's part. If cash from sales
to these Buyers is not enough to pay Tranche SEN Loans, then AHMSA is
responsible for the shortfall.
If a German steel buyer breaches certain representations and warranties or
covenants, goes into bankruptcy or does not otherwise perform its obligations
under its Steel Supply Contract and such default is not cured within
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six months, AHMSA must either provide a substitute buyer or pay the
Administrative Agent a fee equal to 2% of the amount committed to be bought by
the buyer under the subject steel contract during a relevant time period less,
with respect to the initial payment of such fee, amounts deposited in the SEN
Collection Account prior to any such breach pursuant to the subject Steel
Supply Contract. Additionally, AHMSA has certain obligations under the Old SEN
Facility including shipping steel products in accordance with the terms (which
include quality specifications, quantity and shipping terms) of the Steel
Supply Contracts with specified steel buyers, and to make payment into a SEN
Collection Account and/or open letters of credit for the benefit of the
Collateral Agent on behalf of the holders of the Tranche SEN Loans.
Representations and Warranties
Under the New Credit Agreement, AHMSA will make the following
representations and warranties:
. AHMSA and its Subsidiaries are duly organized and validly existing under
the laws of Mexico and we have full power and authority and hold all
requisite governmental approvals to enter into and perform the
transaction;
. the execution and delivery by AHMSA and its Subsidiaries and the
performance of AHMSA's obligations under the transaction documents have
been duly authorized and do not contravene other documents to which
AHMSA or its Subsidiaries are a party;
. no authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body or other
Person is required for the due execution and delivery by AHMSA or any of
its Subsidiaries of, or performance of its obligations under, the
transaction documents and neither AHMSA nor any of its Subsidiaries is
an "investment company" within the meaning of the Investment Company Act
of 1940 or a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935;
. the New Credit Agreement and the New Notes and the other transaction
documents are legal, valid and binding obligations of AHMSA and its
Subsidiaries;
. the financial information presented is in accordance with Mexican GAAP
and fairly represents AHMSA's financial condition;
. there is no litigation pending or threatened in writing against AHMSA or
any of its Subsidiaries that would have a Material Adverse Effect other
than as disclosed on a schedule to the New Credit Agreement;
. AHMSA has no Subsidiaries, other than those identified on a schedule to
the New Credit Agreement;
. AHMSA has title to all of its properties and assets free and clear of
all Liens, except for Permitted Liens;
. AHMSA has filed all required tax returns and reports and paid all taxes
shown to be owing, other than those identified on a schedule to the New
Credit Agreement;
. AHMSA has maintained, operated and administered each employee benefit
plan in accordance with its terms and with applicable law and has made
all payments in a timely and proper manner, except when failure to do so
could not reasonably be expected to have a Material Adverse Effect;
. AHMSA has no payment obligations for retiree benefits that are past due
and unpaid except when failure to do so could not reasonably be expected
to have a Material Adverse Effect;
. AHMSA has no liability or payment obligation for retiree benefits,
except as set forth on a schedule to the New Credit Agreement;
. AHMSA has complied in all material respects with all applicable laws
with respect to employment practices and there is no charge or complaint
alleging any violation of any applicable laws against
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AHMSA or any of its Subsidiaries either pending or, to AHMSA's
knowledge, threatened, which could reasonably be expected to have a
Material Adverse Effect;
. there is no labor strike, request for representation, slowdown or
stoppage actually pending, or to AHMSA's knowledge, threatened against
or affecting AHMSA or any of its Subsidiaries that could reasonably be
expected to have a Material Adverse Effect;
. AHMSA has filed all forms, reports, statements, provider agreements,
benefit plan descriptions, payor agreements, beneficiary materials and
other documents required to be filed by AHMSA with any governmental
authority except where the failure to file could not reasonably be
expected to have a Material Adverse Effect;
. AHMSA is not in violation of any Environmental Law in a manner that
could reasonably be expected to have a Material Adverse Effect;
. except as set forth on a schedule to the New Credit Agreement, neither
AHMSA nor any of its Subsidiaries and, to AHMSA's knowledge, no third
party has used, released, discharged, generated, manufactured, produced,
stored or disposed of it, on, under or about any real property owned,
leased or used by us or any of our Subsidiaries transported thereto or
therefrom any Hazardous Material in a manner that could reasonably be
expected to subject us or any of our Subsidiaries to any liability that
could reasonably be expected to have a Material Adverse Effect, or
subject any Lender to any liability under any Environmental Law;
. except as set forth on a schedule to the New Credit Agreement, there are
no Hazardous Materials used, stored or present at, on or near any real
property owned, leased or used by us or any of our Subsidiaries in
violation of applicable law that could reasonably be expected to have a
Material Adverse Effect;
. there is no proceeding and, to AHMSA's knowledge, no investigation or
inquiry by any governmental authority with respect to the presence or
release of Hazardous Materials in, on, from or to any real property
owned, leased or used by AHMSA or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect;
. the Administrative Agent and each holder of New Loans has received a
true, complete and correct copy of each of the transaction documents and
each of the representations and warranties of AHMSA and its Subsidiaries
set forth therein is true and complete;
. each transaction document is in full force and effect and has not been
amended, modified or terminated;
. neither AHMSA nor any of its Subsidiaries is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock,
and no proceeds of any New Loans will be used for a purpose which
violates, or would be inconsistent with, F.R.S. Board Regulation U or X;
. each transaction document is in proper legal form under the laws of
Mexico;
. the New Credit Agreement and the other loan documents are and will at
all times be direct and unconditional general obligations of AHMSA and
its Subsidiaries and will rank in right of payment at least pari passu
with all other of AHMSA's Indebtedness;
. AHMSA and its Subsidiaries are subject to civil and commercial law with
respect to our obligations under each of the transaction documents, and
the execution and delivery by AHMSA and its Subsidiaries of, and the
performance of its obligations under, each of the transaction documents
are private and commercial acts rather than public or governmental acts;
. neither AHMSA nor any of its Subsidiaries nor any of its properties is
entitled to any right of immunity in any jurisdiction relating to any of
the obligations under any of the transaction documents;
. neither AHMSA nor any of its Subsidiaries have debt outstanding other
than debt listed on a schedule to the New Credit Agreement and
Indebtedness permitted under the New Credit Agreement;
147
. neither AHMSA nor any of its Subsidiaries have Investments (other than
Cash Equivalent Investments) other than those listed on a schedule to
the New Credit Agreement and AHMSA and its Subsidiaries own, free and
clear of all Liens, other than Permitted Liens, all such Investments;
. neither AHMSA nor any of its Subsidiaries have outstanding any Lien or
obligation to create any Lien on or with respect to any of its
properties, except for Permitted Liens and those disclosed on a schedule
to the New Credit Agreement;
. each of the Liens purported to be created by the collateral documents
has been duly created and constitutes a first priority perfected Lien on
all of the property covered thereby, subject only to Permitted Liens;
. neither AHMSA nor any of its Subsidiaries have any place of business in
the United States or Canada; and
. certain information provided by AHMSA and attached to the New Credit
Agreement is true and accurate in all material respects as of the date
stated.
Affirmative Covenants
The New Credit Agreement contains the following affirmative covenants, among
others:
Financial Information, Reports, Notices, Etc.
AHMSA has agreed to provide financial information on a monthly, quarterly
and annual basis and to report the occurrence of any of the following: a known
default, the occurrence of any material adverse development with respect to any
material litigation, action, proceeding or labor controversy, the commencement
of any labor controversy, litigation, action or proceeding or the occurrence of
any adverse development with respect to any Environmental Action. AHMSA must
also provide copies of all reports filed with any securities exchange, and
copies of an annual business plan and copies of letters of credit pertaining to
the SEN Loans.
Compliance With Laws, Etc.
AHMSA has agreed to comply with all material applicable laws, including the
maintenance and preservation of AHMSA's corporate existence, the maintenance
and preservation of the corporate existence of the Subsidiary Guarantors and
the payment of all material taxes, assessments and governmental charges imposed
on AHMSA or its property except to the extent being diligently contested in
good faith.
Maintenance of Properties
AHMSA has agreed to maintain, preserve, protect and keep its properties in
good repair, working order and condition, ordinary wear and tear excepted, and
to make necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times unless AHMSA determines in good faith that the continued maintenance of
any of its properties is no longer economically desirable.
Insurance
AHMSA will maintain or cause to be maintained with responsible insurance
companies insurance with respect to its properties and business against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses.
Books and Records
AHMSA will keep books and records which accurately reflect all of its
business affairs and transactions and permit the Administrative Agent and each
Lender or any of their respective representatives to visit, at reasonable
148
times and intervals, all of our offices to discuss AHMSA's financial matters
with its officers and independent public accountants and to examine any of its
books or other corporate records.
Environmental Covenant
AHMSA will use and operate all of its facilities and properties in material
compliance with all Environmental Laws and keep all necessary permits,
approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in material compliance therewith,
and handle all Hazardous Materials in compliance with all applicable
Environmental Laws except to the extent that the failure to do so could not be
reasonably expected to have a Material Adverse Effect. AHMSA will immediately
notify the Administrative Agent of any actual or threatened in writing
Environmental Action, and provide copies upon receipt of all written claims,
complaints, notices or inquiries relating thereto. AHMSA will also provide such
information and certificates as the Administrative Agent may reasonably request
to demonstrate compliance with applicable Environmental Laws.
Bancomext Obligations
AHMSA will make payments in respect of the principal of the Bancomext
Obligations as set forth in a schedule attached to the Credit Agreement.
Upstreaming of MICARE Cash Flow
By no later than five days prior to each Payment Date, AHMSA will cause
MICARE to make a payment to AHMSA in respect of indebtedness owed by MICARE to
AHMSA in an amount equal to the principal and interest on the Tranche MICARE
Loans due on such Payment Date. By no later than five days prior to each day on
which we are obligated to make a prepayment of the New Subordinated Notes in an
amount equal to one half the amount by which MICARE Sale Proceeds exceed
U.S.$330.0 million (see "Description of New Subordinated Notes"), AHMSA will
cause MICARE to make a payment to AHMSA in respect of Indebtedness owed by
MICARE to AHMSA in amount equal to the amount of such prepayment to the extent
AHMSA receives Gross MICARE Sale Proceeds. By no later than five days prior to
each day on which AHMSA is obligated to make a prepayment to the holders of the
New Subordinated Notes in an amount which is equal to 65% of the amount by
which MICARE Operating Cash Flow for a given fiscal year exceeds Projected
MICARE Cash Flow for such year (see "Description of New Subordinated Notes"),
AHMSA will cause MICARE to make a payment to AHMSA in respect of Indebtedness
owed by MICARE to AHMSA in an amount equal to the amount of such prepayment
minus the aggregate amount of payments made to AHMSA by MICARE. By no later
than fifteen business days after the last day of each fiscal quarter, AHMSA
will cause MICARE to make a payment in respect of Indebtedness owed by MICARE
to AHMSA in an amount equal to the excess of the aggregate amount of cash on
hand in bank accounts, and the aggregate amount of all Cash Equivalent
Investments, held by MICARE and its Subsidiaries on the last day of such fiscal
quarter over U.S.$5.0 million.
Defense of Voting Trust
AHMSA has agreed to uphold, protect and defend the AHMSA Creditor Voting
Trust from and against any claim in any litigation or other legal proceedings
to which AHMSA or any of its Subsidiaries is a party challenging the validity
of any vote of the trustee for the AHMSA Creditor Voting Trust as being the
vote of all shares held in the AHMSA Creditor Voting Trust, provided that AHMSA
is not obligated to seek to overturn any applicable law. AHMSA has also agreed
to cooperate in all reasonable respects with the Collateral Agent and the
trustee for the AHMSA Creditor Voting Trust in connection with any claim in any
litigation or other legal proceedings challenging the validity of any vote of
the trustee for the AHMSA Creditor Voting Trust Trustee as being the vote of
all shares held in the AHMSA Creditor Voting Trust, provided AHMSA is not
obligated to seek to overturn any applicable law.
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New Subsidiary Guarantors; Pledge of Additional Shares
When AHMSA forms, creates, purchases or acquires a new Subsidiary (other
than an Unrestricted Subsidiary), or if an Unrestricted Subsidiary no longer
satisfies the conditions of being an Unrestricted Subsidiary, AHMSA will notify
the Administrative Agent and deliver the following documents to the
Administrative Agent: a stock pledge agreement, an agreement of each such
Subsidiary to be bound by the Subsidiary Guaranty, such additional documents as
are necessary to grant the Collateral Agent a perfected first priority and Lien
on all properties of the Subsidiary, customary opinions of counsel and an
acceptance by the agent for service or process of its appointment as such by
such Subsidiary.
When AHMSA or any of its Subsidiaries (other than any Unrestricted
Subsidiary) acquires additional capital stock of any of its Subsidiaries, AHMSA
will deliver to the Administrative Agent a stock pledge agreement entered into
by the parent company of such Subsidiary that has the effect of granting a
pledge of all such capital stock to the Collateral Agent.
Further Assurances
AHMSA will give, execute, deliver, file and/or record any notice,
instrument, document, agreement or other papers that may be reasonably
necessary or desirable, and do such other acts and things as the Administrative
Agent may reasonably request, to create, preserve, perfect or validate any Lien
purported to be granted by any of the Collateral Documents. If we or any of our
Subsidiaries acquire any property that is not then subject to the Lien of a
Collateral Document, then within 30 days of such acquisition AHMSA will provide
the Collateral Agent and the Administrative Agent with written notice thereof
and AHMSA will cause each of its Subsidiaries to give, execute, deliver, file
and/or record any notice, instrument, document, agreement or other papers that
may be reasonably necessary or desirable in the judgment of the Administrative
Agent, and do such other acts and things as the Administrative Agent may
reasonably request, to create, preserve, perfect or validate the Lien on such
Property purported to be granted by any of the Collateral Documents.
MICARE Sale
AHMSA will accept an offer to purchase MICARE approved by the members of
AHMSA's board of directors appointed by the AHMSA Creditor Voting Trust, so
long as the MICARE Sale Proceeds pursuant to the offer would be at least
U.S.$300.0 million and AHMSA is not required to pay more than U.S.$15.0 million
in post closing price adjustments and indemnification obligations.
SEN Covenants
The New Credit Agreement contains the following covenants which relate to
the Tranche SEN Loans only:
Certain Obligations
AHMSA will deliver products under any Steel Supply Contract to each buyer in
such amounts and time and with the specifications and prices agreed to under
the respective Steel Supply Contracts. If on the 90/th/ day of any delivery
period set forth in any Steel Supply Contract AHMSA has not agreed to deliver
products to any buyer with a value equal to or greater than the contract
commitment and the balance for the Steel Supply Contract for such buyer is less
than the contract commitment, AHMSA shall on that 90/th/ day make a payment to
the SEN Collection Account and/or arrange for one or more of AHMSA's letters of
credit to be opened so that such payment and/or the face amount of the letters
of credit equals the lesser of the amounts due and payable on the Tranche SEN
Loans on the next Payment Date that are attributable to such Steel Supply
Contract less the balance in the SEN Collection Account and the amount of the
contract obligations for such Steel Supply Contract.
AHMSA will also provide the Administrative Agent with a notice of AHMSA's
intention to provide any buyer with a request for principal terms and details
of steel purchases. If AHMSA provides such a notice and on
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the 95/th/ day of the relevant delivery period the contract balance is less
than the contract commitment, then on or before the 98/th/ day of such delivery
period, AHMSA will provide to the buyer under such Steel Supply Contract a
request for principal terms and details of steel purchases. When the buyer
specifies the principal terms and details in response to the request, AHMSA
shall deliver steel products which reflect such terms and details or on the
next succeeding business day will request the Administrative Agent to
countersign AHMSA's rejection of such terms and details. If AHMSA has made the
request for principal terms and details and on the 115/th/ day of the current
delivery period the relevant buyer has not specified principal terms and
details and the contract balance is less than the contract commitment for such
delivery period, AHMSA will make a payment to the SEN Collection Account and/or
arrange for one or more of its letters of credit to be opened so such payment
and/or the face amount of the letters of credit equals the lesser of the
amounts due and payable on the Tranche SEN Loans on the next Payment Date
attributable to such Steel Supply Contract less the balance in the SEN
Collection Account and the amount of the contract obligations under such Steel
Supply Contract.
Steel Supply Contract
AHMSA will not, without the prior written consent of the holders of at least
51% of the outstanding Tranche SEN Loans, agree to any amendment to or
modification of, waive any material right under, or terminate any Steel Supply
Contract or so long as no default under any Steel Supply Contract has occurred
and is continuing, set off any amount claimed to be due to AHMSA under any
Steel Supply Contract or otherwise against its obligations to sell and/or
deliver steel products to the buyer.
Steel Production
AHMSA will not, without the prior written consent of the holders of at least
51% of the outstanding Tranche SEN Loans, permit the aggregate amount of steel
products committed to be produced by AHMSA to finance or secure the Tranche SEN
Loans, plus steel products committed to be produced by AHMSA to finance or
secure any comparable receivable facilities, to exceed 25% of our then current
production capacity of steel products.
Negative Covenants
The Credit Agreement contains the following negative covenants, among others:
Business Activities
AHMSA will not engage in any material business activity other than the lines
of business conducted on the closing date of the restructuring plan (which
shall be deemed to include the production and distribution of energy and gases
and such other activities or business as may be incidental or related to the
lines of business conducted on the closing date).
Indebtedness
AHMSA will not, and will not permit any of its Subsidiaries (other than our
Unrestricted Subsidiaries) to, create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any Indebtedness, other than,
without duplication, the following:
(1) Indebtedness consisting of the following:
(A) Indebtedness under the New Credit Agreement and the Subsidiary
Guaranty;
(B) Indebtedness consisting of the New Notes and the New Subordinated
Notes;
(C) Certain Indebtedness set forth on a schedule to the New Credit
Agreement, to the extent outstanding on the closing date of the
restructuring plan;
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(D) Indebtedness consisting of amounts owed to suppliers prior to the
filing for suspension of payments (but only to the extent such
Indebtedness is described on a schedule to the New Credit Agreement);
(E) Indebtedness consisting of Capital Leases outstanding on the closing
date of the restructuring plan (but only to the extent such
Indebtedness is described on a schedule to the New Credit Agreement);
(F) Indebtedness consisting of the Bancomext Obligation described on a
schedule to the New Credit Agreement, to the extent outstanding on
the closing date of the restructuring plan;
(G) Indebtedness consisting of take-or-pay contracts entered into in
connection with the sale of Subject Assets;
(H) Indebtedness consisting of the Subordinated Converted Interest Notes;
and
(I) Indebtedness in an aggregate principal amount not to exceed U.S.$25.0
million, consisting of Base Debt that has not been restructured
pursuant to the restructuring plan;
(2) Indebtedness in an aggregate principal amount at any one time
outstanding not to exceed U.S.$100.0 million consisting of the following:
(A) Indebtedness (other than Capitalized Lease Obligations) in an
aggregate principal amount not to exceed U.S.$75.0 million at any one
time outstanding;
(B) Indebtedness incurred in respect of Capitalized Lease Obligations in
an aggregate principal amount not to exceed U.S.$25.0 million at any
one time outstanding;
(C) Indebtedness incurred to finance Capital Expenditures in an aggregate
principal amount in any one fiscal year, not to exceed U.S.$25.0
million (which may be in the form of Capitalized Lease Obligations);
(D) Indebtedness secured by Liens permitted in an aggregate principal
amount not to exceed U.S.$20.0 million at any one time outstanding;
and
(E) Indebtedness of a Subsidiary of AHMSA acquired by AHMSA, provided
that such Indebtedness was not incurred in contemplation of such
acquisition, or secured by a Lien on property acquired by AHMSA or
any of its Subsidiaries, so long as such Lien existed prior to the
acquisition of such property and was not created in anticipation of
such acquisition, provided that
(x) the aggregate principal amount of all such Indebtedness incurred
pursuant to clause (E) shall not exceed $20.0 million at any one
time outstanding and
(y) the holder of such Indebtedness has no recourse to any Property
of AHMSA or any of its Subsidiaries other than the Subsidiary so
acquired or the Property so acquired;
(3) Indebtedness consisting of the following:
(A) Hedging Obligations (other than Hedging Obligations in respect of
prices of raw materials and inputs into the steel manufacturing
process), so long as the aggregate notional principal amount of all
Hedging Obligations does not exceed U.S.$50.0 million at any one time
outstanding;
(B) Hedging Obligations in respect of prices of raw materials and inputs
into the steel manufacturing process so long as they are not entered
into for speculative purposes; and
(C) Indebtedness in respect of commercial letters of credit outstanding
(and reimbursement obligations thereunder) in an aggregate amount not
to exceed U.S.$30.0 million at any one time outstanding;
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(4) Indebtedness, the proceeds of which are applied solely to repay the Base
Debt, so long as:
(A) either
(i) such Base Debt shall have been determined to be due and payable
pursuant to an unappealable final judgment of a Mexican court of
competent jurisdiction, or
(ii) the issuance of such Indebtedness is approved by a majority of
the AHMSA directors appointed by the AHMSA Creditor Voting Trust,
(B) AHMSA shall have used its commercially reasonable best efforts to
oppose the validity of such repayment, and
(C) neither AHMSA nor any of its Subsidiaries shall have settled any
litigation with respect to such repayment without the prior consent
of a majority of the AHMSA directors appointed by the AHMSA Creditor
Voting Trust;
(5) Indebtedness, the proceeds of which are used solely to refinance other
permitted Indebtedness ("Permitted Refinancing Indebtedness") so long as:
(A) the Average Life of such Indebtedness is at least six months longer
than the Average Life of the Indebtedness being refinanced and, in
the case of refinancing Indebtedness under the New Credit Agreement
and the Subsidiary Guaranty and Indebtedness consisting of the New
Notes, the final maturity of such Indebtedness occurs after the final
maturity of the New Loans, and
(B) the interest rate, covenants, defaults and other terms of such
Indebtedness are not materially more favorable to the holders thereof
than the Indebtedness being refinanced;
(6) Indebtedness in respect of Customer Advances (and in respect of any
refinancing of any Customer Advances), provided that the aggregate
principal amount of such Customer Advances (and any refinancing thereof)
outstanding during the following respective periods shall not exceed the
respective amounts set forth opposite such periods:
Period Maximum Amount
------ ---------------------
Closing Date through December 30, 2003 U.S.$130.0 million
December 31, 2003 through December 30, 2004 U.S.$ 80.0 million
December 31, 2004 through December 30, 2005 U.S.$ 60.0 million
December 31, 2005 and all times thereafter U.S.$ 30.0 million
(7) Indebtedness of any Subsidiary of AHMSA owing to AHMSA or any other
Subsidiary of AHMSA (other than any Unrestricted Subsidiary), and any
Indebtedness of AHMSA owing to any of its Subsidiaries (other than any
Unrestricted Subsidiary), provided that repayment of any such
Indebtedness owed by AHMSA is fully subordinated to payment of all
obligations under the New Credit Agreement;
(8) Indebtedness that is a Contingent Obligation with respect to
Indebtedness otherwise permitted (except to the extent that any such
provision expressly contemplates that the Indebtedness permitted thereby
not be guaranteed); and
(9) Indebtedness, in an aggregate principal amount not to exceed U.S.$10.0
million at any one time outstanding, incurred on behalf of employees of
AHMSA and its Subsidiaries, for employee housing constructed pursuant to
the terms of AHMSA's and its Subsidiaries' collective bargaining
agreements.
Liens
AHMSA will not, and will not permit any of its Subsidiaries (other than any
Unrestricted Subsidiary) to, create, incur, assume or suffer to exist any Lien
upon any of its property, revenues or assets, whether now owned
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or hereafter acquired (other than the Steel Supply Contract receivables),
except (the following being referred to as the "Permitted Liens"):
(1) Liens securing the obligations under the New Credit Agreement and the
New Indenture, granted pursuant to any transaction document relating to
the restructuring plan;
(2) Liens upon real and/or tangible personal property acquired after the
closing date of the restructuring plan (by purchase, construction or
otherwise) by AHMSA or any of its Subsidiaries, each of which Liens was
created solely for the purpose of securing Indebtedness permitted by the
New Credit Agreement representing, or incurred to finance, refinance or
refund the cost (including the cost of construction) of such property;
provided that
(A) no such Lien shall extend to or cover any property of AHMSA or such
Subsidiary other than the property so acquired and improvements
thereon and
(B) the principal amount of Indebtedness secured by any such Lien shall
at no time exceed the fair market value (as determined in good faith
by the chief financial officer of AHMSA or a majority of the members
of the AHMSA's board of directors) of such property at the time it
was acquired (by purchase, construction or otherwise);
(3) Liens on accounts receivable in an aggregate principal amount not to
exceed U.S.$93.75 million at any one time outstanding (the "Maximum
Pledged A/R Amount") securing Indebtedness not to exceed U.S.$100.0
million consisting of working capital credit facilities, Indebtedness
consisting of certain Hedging Obligations and Indebtedness the proceeds
of which are applied solely to repay Base Debt; provided that the
Maximum Pledged A/R Amount may be increased by an additional
U.S.$100.0 million in the event that
(A) AHMSA shall have given the Administrative Agent and each holder of
New Loans at least ten business days notice of its request to
increase the Maximum Pledged A/R Amount,
(B) a majority of the AHMSA directors appointed by the AHMSA Creditor
Voting Trust shall have approved such increase in the Maximum Pledged
A/R Amount, and
(C) the Required Lenders shall not have notified AHMSA (through the
Administrative Agent) that they do not consent to the increase in the
Maximum Pledged A/R Amount within such ten business day period;
(4) Liens securing Indebtedness incurred on behalf of our employees for
employee housing, but only so long as such Liens cover the employee
housing financed by such Indebtedness;
(5) Liens securing Indebtedness incurred pursuant to the following:
(A) Certain scheduled Indebtedness, Indebtedness consisting of Capital
Leases outstanding as of the closing date of the restructuring plan,
Indebtedness consisting of the Bancomext Obligations, and
Indebtedness in an aggregate principal amount not to exceed U.S.$25.0
million consisting of Base Debt;
(B) Indebtedness incurred in respect of Capitalized Lease Obligations in
an aggregate principal amount not to exceed U.S.$25.0 million and
Indebtedness incurred to finance Capital Expenditures, but only to
the extent that such Lien covers the property acquired with the
proceeds of such Indebtedness;
(C) Indebtedness incurred pursuant to certain acquisitions of
Subsidiaries or properties, but only to the extent that such Lien
existed prior to the acquisition of the property (and was not created
in contemplation or anticipation of such acquisition) referred to in
such clause;
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(D) Indebtedness incurred pursuant to certain Hedging Obligations, but
only so long as
(i) in the case of Hedging Obligations that do not exceed U.S.$50.0
million and Hedging Obligations in respect of prices of raw
materials and inputs, such Lien is either (x) created under the
collateral documents, or (y) covers solely cash and cash
equivalents in an aggregate principal amount not to exceed
U.S.$20.0 million (and provided that the principal amount thereof
that secures obligations owed to persons or entities other than
Petroleos Mexicanos does not exceed U.S.$5.0 million), and
(ii) in the case of indebtedness in respect of commercial letters of
credit outstanding, such Lien covers solely cash or cash
equivalents and the value of such cash or cash equivalents does
not exceed 110% of the face amount of the letters of credit
secured thereby;
(E) Indebtedness, the proceeds of which are used solely to refinance
other permitted Indebtedness, but only to the extent that
(1) such Lien would have been permitted to secure the Indebtedness
being refinanced by the Indebtedness referred to in such clause,
and
(2) if the Indebtedness being refinancing is Restructured Debt, such
Lien is junior and subordinate to the Restructured Debt;
(6) Liens for taxes, assessments or other governmental charges or levies not
at the time delinquent or thereafter payable without penalty or being
diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with Mexican GAAP shall have been
set aside on its books;
(7) Certain Liens existing on the closing date of the restructuring plan and
set forth on a schedule to the New Credit Agreement;
(8) Any minor imperfection of title with respect to any property which does
not materially adversely affect the value of such property or materially
interfere with the present use and the continuation of such present use
of such property;
(9) The following:
(A) Liens incurred in the ordinary course of business in favor of
governmental authorities in connection with social security
obligations, unemployment insurance or other forms of governmental
insurance or benefits,
(B) Liens securing the performance of tenders, statutory obligations,
leases and contracts (other than for borrowed money), including the
designation of loss payees or beneficiaries or similar arrangements
under insurance contracts in respect to tangible property in favor of
holders of Indebtedness (but only to the extent such Indebtedness is
permitted to be secured by such tangible property by the New Credit
Agreement) entered into in the ordinary course of business, and
(C) Liens securing obligations on surety or appeal bonds;
(10) Liens customarily granted or incurred in the ordinary course of business
with regard to services rendered by carriers, warehouses, suppliers of
materials and equipment, mechanics and repairmen, and other similar
Liens imposed by applicable law;
(11) Liens arising out of attachments, judgments or awards either
(A) relating to Indebtedness owed to suppliers prior to the filing for
suspension of payments or Indebtedness in an aggregate principal
amount not to exceed U.S.$25.0 million consisting of Base Debt that
has not been restructured or
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(B) as to which an appeal or other appropriate proceedings for contest or
review are timely commenced (and as to which foreclosure and other
enforcement proceedings shall not have been commenced (unless fully
bonded or otherwise effectively stayed)), and as to which appropriate
reserves have been established in accordance with Mexican GAAP to the
extent any such reserves are required by Mexican GAAP;
(12) Liens arising by virtue of any statutory or common law provision
relating to banker's liens, rights of set off or similar rights with
respect to deposit accounts;
(13) Liens incurred in the ordinary course of business with respect to
obligations that do not exceed U.S.$5.0 million at any one time
outstanding and that are not incurred in connection with Indebtedness or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(14) Rights of first refusal, options or other contractual rights to sell,
assign or otherwise dispose of any Property or interest therein, which
right of first refusal, option or contractual right is in connection
with a Disposition permitted by the New Credit Agreement.
In addition, AHMSA will not, and will not permit any of its Subsidiaries to,
create, incur, assume or suffer to exist any Lien upon any of the Steel Supply
Contract receivables, except for Liens securing the Tranche SEN Loans and other
Restructured Debt and interest thereon.
Financial Covenants
AHMSA has agreed to be bound by certain financial covenants, which are
tested quarterly, based on the following ratios:
(1) AHMSA's Debt to EBITDA Ratio must be less than the following respective
ratios as of the last day of any fiscal quarter occurring during the
following respective periods:
Period Maximum Ratio
------ -------------
October 1, 2002 through December 31, 2002........ to 1
January 1, 2003 through December 31, 2003........ to 1
January 1, 2004 and at all times thereafter...... to 1
(2) AHMSA's EBITDA to Interest Expense Ratio must be more than the following
respective ratios as of the last day of any fiscal quarter occurring
during the following respective periods:
Period Maximum Ratio
------ -------------
October 1, 2002 through December 31, 2002........ to 1
January 1, 2003 through December 31, 2005........ to 1
January 1, 2006 and at all times thereafter...... to 1
(3) AHMSA's Cash Available for Debt Service Ratio must be more than the
following respective ratios as of the last day of any fiscal quarter
occurring during the following respective periods:
Period Maximum Ratio
------ -------------
October 1, 2002 through December 31, 2003........ to 1
January 1, 2004 through December 31, 2006........ to 1
January 1, 2007 and at all times thereafter...... to 1
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Investments
AHMSA will not, and will not permit any of its Subsidiaries (other than an
Unrestricted Subsidiary) to, make, incur, assume or suffer to exist any
Investment in any other Person, except:
(1) Investments existing as of the closing date of the restructuring plan in
Subsidiaries existing as of the closing date and other Investments
existing as of the closing date (but only to the extent such Investments
are disclosed on a schedule to the New Credit Agreement);
(2) Cash Equivalent Investments;
(3) Investments by AHMSA in its Subsidiaries (other than Unrestricted
Subsidiaries);
(4) Investments with an aggregate fair market value (measured on the date
each such Investment is made and without giving effect to subsequent
changes in value) which, when taken together with all other Investments
that are at the time outstanding, does not exceed U.S.$25.0 million;
(5) Property received in connection with any good faith settlement of any
claims of AHMSA or its Subsidiaries, or in connection with Dispositions
permitted pursuant to the New Credit Agreement;
(6) Prepaid expenses, deposits and advances to suppliers and similar items
in the ordinary course of business;
(7) The following:
(A) loans made to employees of AHMSA in the ordinary course of business;
provided that
(1) the aggregate outstanding amount of all loans made after July 31,
2000 to any one employee shall not exceed U.S.$100,000 and
(2) the aggregate outstanding amount of all such loans made after
July 31, 2000 shall not exceed U.S.$1.5 million;
(B) 50-day salary advances to employees made in the ordinary course of
business; and
(C) Investments consisting of loans made to employees (pursuant to
AHMSA's and its Subsidiaries' collective bargaining agreements) to
finance employee housing, in an aggregate principal amount not to
exceed U.S.$10.0 million at any one time outstanding.
(8) Endorsements of negotiable instruments and other similar negotiable
documents for collection in the ordinary course of business; and
(9) Purchases of the New Notes, redeemed or purchased for cancellation and
returned to the trustee for the New Notes for redemption or cancellation
in accordance with the provisions of the New Indenture described in
"Description of New Notes--Mandatory Sinking Fund Redemptions."
Restricted Payments
Neither AHMSA nor any of its Subsidiaries (other than any Unrestricted
Subsidiaries) may
. declare, pay or make any dividend or distribution (in cash, property or
obligations) on any shares of any class of AHMSA's capital stock (now or
hereafter outstanding) or such Subsidiaries (other than any Unrestricted
Subsidiaries), or on any warrants, options or other rights with respect
to any shares of any class of AHMSA's capital stock (now or hereafter
outstanding) of such Subsidiaries (other than any Unrestricted
Subsidiaries), other than dividends or distributions payable in our
common stock or warrants to purchase our common stock or splitups,
escision or reclassifications of our stock into additional or other
shares of our common stock, or
. apply, or permit any of its Subsidiaries (other than Unrestricted
Subsidiaries) to apply, any of its funds, property or assets to the
purchase, redemption, sinking fund or other retirement of, or agree or
permit
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any of its Subsidiaries (other than Unrestricted Subsidiaries) to
purchase or redeem, any shares of any class of AHMSA's capital stock
(now or hereafter outstanding) or any of its Subsidiaries, or warrants,
options or other rights with respect to any shares of any class of
AHMSA's capital stock (now or hereafter outstanding) or any of its
Subsidiaries; or
. pay, agree to pay or accrue to be paid any management, guarantee fee or
similar fee to any Affiliate of AHMSA,
all of the foregoing being "Restricted Payments", other than:
(1) the dividend payments described on a schedule to the New Credit
Agreement,
(2) any of our Subsidiaries may make Restricted Payments to us or any
Subsidiary Guarantor,
(3) in addition to the dividend payments permitted pursuant to the above two
clauses, at any time after December 31, 2004, AHMSA may declare and make
dividend payments in cash in respect of its capital stock, to the extent
consistent with applicable law and Mexican GAAP, and subject to the
satisfaction of each of the following conditions on the date of such
dividend payment and after giving effect to such payment:
(A) no Default shall have occurred and be continuing,
(B) the aggregate amount of such dividend payments made during the period
commencing on January 1, 2005 and ending on the date of such dividend
payment shall not exceed an amount equal to 30% of the cumulative
Excess Cash Flow for the period commencing on January 1, 2004 and
ending on the last day of the fiscal year most recently ended prior
to the date of such dividend payment,
(C) AHMSA shall have delivered to the Administrative Agent, at least ten
business days prior to the date of such proposed Restricted Payment,
a certificate of Arthur Andersen or other independent public
accountants reasonably acceptable to the Administrative Agent setting
forth computations in reasonable detail demonstrating satisfaction of
the condition set forth in the foregoing clause as of the date of
such certificate;
(4) AHMSA may make payments in respect of management fees, guarantee fees or
similar fees to an affiliate of ours in an aggregate amount, in any
fiscal quarter, not to exceed the Maximum Guarantee Fee Amount for such
fiscal quarter, subject to the satisfaction of the following conditions
on the date of such payment and after giving effect to such payment:
(A) no Default as a result of non-payment of principal or non-payment of
interest shall have occurred and be continuing,
(B) AHMSA shall not have failed for two consecutive fiscal quarters to
comply with any of its obligations under the Debt to EBITDA Ratio
test, the EBITDA to Interest Expense Ratio test and the Cash
Available for Debt Service Ratio test,
(C) a Default (other than a Default of the type described in the
foregoing clauses) shall not have occurred and be continuing for more
than 90 consecutive days,
(D) the maximum amount of the Guarantee Fees that may be paid in any
fiscal quarter to any Person other than GAN (and creditors of GAN in
payment of Indebtedness owed by GAN to such creditors) shall not
exceed the sum of (x) the aggregate amount of Guarantee Fees paid in
such fiscal quarter minus (y) the GAN Amount for such fiscal quarter,
(E) AHMSA shall not have made an election to use Converted Interest with
respect to the Payment Date occurring in the fiscal quarter with
respect to which such Guarantee Fee is to be paid; and
(F) AHMSA shall have delivered to the Administrative Agent, at least ten
business days prior to the date of such proposed Guarantee Fee, a
certificate of Arthur Andersen or other independent public
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accountants reasonably acceptable to the Administrative Agent setting
forth computations in reasonable detail demonstrating satisfaction of
the foregoing conditions as of the date of such certificate;
but any such payment to be made in any fiscal quarter that was not made
in such fiscal quarter because one or more of the foregoing conditions
was not satisfied may be made subsequent to such fiscal quarter so long
as, both prior to making such payment and after giving effect thereto,
each of such conditions is satisfied;
(5) AHMSA may exercise its option under the Stock Option Agreement; and
(6) AHMSA may perform its obligations under the Company Agreement and the
Registration Rights Agreement.
Capital Expenditures
AHMSA cannot make Capital Expenditures in an aggregate amount over
U.S.$150.0 million in any fiscal year.
Rental Obligations
AHMSA will not, and will not permit any of its Subsidiaries (other than
Unrestricted Subsidiaries) to, enter into at any time any arrangement which
does not create a Capitalized Lease Obligation and which involves the leasing
by either AHMSA or any of its Subsidiaries (other than Unrestricted
Subsidiaries) from any lessor of any real or personal property, except
arrangements which, together with all other such arrangements which shall than
be in effect, will not require the payment of an aggregate amount of rentals by
AHMSA and its Subsidiaries (other than Unrestricted Subsidiaries) in excess of
U.S.$60.0 million (excluding escalations resulting from a rise in the consumer
price or similar index, and excluding any amounts required to be expended for
maintenance and repairs, insurance, taxes, assessments, and other similar
charges) in any one fiscal year.
Consolidation, Merger
AHMSA will not, and will not permit any of its Subsidiaries (other than
Unrestricted Subsidiaries) to, liquidate or dissolve, consolidate with, or
merge into or with, any other corporation, or purchase or otherwise acquire all
or any material portion of the assets of any Person, or of any division thereof
(an "Acquisition") except:
(1) any such Subsidiary may liquidate or dissolve voluntarily into, and may
merge with and into, AHMSA or any other Subsidiary (other than an
Unrestricted Subsidiary), and the assets or stock of any Subsidiary may
be purchased or otherwise acquired by AHMSA or any other Subsidiary
(other than an Unrestricted Subsidiary), provided that, in each case,
the property of the surviving entity or acquiring entity constituting
collateral with respect to the New Loans is subject to a first priority
perfected Lien pursuant to the collateral documents, subject only to
Permitted Liens; and
(2) AHMSA or any of its Subsidiaries may make Acquisitions, subject to the
satisfaction of each of the following conditions on the date of such
Acquisition and after giving effect thereto:
(A) no Default shall have occurred and be continuing,
(B) the aggregate consideration paid or to be paid for all such
Acquisitions (including the aggregate amount of any Indebtedness
assumed) made at any time after the closing date of the restructuring
plan does not exceed U.S.$25.0 million, and
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(C) AHMSA shall have delivered to the Administrative Agent, at least five
business days prior to the date of such proposed Acquisition, a
certificate of Arthur Andersen or other independent public
accountants acceptable to the Administrative Agent setting forth
computations in reasonable detail demonstrating satisfaction of the
foregoing condition as of the date of such certificate.
(3) consolidations or mergers constituting Dispositions permitted by the
limitations regarding Asset Dispositions.
Asset Dispositions
AHMSA will not, and will not permit any of its Subsidiaries (other than an
Unrestricted Subsidiary) to, sell, transfer, lease, contribute or otherwise
convey (including leaseback transactions, sale or discounts of accounts
receivable and capital stock of AHMSA or any of its Subsidiaries), all or any
material part of its property to any Person (in each case, a "Disposition"), or
grant an option or enter into a contract for a Disposition, except for:
(1) Dispositions of inventory in the ordinary course of its business, and
Dispositions by AHMSA to any Subsidiary Guarantor, or by any of AHMSA's
Subsidiaries to AHMSA or any Subsidiary Guarantor,
(2) Dispositions of Subject Assets for a consideration consisting solely of
cash (provided that, in connection with any such Disposition, AHMSA and
its Subsidiaries may enter into sale lease-back arrangements, supply
agreements and similar or related agreements), subject to the condition
that AHMSA shall have delivered to the Administrative Agent, at least
five business days prior to the date of such proposed Disposition of
Subject Assets, a certificate of Arthur Andersen or other independent
public accountants reasonably acceptable to the Administrative Agent
setting forth computations in reasonable detail demonstrating that the
projected decrease in EBITDA as a result of such Disposition (together
with all prior Dispositions of Subject Assets) will not be greater than
U.S.$11.0 million per year,
(3) Dispositions of worn-out, obsolete or not-in-service assets,
(4) Dispositions of real property not used for mining purposes or not
forming part of AHMSA's production facilities in Monclova, so long as at
least 75% of the consideration therefor consists of cash, and any
balance consists of Indebtedness payable within one year after the date
of such Disposition,
(5) a sale of MICARE for a consideration consisting solely of cash (and
assumption of Assumed MICARE Debt), so long as
(A) the Gross MICARE Sale Proceeds resulting therefrom are at least equal
to U.S.$300.0 million, and
(B) we give the holders of the New Loans (through the Administrative
Agent) at least five business days prior notice of such sale (which
notice shall specify the amount of Gross MICARE Sale Proceeds then
expected to result from such sale),
(6) other Dispositions so long as the fair market value of all property sold
in all such sales pursuant to this clause in any fiscal year (as
determined by AHMSA's board of directors) does not exceed U.S.$10.0
million,
(7) sales of accounts receivables, so long as the aggregate face amount of
all accounts receivable that have been sold and not yet paid by the
respective account debtor, or less than days past due, shall not
exceed U.S.$25.0 million at any one time, and
(8) Dispositions expressly permitted by the limitations regarding Liens;
But in no event shall we or any of our Subsidiaries effect any Disposition of
any of the Steel Supply Contract receivables (other than to the extent
permitted by the collateral documents).
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Transactions With Affiliates
AHMSA can enter into the following transactions with Affiliates:
. the payment of the Guarantee Fee;
. the reimbursement of reasonable expenses of each of the non-employee
members of AHMSA's board of directors and the payment of annual director
fees of U.S.$40,000 each;
. the purchase of magnetite supply from Compania Minera el Baztan, S.A. de
C.V.;
. compensation arrangements with officers in the ordinary course of
business consistent with industry practice approved by AHMSA's board of
directors including a majority of the directors appointed by the AHMSA
Creditor Voting Trust;
. the Registration Rights Agreement, the Stock Option Agreement, the
Company Agreement and other transactions with the AHMSA Creditor Voting
Trust;
. dividend payments or other distributions with respect to AHMSA's capital
stock paid pro rata to the holders thereof in accordance with the New
Credit Agreement;
. the execution, delivery, performance, payment and prepayment of Exchange
Agreements and Subordinated Converted Interest Notes;
. the Banamex Transaction;
. so long as no Default has occurred and is continuing, the reimbursement
of professional fees incurred by GAN in the ordinary course of business,
not to exceed U.S.$400,000 in any fiscal year;
. other transactions so long as the aggregate consideration or other
payments to be made with respect to all such transactions in any fiscal
year does not exceed U.S.$2.5 million; and
. the transaction documents;
provided that each such transaction is on an arm's length basis and on terms no
less favorable to us than they would be with an unaffiliated third party.
Restrictive Agreements
AHMSA will not, and will not permit any of its Subsidiaries (other than any
Unrestricted Subsidiary) to, enter into any agreement prohibiting:
(1) the creation or assumption of any Lien (other than Permitted Liens) upon
our properties, revenues or assets, whether now owned or hereafter
acquired;
(2) AHMSA or any of its Subsidiaries or Affiliates obligated under the loan
documents from amending or otherwise modifying the New Credit Agreement
or any other loan document; or
(3) the ability of any Subsidiary (other than any Unrestricted Subsidiary)
to make any payments, directly or indirectly, to AHMSA by way of
dividends, advances, repayments of loans or advances, reimbursements of
management and other intercompany charges, expenses and accruals or
other returns on investments, or any other agreement or arrangement
which restricts the ability of any such Subsidiary to make any payment,
directly or indirectly, to AHMSA,
except for such Liens or restrictions existing under or by reason of
(A) Indebtedness as in effect on the closing date of the restructuring plan,
any amendments, modifications, restatements, renewals, increases, or
supplements thereof, and Permitted Refinancing Indebtedness, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, or Permitted Refinancing Indebtedness are no more
restrictive with respect to such restrictions than those contained in
the Indebtedness as in effect of the closing date,
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(B) applicable law,
(C) any instrument governing Indebtedness or capital stock or contract of a
Person acquired by AHMSA or its Subsidiaries as in effect at the time of
such acquisitions, which restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person and its
Subsidiaries, or the property or assets of the Person and its
Subsidiaries, so acquired,
(D) by reason of customary non-assignment provisions in leases entered into
in the ordinary course of business and consistent with past practices,
(E) any instrument or agreement governing Indebtedness permitted to be
incurred under the New Credit Agreement, which is secured by (or which
is permitted by the New Credit Agreement to be secured by) a Lien
permitted to be incurred under the New Credit Agreement, which
encumbrance or restriction is not applicable to any property or assets
other than the property or assets subject to (or permitted to be subject
to) such Lien,
(F) Permitted Liens or
(G) restrictions applicable to property subject to an agreement relating to
its Disposition, pending such Disposition.
Non-Interference With Financial Matters
AHMSA will pay when due the salary and bonus of the chief financial officer,
the controller and the treasurer established pursuant to the term of its
Charter Documents, and we shall not, and will not permit any of its
Subsidiaries to, take any action that would directly result in the chief
financial officer being unable to fulfill the obligations required of him or
her pursuant to the terms of the New Credit Agreement.
Take-or-Pay Arrangements
AHMSA will not, and will not permit any of its Subsidiaries to, enter into
or be a party to any arrangement for the purchase of materials, supplies or
other property or services if such arrangement requires that payment be made by
AHMSA or such Subsidiary regardless of whether such materials, supplies or
other property or services are delivered or furnished to AHMSA, except to the
extent that
. the aggregate amount payable by AHMSA and its Subsidiaries under all
such arrangements at any one time (excluding such arrangements entered
into in connection with the sale of Subject Assets permitted by the
limitations on Asset Disposition) shall not exceed U.S.$50.0 million, and
. all such arrangements are on market terms (as reasonably determined by
AHMSA's board of directors).
Events of Default
The following are "Events of Default" under the New Credit Agreement:
(1) Any default in the payment or prepayment when due of the principal of
any Loan.
(2) Any default in the payment when due of any interest on any New Loan or
any fee or other amount (other than principal of any New Loan) payable
hereunder or under any notes with respect thereto and such default shall
continue unremedied for a period of two business days.
(3) Any representation or warranty made or deemed to be made under the New
Credit Agreement or in any other loan document executed by AHMSA or any
Obligor, or made or deemed to be made in any AHMSA equity documents
executed by it, or any other writing or certificate required to be
furnished by or on behalf of us or any Obligor to either the Collateral
Agent or Administrative Agent or any holder of New Loans under the New
Credit Agreement or any such other loan document, or by or on behalf of
AHMSA or any Subsidiary or Affiliate of AHMSA obligated under the loan
documents
162
pursuant to any AHMSA equity document, is or shall be incorrect when
made or deemed made in any material respect.
(4) Any of the following non-performance of certain covenants and
obligations shall occur:
(A) AHMSA shall default in the due performance or observance of any of
its obligations concerning insurance, new Subsidiary Guarantors,
defense of AHMSA Creditor Voting Trust, MICARE Sale and negative
covenants (with the negative covenants other than Indebtedness or
Liens); provided that with respect to insurance, new Subsidiary
Guarantors, defense of AHMSA Creditor Voting Trust, and Restricted
Payments (but, in the case of the Restricted Payments solely to the
extent that such default results from the failure to provide certain
accountants' certificates and in the case of an Acquisition solely to
the extent that such default results from the failure to provide the
certificate of independent public accountants for such an
Acquisition) such default shall continue unremedied for a period of
20 days after notice thereof shall have been given to AHMSA by the
Administrative Agent or any holder of New Loans; or
(B) AHMSA shall default in the due performance or observance of any of
its obligations concerning Indebtedness or Liens (unless such default
consists of the incurrence of Indebtedness secured by a Lien (x) the
proceeds of which are used to replace substantial plant or equipment
that has been destroyed by a natural disaster and (y) the incurrence
of which was approved by a majority of the AHMSA directors appointed
by the AHMSA Creditor Voting Trust) and such default shall continue
unremedied for 30 days (or such shorter period as the Administrative
Agent, acting on instructions from the Required Lenders, shall notify
AHMSA at any time after the occurrence of such default); or
(5) Any of the following non-performance of certain other covenants and
obligations shall occur:
(A) AHMSA or any of its Subsidiaries or any other Obligor shall default
in the due performance and observance of any other agreement
contained herein or in any other Loan Document other than those
specified above, and such default shall continue unremedied for a
period of 20 days after the earlier of (i) a Responsible Officer of
AHMSA becomes aware that such default has occurred and that it
constitutes a Default, and (ii) notice thereof shall have been given
to the AHMSA by the Administrative Agent or any holder of New Loans;
or
(B) We or any of our Subsidiaries shall default in the due performance
and observance of any agreement contained in any AHMSA equity
document (other than corporate governance pursuant to the Company
Agreement), and such default shall continue unremedied for a period
of 20 days after notice thereof shall have been given to us by the
Administrative Agent or any holder of New Loans.
(6) A default shall occur in the payment when due (subject to any applicable
grace period), whether by acceleration or otherwise, of any Indebtedness
(other than Indebtedness based on principal and interest on the New
Loans and other than any Base Debt that is not restructured as provided
in the restructuring plan) of ours or any of our Subsidiaries (other
than our Unrestricted Subsidiaries) in an aggregate principal amount
exceeding U.S.$20.0 million, or a default shall occur in the performance
or observance of any obligation or condition with respect to such
Indebtedness if the effect of such default is to accelerate the maturity
of any such Indebtedness or such default shall continue unremedied for
any applicable period of time sufficient to permit the holder or holders
of such Indebtedness, or any trustee or agent for such holders, to cause
such Indebtedness to become due and payable prior to its expressed
maturity.
(7) Any final, non-appealable judgment or order for the payment of money in
excess of U.S.$1.0 million shall be rendered against us or any of our
Subsidiaries (other than our Unrestricted Subsidiary) (other than (x) a
judgment as to which, and only to the extent, a reputable insurance
company has acknowledged coverage of such claim in writing or (y) a
judgment relating to Base Debt that has not been restructured pursuant
to the restructuring plan or relating to any of the Indebtedness owed to
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suppliers prior to the filing for suspension of payments or (z) a
judgment which reduces the amount of outstanding Base Debt that has not
been restructured pursuant to the restructuring plan) and either:
(A) enforcement proceedings shall have been commenced by any creditor
upon such judgment or order; or
(B) there shall be any period of 15 consecutive days during which a stay
of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.
(8) AHMSA or any of its Subsidiaries (other than Unrestricted Subsidiaries)
shall:
(A) become insolvent or generally fail to pay, or admit in writing its
inability or unwillingness to pay, debts as they become due;
(B) apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator, sindico, interventor or other custodian for
AHMSA or any of its Subsidiaries or any property of any thereof, or
make a general assignment for the benefit of creditors;
(C) in the absence of such application, consent or acquiescence, permit
or suffer to exist the appointment of a trustee, receiver,
sequestrator, sindico, interventor or other custodian for AHMSA or
any of its Subsidiaries or for a substantial part of the property of
any thereof, and such trustee, receiver, sequestrator, sindico,
interventor or other custodian shall not be discharged within 90
days; or
(D) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law, including the Mexican Ley de
Concursos Mercantiles or any dissolution, winding up or liquidation
proceeding, in respect of us or any of our Subsidiaries and, if any
such case or proceeding is not commenced by AHMSA or any of its
Subsidiaries, such case or proceeding shall be consented to or
acquiesced in by us or such Subsidiary or shall result in the entry
of an order for relief or shall remain for 90 days undismissed.
(9) Any of the following impairments of security shall occur:
(A) Any transaction document shall, in whole or in part, terminate, cease
to be effective or cease to be the legally valid, binding and
enforceable obligation of any party thereto, except in accordance
with its terms, and to the extent that any transaction documents to
which the AHMSA Creditor Voting Trust or its trustee is a party
terminates, is not effective, or is not legally valid, binding or
enforceable as a result of a determination that the AHMSA Creditor
Voting Trust is an unregistered investment company under the U.S.
Investment Company Act of 1940;
(B) any of the direct or indirect beneficial controlling shareholders of
GAN as of the closing date of the restructuring plan, GAN (but only
for so long as the current direct or indirect controlling
shareholders of GAN continue to control GAN), AHMSA or any of its
Subsidiaries shall, directly or indirectly, contest in any manner the
effectiveness, validity, binding nature or enforceability of any
transaction document; or
(C) any Lien securing any obligation under the New Credit Agreement
shall, in whole or in part, cease to be a perfected first priority
Lien, subject only to those exceptions expressly permitted by the
transaction document pursuant to which such Lien was intended to be
created; provided, that no such defect pursuant to the above
requirements with respect to a Lien granted or purported to be
granted by any of the transaction documents shall give rise to an
Event of Default unless such defect shall affect collateral that is
or should be subject to a Lien in favor of the Collateral Agent
having an aggregate value in excess of U.S.$ .
(10) AHMSA or any of its Subsidiaries shall breach any of the provisions of
their respective estatutos sociales, or any of Article VII of the
Company Agreement, which breach, in any such case, shall not
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have been cured within 15 days of notice thereof by AHMSA's directors
appointed by the AHMSA Creditor Voting Trust.
(11) Any of the following SEN-related matters occurring:
(A) Any representation, warranty, certification or statement made by any
buyer in the applicable Steel Supply Contract, in the applicable
buyer consent to the security granted pursuant to the restructuring
plan or in any agreement related thereto shall prove to have been
incorrect in any material respect when made (or deemed made), and
such representation, warranty, certification or statement that is not
corrected by the earlier of
(i) the date six months after written notice thereof has been given
to such buyer and us by the Administrative Agent identifying such
representation, warranty, certification or statement or
(ii) the date 90 days after the commencement of the delivery period
next succeeding the delivery period in which written notice
thereof has been given to such buyer and AHMSA by the
Administrative Agent identifying such representation, warranty,
certification or statement; or
(B) Either (x) AHMSA or (y) any of the buyers shall default in the
observance or performance of any material covenant or agreement
contained in any Steel Supply Contract and such default being
incapable of being remedied or, if capable of being remedied, not in
fact being remedied for 60 days after a responsible officer of the
defaulting party obtains knowledge of such default; or
(C) Any of the buyers shall default in the observance or performance of
any material covenant or agreement contained in any buyer consent to
security granted pursuant to the restructuring plan and such default
being incapable of being remedied or, if capable of being remedied,
not in fact being remedied for 60 days after written notice thereof
has been given to us and such buyer by the Administrative Agent
requiring the same to be remedied; or
(D) Any Indebtedness of any of the buyers for or in respect of borrowed
money (whether incurred as principal or as guarantor or surety)
having a principal amount of U.S.$50.0 million in the aggregate (or
the equivalent thereof in any other currency or currencies) or more
shall become due and payable prior to such Indebtedness' specified
maturity as a result of a payment default thereunder continuing
beyond any applicable grace period; or
(E) Any of the buyers shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency, suspension of
payments, or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, "sindico",
custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing; or
(F) An involuntary case or other proceeding shall be commenced against
the buyers seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency,
suspension of payments or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
"sindico", custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 45
days; or an order for relief shall be entered against any buyer under
any bankruptcy, insolvency, suspension of payments or other similar
laws as now or hereafter in effect; or
(G) A distress, execution or seizure in connection with the enforcement
of a judgment by or on behalf of any creditor being levied or
enforced upon or sued out against all or a substantial part of the
assets of any of the buyers and not being discharged within 15 days
thereof (a substantial part
165
means a part of the value which amounts to whichever is greater of
(A) 15% or more of the Buyer Consolidated Total Assets determined by
reference to the relevant company's then most recent quarterly
financial statements and (B) U.S.$2.0 million; or
(H) The failure of any buyer party to a Substitute Steel Supply Contract
to keep a standby letter of credit in the amount of such buyer's
purchase commitment pursuant to the Substitute Steel Supply Contract)
for the relevant Delivery Period at any time and fails to replace
such standby letter of credit within five business days; or
(I) Any authorization, approval, license or consent required in or by the
laws of Mexico or the Federal Republic of Germany to enable us
lawfully to enter into any Steel Supply Contract or SEN Collateral
Document and undertake the transactions contemplated thereby, to
exercise the rights expressed to be granted to AHMSA thereunder, to
perform the obligations expressed to be assumed by AHMSA thereunder
and to ensure the legality, validity, enforceability and
admissibility in evidence in Mexico of any SEN Collateral Document or
any of the documents entered into in connection therewith ceasing to
be in full force and effect for a period of 30 days or more;
provided, that none of the above SEN-related matters (other than (B)(x)
and (I)) shall constitute an Event of Default until six months after the
occurrence of such SEN-related matter, unless either
(x) AHMSA provides the administrative agent with evidence reasonably
satisfactory to the administrative agent that AHMSA has replaced
the applicable Steel Supply Contract with a Substitute Steel
Supply Contract; or
(y) on each payment date for which a Substitute Steel Supply Contract
for which evidence reasonably satisfactory has been provided is
not in effect, AHMSA pays a fee to the administrative agent, for
account of the SEN Lenders, on such date in an amount equal to 2%
of the SEN amortization amount that is attributable to the
contract commitment of the Steel Supply Contract subject to the
occurrence of such SEN-related matter less, with respect to the
initial payment of such fee, any amounts on deposit in the SEN
collection account received prior to the occurrence of such
SEN-related matter from such Steel Supply Contract.
(12) A moratorium shall have been agreed or declared in respect of any
Indebtedness of ours, or any governmental authority shall have
condemned, seized, compulsorily purchased or expropriated all or a
substantial part of our assets, provided that such assets represent in
value 15% or more of AHMSA's total assets and its consolidated
Subsidiaries (excluding any amounts attributable to goodwill or other
intangible assets), determined by reference to AHMSA's then most recent
audited annual consolidated financial statements.
(13) The occurrence of a Change in Control.
Amendments and Waivers
The provisions of the New Credit Agreement may from time to time be amended,
modified or waived, if such amendment, modification or waiver is in writing and
consented to by AHMSA and the Required Lenders; provided that no such
amendment, modification or waiver which would:
(1) modify any requirement under the New Credit Agreement that any
particular action be taken by all the all holders of New Loans or by the
Required Lenders, shall be effective unless consented to by each holder
of New Loans;
(2) change the definition of "Required Lenders," shall be effective unless
consented to by each holder of New Loans;
(3) increase or expand the scope of the obligations of any holder of New
Loans, shall be effective unless consented to by such holder;
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(4) release any collateral security for the Obligations (except as otherwise
specifically provided in any loan document), release any Subsidiary
Guarantor for its obligations under the Subsidiary Guaranty, or reduce
or limit the obligations of any Subsidiary Guarantor under any of the
loan documents (except, in each case, as otherwise specifically provided
in any transaction document), shall be effective unless consented to by
holder of New Loans holding 90% of the outstanding principal amount of
the New Loans;
(5) extend the due date for, or reduce the amount of, any scheduled
repayment or prepayment of principal of or interest on any New Loan (or
reduce the principal amount of, or rate of interest on, any Loan), shall
be effective unless either:
(A) consented to by each holder of New Loans, or
(B) each of the following conditions shall have been satisfied: either
(x) both (1) holders of New Loans holding at least 95% of the
principal amount of the Loans shall have consented thereto (and such
amendment or modification shall be effective only against such
approving lenders and not against or with respect to any other
lenders), and (2) AHMSA and the Administrative Agent shall have
entered into an agreement pursuant to which AHMSA agrees to pay to
the Administrative Agent such additional compensation as it may
request to compensate it for the additional costs associated with
administration of the transactions contemplated by the New Credit
Agreement after giving effect to such amendment or modification, or
(y) AHMSA arranges, at its expense, for a financial institution (with
an office in New York, New York and reasonably satisfactory to the
lenders holding at least a majority in principal amount of the New
Loans that are not subject to such amendment or modification) to act
as agent for the lenders holding the New Loans that are not subject
to such amendment or modification (and the Administrative Agent,
AHMSA and such new agent shall, without needing to obtain the consent
of any Lender, enter into modifications to the New Credit Agreement
and the other loan documents, reasonably satisfactory to each of
them, to reflect the rights and responsibilities of such new agent);
(6) affect adversely the interests, rights or obligations of the
Administrative Agent in its capacity as Administrative Agent, shall be
made without the consent of the Administrative Agent;
provided that (subject to clauses (1), (2), (3) and (4), above) any of the
provisions specifically to the Tranche SEN Loans may be modified with the
consent of AHMSA and the holders of at least 51% of the outstanding Tranche SEN
Loans (if such modification affects the obligations of the Administrative
Agent) the Administrative Agent and (if such modification adversely affects the
interests of the holders of New Loans) the Required Lenders.
No failure or delay on the part of the Administrative Agent or any lender or
the holder of any note under the New Credit Agreement in exercising any power
or right under the New Credit Agreement or any other loan document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power or right preclude any other or further exercise thereof or the
exercise of any other power or right. No notice to or demand on AHMSA in any
case shall entitle it to any notice or demand in similar or other
circumstances. No waiver or approval by any Agent, any lender or the holder of
any note under the New Credit Agreement or any other loan document shall,
except as may be otherwise stated in such waiver or approval, be applicable to
subsequent transactions. No waiver or approval hereunder shall require any
similar or dissimilar waiver or approval thereafter to be granted hereunder.
Security
The payment of the principal, premiums and interest on the New Loans, when
due and payable, whether on a Payment Date, at maturity, by acceleration,
prepayment or otherwise, interest on overdue principal of, and interest (to the
extent permitted by law), if any, on, the New Loans and the performance of all
other obligations of AHMSA to the holders of the New Loans and the
Administrative Agent will be secured as provided in the
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Mortgage and the other Mexican security documents, the Intercreditor Agreement,
the Supplemental Trust Agreement, the Subsidiary Pledge Agreement, the U.S.
Security Agreement, and the other collateral documents. The security under the
New Credit Agreement will be ratable to that under the New Indenture, except
that
. the Tranche SEN Loans will have a first priority claim to the German
Contract Receivables;
. the Tranche MICARE Loans will have a first priority claim to the equity in
and assets of MICARE;
. the New Class B Loans and the New Series B Notes will have a first
priority claim to the Subject Assets; and
. the holders of liens recognized by the Mexican Bankruptcy Court will have
a first priority claim to the assets subject to the liens to the extent
recognized by the Mexican Bankruptcy Court.
Guaranty
The New Loans are irrevocably and unconditionally guaranteed by the
Significant Subsidiaries of AHMSA. The guarantee of each Significant Subsidiary
will be released upon the sale or other disposition of such Significant
Subsidiary in accordance with the New Credit Agreement to an entity which is
not AHMSA or a Restricted Subsidiary of AHMSA.
Indemnification
AHMSA will indemnify each of the lenders holding New Loans and each of their
respective Affiliates from and hold each of them harmless against any and all
liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, suits, costs, expenses and disbursements incurred by any of them as
a result of, or arising out of, or in any way related to, or by reason of, any
third-party investigation, litigation or other proceeding relating to the
entering into and/or performance of any loan document or the consummation of
any transactions contemplated in any loan document but excluding any such
indemnified liabilities to the extent incurred by reason of the gross
negligence or willful misconduct of the indemnified person to be indemnified as
determined pursuant to a final, non-appealable judgment by a court of competent
jurisdiction. AHMSA will not be responsible for attorney's costs except one
counsel in any applicable jurisdiction for the administrative agent, or for one
counsel in any applicable jurisdiction for each tranche of loans or for one
counsel in any applicable jurisdiction for any individual lender which on the
closing date held New Loans in an aggregate amount at least equal to U.S.$25.0
million. All amounts paid and costs incurred by any indemnified person in
respect of any matter indemnified under the New Credit Agreement will be added
to the obligations thereunder and be secured by the collateral documents and
will be immediately due and payable on demand.
Releases
Both
. AHMSA, on behalf of itself and its Subsidiaries and Affiliates, will
release and forever discharge each holder of New Loans and its affiliates
and each member of any steering committee or similar committee of
creditors of AHMSA and its affiliates, and
. each holder of New Loans, on behalf of itself and its affiliates, will
release and forever discharge AHMSA, its subsidiaries and Affiliates, GAN,
and each member of any steering committee or similar committee of
creditors of AHMSA and its affiliates,
and each of their respective past, present, and future Affiliates,
stockholders, controlling persons, directors, officers, employees,
subsidiaries, successors and assigns and their respective advisors and
representatives from any and all claims, demands, proceedings, causes of
action, orders, obligations, contracts, agreements, debts, Liens, and
liabilities whatsoever, whether known or unknown, suspected or unsuspected,
both at law and in equity, which each of such parties has, has ever had or may
hereafter have against the other parties on account of or arising out of any
matter occurring at the time of or prior to the closing date of the
restructuring plan, relating to the Base Debt or AHMSA, its Subsidiaries and
Affiliates, but this release will not relieve any obligations under the New
Credit Agreement and the related loan documents.
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Governing Law and Jurisdiction
The New Credit Agreement and the New Loans will be governed by and construed
in accordance with the law of New York. Any legal action or proceeding by or
against any party to the New Credit Agreement with respect to or arising out of
the New Credit Agreement or any other loan document may be brought in the
courts of the United States of America for the Southern District of New York or
the New York State Supreme Court for the County of New York or in the
jurisdiction of the parties' corporate domicile and removed by any party
thereto to any such federal courts in the Borough of Manhattan, New York, New
York.
Certain Definitions
"Affiliate" shall mean, with respect to any Person, any other Person who
directly or indirectly is controlled by, controls, or is under common control
with, such Person and, if such Person is an individual, such individual's
spouse, children and siblings, and any first cousin (unless such first cousin
is of illegitimate birth) of such individual, and any trust whose principal
beneficiary is such individual or one or more members of such specified family
members and any Person who is controlled by any such member or trust. As used
in this definition, "control" (including, with its correlative meanings,
"controlled by" and "under common control with") shall mean possession,
directly or indirectly, of the power to direct or cause the direction of
management or policies (whether through ownership of Voting Stock, by contract
or otherwise) of such Person; provided that, in any event, any Person who owns
directly or indirectly 10% or more of the Voting Stock of any other Person
shall be deemed to control such Person, notwithstanding the foregoing, (a) no
individual shall be deemed to be our Affiliate solely by reason of his or her
being a director, officer or employee of us or any of our Subsidiaries, (b) no
Lender or Bondholder shall be deemed to be our Affiliate solely by the reason
of the fact that it controls the Voting Trust, and (c) we and the Subsidiary
Guarantors shall not be Affiliates of each other.
"Aggregate Restructuring Fee" shall be an amount equal to the sum of
U.S.$20.0 million, plus the amount of Specified Post-April 1 Committee Expenses.
"AHMSA" shall mean Altos Hornos de Mexico, S.A. de C.V., a Mexican sociedad
anonima de capital variable."
"AHMSA Creditor Voting Trust Declaration" shall mean our Creditor Voting
Trust Declaration made by us and HSBC Financial Services (Cayman) Limited.
"AHMSA Funds" shall mean for any delivery period under any Steel Supply
Contract, the aggregate amount of funds received by the Administrative Agent by
payment from AHMSA or by a drawing under any AHMSA Letter of Credit in favor of
the Administrative Agent.
"AHMSA Letter of Credit" shall mean an irrevocable stand-by letter of credit
issued by an approved bank and opened for our account or for the account of an
approved buyer, in favor of the administrative agent, which provides for
payment on sight and permits partial drawings, and which is in form and
substance reasonably satisfactory to the administrative agent. Each AHMSA
Letter of Credit shall be written in English.
"Assumed MICARE Debt" shall mean the aggregate principal amount of all
Indebtedness of MICARE assumed by a purchaser of MICARE and as to which, after
giving effect to such purchase, AHMSA and its subsidiaries will have no further
liability or obligation.
"As-yet Unapplied Insurance Proceeds" shall mean Insurance Proceeds as to
which no mandatory prepayment has yet been made.
"As-yet Unapplied Other Asset Sale Proceeds" shall mean Other Asset Sale
Proceeds as to which no mandatory prepayment has yet been made.
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"Average Life" shall mean, with respect to any Indebtedness, as of the date
of determination thereof, the quotient, expressed as a number of years, of (A)
the sum of the products obtained by multiplying (x) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof by (y)
the number of years (calculated to the nearest one-twelfth) then remaining
until the date of each such payment, divided by (B) the total principal amount
of such Indebtedness then outstanding.
"Bancomext Obligation" shall mean U.S.$22.8 million of our principal
obligations held by Banco Nacional de Comercio Exterior, S.N.C. as of September
30, 2001.
"Bank Percentage" shall mean with respect to (x) any mandatory prepayment
required to be made pursuant to the New Credit Agreement and any mandatory
redemption pursuant to the New Indenture, (y) interest calculations made
pursuant to the New Credit Agreement or pursuant to the New Indenture, and (z)
the payment of any fee pursuant to the New Credit Agreement and the New
Indenture:
(a) with respect to a fee payment, a fraction (expressed as a percentage) in
which the numerator is the aggregate principal amount of New Loans, and
the denominator is the sum of the aggregate principal amount of New
Loans and the New Notes, in each case, as of the closing date of the
restructuring plan;
(b) with respect to any calculation date (other than interest calculations)
occurring prior to the six-month anniversary of the closing date of the
restructuring plan,
(i) for purposes of calculating mandatory prepayments from Subject Asset
Sale Proceeds, a fraction (expressed as a percentage) in which the
numerator is the aggregate principal amount of New Class B Loans on
such date, and the denominator is the sum of (x) the aggregate
principal amount of New Class B Loans on such date plus (y) the
aggregate principal amount of the New Series B Notes on such date, and
(ii) for all other purposes of the New Credit Agreement, a fraction
(expressed as a percentage) in which the numerator is the aggregate
principal amount of New Class A Loans on such date, and the
denominator is the sum of (x) the aggregate principal amount of New
Class A Loans on such date plus (y) the aggregate principal amount of
the New Series A Notes on such date; and
(c) with respect to any calculation date occurring on or after the six-month
anniversary of the closing date of the restructuring plan and with
respect to all interest calculations, a fraction (expressed as a
percentage) in which the numerator is the aggregate principal amount of
the New Loans on such date, and the denominator is the aggregate
principal amount of New Loans and New Notes on such date.
"Base Debt" shall mean the Old Loans and the Old Notes.
"Base Rate" shall mean, for any date, a rate per annum equal to the higher
of the Federal Funds Rate for such date plus 1/2 of 1%, and the Prime Rate for
such date. Each change in any interest rate provided for in the New Credit
Agreement based upon the Base Rate resulting from a change in the Base Rate
shall take effect as of the opening of business on the date on which such
change in the Base Rate becomes effective.
"Capital Expenditure" shall mean, with respect to any Person for any period,
expenditures that are capitalized on the books of such Person in accordance
with Mexican GAAP and, for purposes of this definition (but without
duplication), expenditures made during such period for equipment and services
financed under sale/leaseback arrangements, and which are made in connection
with the purchase, construction or improvement of items properly classified on
such books as property, plant, equipment or other fixed assets or intangibles.
"Capital Leases" shall mean with respect to any Person, any lease of any
Property by such Person as lessee that (a) in conformity with Mexican GAAP, is
required to be accounted for as a capital lease on the balance sheet of such
Person, and (b) the Court has authorized such Person to make payments in
respect of during the pendency of the suspension of payments.
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"Capitalized Lease Obligations" shall mean, with respect to any Person, all
obligations of such Person in respect of any lease of any Property by such
Person as lessee that in conformity with Mexican GAAP, is required to be
accounted for as a capital lease on the balance sheet of such Person, in each
case taken at the capitalized amount thereof accounted for as indebtedness in
accordance with Mexican GAAP.
"Cash Available for Debt Service Ratio" shall mean, at any date of
determination, the ratio of the following (determined on a consolidated basis
in accordance with Mexican GAAP):
(a) our EBITDA for the four consecutive fiscal quarters ending on, or most
recently ended prior to, such date, plus the aggregate proceeds received
by AHMSA and its Subsidiaries during such period from the incurrence of
Indebtedness pursuant to clauses (2) and (6) of "--Negative
Covenants--Indebtedness," minus (i) the aggregate amount of Capital
Expenditures made by AHMSA and its Subsidiaries during such four fiscal
quarters, minus (ii) taxes paid in cash by AHMSA and its Subsidiaries
during such four fiscal quarters, to
(b) Debt Service for such four fiscal quarters.
"Cash Equivalent Investment" shall mean
. any evidence of indebtedness maturing not more than one year after the
date of purchase, issued or fully guaranteed by Mexico or issued, fully
guaranteed or fully insured by the United States, or an instrumentality
or agency thereof,
. any certificate of deposit, Eurodollar time deposit, overnight bank
deposit or banker's acceptance maturing not more than one year after the
date of purchase, issued by, or time deposit or demand deposit of, a
commercial banking institution which is organized under the laws of the
United States or any state thereof or any country recognized by the
United States, which has combined capital and surplus and undivided
profits of not less than U.S.$100 million and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least
one internationally recognized statistical rating organization,
. commercial paper, maturing not more than 180 days after the date of
purchase, issued by a corporation (other than an affiliate of AHMSA)
organized and existing under the laws of Mexico or the United States
which is rated, at the time as of which any investment therein is made,
"P-1" (or higher) by Moody's Investors Service, Inc. or "A1" (or higher)
by Standard and Poor's Rating Group,
. money market funds,
. demand deposits not otherwise permitted under clause (B) or (F) of this
definition, in an aggregate amount not to exceed U.S.$15.0 million at
any one time outstanding,
. demand deposits, certificates of deposit, bank promissory notes and
bankers' acceptances denominated in pesos maturing not more than 180
days after the acquisition thereof and issued or guaranteed by any one
of the five largest banks (based on assets as of the immediately
preceding December 31) organized under the laws of Mexico (and up to
U.S.$20.0 million of certificates of deposit, bank promissory notes and
bankers' acceptances of one or more other banks organized under the laws
of Mexico) and which are not under intervention or controlled by the
Instituto de Proteccion al Ahorro Bancario or
. repurchase agreements and reverse repurchase agreements with respect to
marketable obligations directly or indirectly issued or unconditionally
guaranteed by the United States or issued by an agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition, provided,
however, that the terms of such agreements comply with the guidelines
set forth in the "Federal Financial Agreements of Depository
Institutions with Securities Dealers and Others," as adopted by the
United States Comptroller of the Currency.
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"Change of Control" means either:
(a) the Permitted Holders, in the aggregate, shall cease to have voting,
disposition and economic rights in respect of at least 30% of the
outstanding capital stock of AHMSA, and any Person (including any
syndicate or group deemed to be a "person" under Section 13(d)(3) of the
Exchange Act), other than a Permitted Holder, together with any
Affiliates or Related Persons of such Person, shall have voting,
disposition or economic rights in respect of a greater percentage of the
outstanding capital stock of AHMSA than the percentage of such capital
stock in respect of which the Permitted Holders, in the aggregate, have
voting, disposition and economic rights; or
(b) any Person (other than a Permitted Holder), together with any affiliates
or Related Persons of such Person, shall succeed in having a sufficient
number of its nominees elected to the board of directors of AHMSA such
that the number of such nominees exceeds the number of nominees of the
Permitted Holders elected to the board of directors of AHMSA.
For purposes of calculating the percentage interest of outstanding capital
stock held indirectly by any Person, such Person's percentage interest of the
capital stock of AHMSA shall be determined as the product of such Person's
percentage interest in any intermediate entity and such intermediate entity's
percentage interest in AHMSA (or, in the case of multiple intermediate
entities, the product of each such intermediate entity's percentage ownership
interest in the other intermediate entities in the chain of ownership and in
AHMSA).
"Charter Documents" shall mean, with respect to any Person:
. its articles of incorporation or other similar document,
. its by-laws, estatutos sociales or other similar document,
. any certificate of designation or instrument relating to the rights of
preferred shareholders or other equity holders of such Person,
. any shareholder rights agreement or other similar agreement relating to
such Person, and
. all resolutions of the board of directors (or any committee thereof) or
similar governing body of such Person.
"Collateral" shall mean all Property that, in accordance with any Collateral
Document, is purported to be subject to a Lien securing the obligations under
the New Credit Agreement.
"Collateral Documents" shall mean the Mortgage and the other Mexican
security documents, the Intercreditor Agreement, the Supplemental Trust
Agreement, the Subsidiary Pledge Agreement and the U.S. Security Agreement.
"Company Agreement" shall mean the Acknowledgment, Consent, Indemnification
and Cooperation Agreement among the Creditor Voting Trust Trustee, AHMSA and
the holders of New Loans and New Notes.
"Consolidated Debt" shall mean, as of any date of determination, the
aggregate amount of all our Indebtedness (including, without limitation or
duplication, the Obligations, outstanding letters of credit and Hedging
Obligations, but excluding any Customer Advances) and each of our Subsidiaries,
as shown on the balance sheet (or as would be shown on the balance sheet) as of
such date, determined on a consolidated basis in accordance with Mexican GAAP.
"Contingent Obligation" shall mean, with respect to any Person, any:
(a) performance bond (including a fianza), guaranty endorsement or aval for
which such Person has a reimbursement or payment obligation that is then
due and payable (in each case, without limitation of clause (c) hereof),
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(b) obligations of such Person under agreements providing for swaps, caps,
collars, contingent participations or other hedging mechanisms with
respect to the payment of interest or the convertibility of currency, and
(c) obligation of such Person guaranteeing or intending to guarantee any
Indebtedness ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including any
obligation of such Person, whether or not contingent: (i) to purchase
any such primary obligation or any Property constituting direct or
indirect security therefor, (ii) to advance or supply funds: (A) for the
purchase or payment of any such primary obligation or (B) to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency of the primary obligor, (iii) to
purchase Property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the
primary obligor to make payment of such primary obligation or (iv)
otherwise to assure, indemnify or hold harmless the owner of such
primary obligation against loss in respect thereof (other than indemnity
obligations arising in the ordinary course of business);
provided that the term "Contingent Obligation" shall not include endorsements
of instruments for deposit or collection in the ordinary course of business or
obligations under take-or-pay contracts. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof (assuming such Person is required to perform
thereunder) as determined in good faith.
"Customer Advances" shall mean our Indebtedness or the Indebtedness of AHMSA
or any of its Subsidiaries that is held by one or more customers of AHMSA and
its Subsidiaries representing advance payments for goods to be delivered at a
future date.
"Debt Service" shall mean, for any period, an amount in U.S. dollars equal
to the total amount of Interest Expense for us and principal paid or scheduled
or required to be paid by us and each of our Subsidiaries, determined on a
consolidated basis, in respect of Indebtedness during such period.
"Debt to EBITDA Ratio" shall mean, at any date of determination, the ratio
of the following (determined on a consolidated basis in accordance with Mexican
GAAP): (a) Consolidated Debt (excluding interest, fees (including the 2% fee
payable upon a breach by a buyer under a Steel Supply Contract) and accounts
payable) as of such date divided by (b) our EBITDA for the four consecutive
fiscal quarters ending on, or most recently ended prior to, such date.
"Default" shall mean any event or circumstance that, with the giving of
notice, the expiration of any grace period or both, would (if not cured, waived
or otherwise remedied during such time) constitute an Event of Default.
"Default Rate" shall mean, at any time during the continuance of an Event of
Default, a rate of 2% in excess of the otherwise applicable interest rate.
"Deferred Mandatory Prepayment" shall have the meaning set forth in
"--Payment of Principal and Interest--Mandatory Prepayments--Subject Asset Sale
Proceeds."
"Delivery Period" shall have the meaning, with respect to each Steel Supply
Contract, set forth in such Steel Supply Contract.
"Disposition" shall mean the sale, transfer, lease, contribution or other
conveyance (including leaseback transactions, sale or discounts of accounts
receivable and capital stock of AHMSA or any of its Subsidiaries) of all or any
material part of its Property to any Person.
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"EBITDA" shall mean, for any period and for any Person, the sum of the
following for such Person and its Subsidiaries (calculated on a consolidated
basis in accordance with Mexican GAAP):
(a) operating income for such period, calculated before Interest Expense
(net of any interest income), cash taxes paid, and depreciation and
amortization, minus
(b) any net non-cash gains (or plus any net non-cash losses) to the extent
included in determining operating income for such period.
"EBITDA to Interest Expense Ratio" shall mean, at any date of determination,
the ratio of the following (determined on a consolidated basis in accordance
with Mexican GAAP): (a) our EBITDA for the four consecutive fiscal quarters
ending on, or most recently ended prior to, such date divided by (b) our
aggregate Interest Expense scheduled or required to be paid in cash during such
four fiscal quarters (other than any Interest Expense in respect of Customer
Advances).
"Environmental Law" shall mean any federal, national, multilateral, state or
local statute, law, common law duty, rule, regulation, ordinance, technical
standard (norma tecnica), code or policy, together with any administrative
order, directed duty, request, license, authorization and permit of, and
agreement with, any governmental authority, in each case relating to
environmental matters.
"Equity Proceeds" shall mean the Net Cash Payment actually received by AHMSA
or any of its Subsidiaries in respect of any of the following:
(a) any issuance or sale by AHMSA or any of its Subsidiaries after the
closing date of the restructuring plan of (i) any capital stock,
(ii) any warrants or options exercisable in respect of capital stock
(other than the Incentive Warrants), (iii) any other security or
instrument representing an equity interest (or the right to obtain an
equity interest) in the issuing or selling Person (other than (x) the
issuance of employee stock options so long as the aggregate Net Cash
Payments from the issuance and exercise thereof do not exceed
U.S.$ , and (y) securities to the extent issued in satisfaction of
conversion or stock purchase rights and not for cash consideration), or
(b) the receipt by AHMSA or any of its Subsidiaries after the closing date
of the restructuring plan of any capital contribution received, whether
or not evidenced by an equity security issued by the recipient of such
contribution,
in each case other than Equity Proceeds received by any Subsidiary of AHMSA
from AHMSA or another of its Subsidiaries.
"Estatutos" shall mean AHMSA's organizational documents, and those of its
Mexican Subsidiaries.
"Event of Default" shall mean an event as set forth in "--Events of Default."
"Excess Cash Flow" shall mean, for any period, the sum of the following for
us and our Subsidiaries (determined on a consolidated basis in accordance with
Mexican GAAP):
(a) EBITDA for such period, minus
(b) Capital Expenditures made during such period (other than Capital
Expenditures to the extent financed with the proceeds of Indebtedness),
plus
(c) decreases (or minus increases) in working capital for such period
(including as a result of the payment of Customer Advances as described
in "--Negative Covenants--Indebtedness") minus
(d) Debt Service for such period (including the aggregate amount of payments
made by us to GAN in respect of Subordinated Converted Interest Notes
with respect to such period (unless such payment was a mandatory
repayment made in respect of Excess Cash Flow for the preceding fiscal
year), but only to the extent that such payments were used by GAN to
repurchase Converted Interest Supplemental
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Shares, but excluding any interest on the New Loans or the New Notes to
the extent it constitutes Converted Interest provided that in the case
of any redemption of New Notes with other New Notes purchased at a
discount from the face amount thereof, the principal amount paid in
respect of such New Notes shall, for purposes of this definition, be the
purchase price for such New Notes at a Discount and banking fees paid
during such period, minus
(e) the aggregate amount of the Aggregate Restructuring Fee and Three Month
Interest Fee paid during such period, minus
(f) an amount equal to the lesser of the following:
(i) U.S.$15.0 million, and
(ii) the aggregate amount of cash on hand and in bank accounts and Cash
Equivalent Investments on the last day of such period, in each case,
less any Deferred Mandatory Prepayments, As-yet Unapplied Other Asset
Sale Proceeds, As-yet Unapplied Insurance Proceeds and any other
amounts on deposit in the Collateral Account, minus
(g) an amount paid in cash during such period by us or any of our
Subsidiaries in respect of purchase price adjustments or indemnity
payments in connection with any permitted Disposition, minus
(h) certain properly authorized cash items, such as income taxes, severance
payments, asset taxes, penalties on taxes, statutory profit sharing,
restructuring expenses, severance payments and advisor fees, minus
(i) payments made in respect of the Guarantee Fee during such period, minus
(j) the aggregate amount of mandatory prepayments of our New Subordinated
Notes made in such fiscal year.
Notwithstanding anything to the contrary contained herein or in any transaction
document, Excess Cash Flow for the fiscal year that includes the closing date
for the restructuring plan shall be measured for the period from (but
excluding) the closing date to the end of such fiscal year.
"Exchange Act" shall mean the United States Securities Exchange Act of 1934,
as amended.
"Exchange Agreement" shall mean an exchange agreement, in substantially the
form of Exhibit A to the Credit Agreement, among GAN, us and the Administrative
Agent.
"Federal Funds Rate" shall mean, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York on the preceding
business day opposite the caption "Federal Funds (Effective)"; or, if for any
relevant day such rate is not so published on any such preceding business day,
the rate for such day will be the arithmetic mean as determined by the
Administrative Agent of the rates for the last transaction in overnight Federal
funds arranged before 9:00 a.m. (New York City time) on that day by each of
three leading brokers of Federal funds transactions in New York City selected
by the Administrative Agent.
"Ferrostaal" shall mean Ferrostaal AG, a German corporation, or any
successor of such entity.
"Financial Advisor Expenses" shall mean the fees and expenses incurred by
PricewaterhouseCoopers and E&Y Capital Advisors in their respective capacities
as financial advisors of the Steering Committee or for work otherwise performed
by such advisors on its behalf (but excluding any such fees and expenses
included in the Aggregate Restructuring Fee and any such fees and expenses paid
for by the trustee for the Old Notes and reimbursed separately by or on behalf
of AHMSA), as certified by the Steering Committee to AHMSA.
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"GAN" shall mean Grupo Acerero del Norte, S.A. de C.V.
"GAN Amount" shall have the meaning given to that term in the definition of
"Maximum Guarantee Fee Amount."
"German Contract Receivables" means accounts receivable arising out of
contractual arrangements between AHMSA and Thyssen Handelsunion AG, Ferrostaal
AG or Kloeckner & Co. AG to the extent they enter into new Steel Supply
Contracts on the closing of the restructuring plan.
"Governmental Approval" shall mean any action, order, authorization,
consent, approval, license, lease, ruling, permit, tariff, certification,
exemption, filing or registration by or with any governmental authority.
"Gross MICARE Sale Proceeds" shall mean Net Cash Payments actually received
by AHMSA or any of its Subsidiaries in connection with any Disposition of the
capital stock of, or substantially all of the Property of, MICARE
"Guarantee Fee" shall mean a guarantee fee payable by us to GAN.
"Hazardous Material" shall mean: (a) any chemicals, materials or substances
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes," "restricted
hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or
"pollutants," or words of similar import, under any applicable Environmental
Law and (b) any other chemical, material or substance, in each case to the
extent exposure to the same is prohibited, limited or regulated by any
Environmental Law by reason of its hazardous nature.
"Hedging Obligations" shall mean, with respect to any Person, all
liabilities of such Person under swap agreements, cap agreements and collar
agreements, and all other agreements or arrangements designed to protect, and
actually entered into with the intent of protecting such Person against
fluctuations in interest rates, raw material prices or currency exchange rates.
"Incentive Warrants" shall mean warrants to purchase not more than 5% of our
outstanding capital stock issued by us to members of our senior management,
provided that such warrants may not be exercised prior to (a) the consummation
of a Change of Control and (b) payment in full of all outstanding Indebtedness
under the New Credit Agreement and the New Indenture.
"Indebtedness" shall mean, for any Person (without duplication):
(a) all indebtedness (including principal, interest, fees and charges) of
such Person for borrowed money,
(b) all obligations of such Person for the deferred purchase price of goods
or services (other than trade accounts payable arising, and accrued
expenses incurred, in the ordinary course of business so long as such
trade accounts payable are payable within 150 days of the date the
respective goods are delivered or the respective services are rendered
(and trade accounts payable within 270 days of such date so long as the
aggregate outstanding amount of such trade accounts payable that are
payable more than 150 days after such date does not exceed U.S.$30
million)),
(c) all obligations of such Person evidenced by bonds (other than surety,
performance or appeal bonds for which such Person does not have a
reimbursement or payment obligation that is then due and payable),
debentures, convertible debentures, notes, commercial paper, bills of
exchange or other similar instruments,
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(d) the available amount of all letters of credit issued for the account of
such Person and all outstanding reimbursement obligations of such Person
with respect to letters of credit,
(e) all Indebtedness (as that term is defined in the other clauses of this
definition) of others secured by any Lien on any Property owned by such
Person, which Indebtedness has not been otherwise assumed by such Person
(provided that, for purposes of the New Credit Agreement, the amount of
such Indebtedness shall be an amount equal to the lesser of (x) the
amount of such Indebtedness and (y) the fair market value of such
Property),
(f) all obligations of such Person under trade or bankers' acceptances
(other than obligations evidenced by trade or banker's acceptances
incurred in the ordinary course of business),
(g) all Capitalized Lease Obligations of such Person,
(h) all net obligations under agreements providing for swaps, caps, collars,
contingent participation or other hedging mechanisms with respect to the
payment of interest or the convertibility of currency,
(i) all obligations under any conditional sale agreement or other title
retention agreement, and
(j) all Contingent Obligations of such Person.
"Insurance Proceeds" shall mean the Net Cash Payments of insurance,
condemnation awards and other compensation actually received by us and our
Subsidiaries in respect of any loss of or damage to, or any condemnation or
other taking of, any Property of us or any of our Subsidiaries, net of
reasonable expenses incurred by us and our Subsidiaries in connection
therewith; provided that such Net Cash Payments shall be deemed not to be
"Insurance Proceeds" for purposes hereof:
(a) during the period from the date of receipt of such Net Cash Payments to
the date six months after the date of such receipt, to the extent that
during such period we or any of our Subsidiaries intend to enter into
contractual arrangements (the "Replacement Property Contracts" with
respect to such Net Cash Payments) to acquire Property that will perform
the same function as, or functions substantially similar to, the
Property so lost, damaged or condemned,
(b) during the period from the date six months after the date of receipt of
such Net Cash Payments to the date 36 months after the date of such
receipt, to the extent that, no later than the first day of such period,
we or any of our Subsidiaries shall have entered into the Replacement
Property Contacts with respect to such Net Cash Payments, and
(c) thereafter, to the extent that on or prior to the date 36 months after
the date of such receipt we or any of ours Subsidiaries shall have
actually purchased the replacement Property pursuant to the Replacement
Property Contracts with respect to such Net Cash Payments.
"Interest Expense" shall mean, for any period and with respect to any
Person, determined on a consolidated basis for such Person and each of its
Subsidiaries (and without duplication) all interest (or similar) expense on
Indebtedness, including: (i) fees payable in connection with Indebtedness
(including commitment fees), (ii) net payments made (less net payments
received) under any interest rate protection agreements or other hedging
agreements, (iii) the interest portion of any deferred payment obligations,
(iv) all fees and charges owed with respect to letters of credit (but excluding
any interest in respect of fianzas), (v) all accrued or capitalized interest
(but excluding any interest in respect of Customer Advances), (vi) any
amortization of debt discount, and (vii) the interest component of Capitalized
Lease Obligations.
"Interest Period" shall mean, as to any New Loan: (a) the period commencing
on the closing date and ending on the first Payment Date after the closing
date, and (b) thereafter, each three-month period commencing on the last day of
the immediately preceding Interest Period and ending on the next Payment Date.
"Investment" in any Person shall mean (without duplication): (a) the
acquisition (whether for cash, securities, other Property, services or
otherwise) or holding of capital stock, bonds, notes, debentures, partnership
177
or other ownership interests or other securities of such Person, or the assets
comprising a division or business unit or substantial part or all of the
business of such Person, or any agreement to make any such acquisition or to
make any capital contribution to such Person, and (b) the making of any deposit
with, contribution for future capital increases or advance, loan or other
extension of credit to, such Person (but excluding any trade receivables
created in the ordinary course of business).
"Kloeckner" shall mean Kloeckner & Co. AG, a German corporation, or
Kloeckner Stahl- und Metallhandel GmbH or any successor to either of such
entities.
"Letter of Credit" means an AHMSA Letter of Credit or a Buyer Letter of
Credit.
"LIBO Rate" applicable to any Interest Period shall mean:
(a) the rate for deposits in dollars for a period of approximately three
months quoted on the second business day before the first day of such
Interest Period, as such rate appears on the display designated as page
"3750" on the Telerate Service (or such other page as may replace page
"3750" on the Telerate Service or such other service as may be nominated
by the British Bankers' Association as the information vendor for the
purpose of displaying British Bankers' Association Interest Settlement
Rates for Dollar deposit) (the "Telerate Page") as of 11:00 a.m. (London
time) on such date, or
(b) if, as of 11:00 a.m. (London time) on any such date, such rate does not
appear on the Telerate Page, the arithmetic mean (rounded upwards to the
nearest 1/100th of 1%) of the offered rates for deposits in U.S. dollars
for a period of approximately three months quoted on the second business
day before the first day of such Interest Period, as such rates appear
on the display designated as page "LIBO" on the Reuters Monitor Money
Rates Service (or such other page as may replace the "LIBO" page on that
service for the purpose of displaying London interbank offered rates of
major banks) (the "Reuters Screen LIBO Page") as of 11:00 a.m. (London
time) on such date, if at least two such offered rates appear on the
Reuters Screen LIBO Page, or
(c) if, as of 11:00 a.m. (London time) on any such date, rates for deposits
in U.S. dollars for a period equal to such Interest Period do not appear
on the Reuters Screen LIBO Page or the Telerate Page, the arithmetic
mean (rounded upwards to the nearest 1/100th of 1%) of the rate for
deposits in U.S. dollars for a period approximately equal to such
Interest Period that are offered to the collateral agent by two or more
leading banks in the London interbank market;
in each case, as determined by the collateral agent and notified to the
Administrative Agent, the holders of New Loans, the Indenture Trustee and us on
such second prior Business Day.
"Lien" shall mean, with respect to any Property of any Person, any security
interest, mortgage, pledge, assignment by way of security, guaranty trust or
other trust arrangement provided for the vesting of ownership or possession of
assets of such Person to another Person upon default of the former or maturity
of indebtedness to the latter, charge, lease, easement, servitude, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement of any kind or nature whatsoever in respect of such
Property, including: (a) any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under any
recording or notice statute, and any lease having substantially the same effect
as any of the foregoing and (b) any designation (except as contemplated by the
New Credit Agreement or the Indenture) of loss payees or beneficiaries or any
similar arrangement under any insurance contract.
"Majority SEN Lenders" shall mean the lenders holding at least 51% of the
aggregate outstanding principal amount of the SEN Loans.
"Material Adverse Effect" shall mean a material and adverse effect (whether
at the time of any determination thereof or after such time) on:
(a) the business, Property, liabilities, operations or financial condition
of us and our Subsidiaries (taken as a whole),
178
(b) the validity or enforceability of any of the loan documents (including
the ability of any holders of New Loans to enforce any of its remedies
under any loan document), and
(c) the validity, priority or enforceability of the Liens purported to be
created by any of the Collateral Documents, provided that no such
adverse effect with respect to any such Lien shall constitute a
"Material Adverse Effect" unless it shall be with respect to Collateral
with an aggregate fair market value at least equal to U.S.$ .
"Maximum Guarantee Fee Amount" shall mean, for any fiscal quarter, an amount
equal to the sum of the following:
(a) the lesser of the following amounts (the "GAN Amount" for such fiscal
quarter):
(i) the aggregate amount payable or to be paid in cash in respect of
principal of or interest on Indebtedness of GAN during such fiscal
quarter, and
(ii) U.S.$4.45 million; and
(b) U.S.$550,000.
"Mexican GAAP " shall mean generally accepted accounting principles in
Mexico in effect from time to time, applied on a consistent basis both as to
classification of items and amounts.
"Mexico" shall mean the United Mexican States.
"MICARE " shall mean Minera Carbonifera Rio Escondido, S.A. de C.V., a
Mexican corporation.
"MICARE Cash Flow From Operations" shall mean, for any period, the sum of
the following for MICARE and its Subsidiaries (calculated on a consolidated
basis in accordance with Mexican GAAP):
(a) operating income for such period, calculated before interest expense
(net of any interest income), cash taxes paid, and depreciation and
amortization, minus
(b) any net non-cash gains (or plus any net non-cash losses) to the extent
included in determining operating income for such period; plus
(c) decreases (or minus increases) in working capital of MICARE and its
Subsidiaries for such period, minus
(d) cash taxes paid by MICARE and its Subsidiaries during such period.
"MICARE Sale Proceeds" shall mean Gross MICARE Sale Proceeds less the amount
of any mandatory prepayment of the New Subordinated Notes made in respect
thereof.
"Mortgage" shall mean each of the mortgages under Mexican law (hipoteca en
primer lugar) executed by AHMSA and certain of its Subsidiaries, as applicable
on certain of their facilities.
"Net Cash Payments" shall mean, with respect to any Equity Proceeds,
Insurance Proceeds, MICARE Sale Proceeds, Other Asset Sale Proceeds, Permitted
Refinancing Indebtedness Proceeds or Subject Asset Sale Proceeds, the aggregate
amount of all cash payments (including all deferred cash payments, including
cash payments received pursuant to a promissory note or otherwise, but only to
the extent actually received as a cash payment), less the following (without
duplication):
(a) reasonable and customary fees and expenses (including reasonable and
customary fees and expenses of counsel and investment bankers and, in
the case of MICARE Sale Proceeds, Other Asset Sale Proceeds and Subject
Asset Sale Proceeds, reasonable and customary brokerage commissions, in
each case actually paid by us or our Subsidiaries),
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(b) in the case of MICARE Sale Proceeds, Other Asset Sale Proceeds or
Subject Asset Sale Proceeds, reasonable expenditures to improve the same
in connection with such Disposition (but only to the extent that such
expenditures do not exceed 10% of the cash purchase price received in
connection with the related Disposition),
(c) in the case of MICARE Sale Proceeds, Other Asset Sale Proceeds and
Subject Asset Sale Proceeds, (i) payments made to repay Indebtedness
(other than Restructured Debt) secured by the Property the Disposition
of which resulted in such proceeds, but only if the payment of such
Indebtedness is required in connection with such Disposition, and (ii)
reasonable payments to holders of Indebtedness (other than Restructured
Debt) secured by such Property to the extent necessary to obtain the
consent of such holders to such Disposition,
(d) any income, franchise, transfer or other tax liability of us or any of
our Subsidiaries arising from such transaction, but only to the extent
that such tax is actually paid in cash no later than 18 months after the
date of such transaction, and
(e) in the case of MICARE Sale Proceeds, Other Asset Sale Proceeds and
Subject Asset Sale Proceeds, reasonable reserves for customary indemnity
obligations and purchase price adjustment obligations that we or any of
our Subsidiaries may be obligated to pay in connection with the
Disposition that resulted in such proceeds.
"Obligations" shall mean all obligations of us or any of our Subsidiaries
now existing or hereinafter arising, direct or indirect, absolute or
contingent, due or to become due, under any of the loan documents.
"Obligor" shall mean us or any of our Subsidiaries or Affiliates (other than
the Voting Trust) obligated under, or otherwise a party to, any of the loan
documents.
"Other Asset Sale Proceeds" shall mean the Net Cash Payments actually
received by us or any of our Subsidiaries in connection with any Disposition of
any Property (other than (i) MICARE Sale Proceeds, (ii) Subject Asset Sale
Proceeds, (iii) sales of inventory in the ordinary course of business, (iv)
Dispositions where the Net Cash Payments actually received in connection with
any one Disposition or series of related Dispositions does not exceed
U.S.$500,000, (v) Dispositions among us and the Subsidiary Guarantors, and
(vi) the use or transfer of money and Cash Equivalent Investments); provided
that such Net Cash Payments shall be deemed not to be "Other Asset Sale
Proceeds" for purposes hereof:
(a) during the period from the date of receipt of such Net Cash Payments to
the date six months after the date of such receipt, to the extent that
during such period we or any of our Subsidiaries intend to enter into
contractual arrangements (the "Replacement Property Contracts" with
respect to such Net Cash Payments) to acquire Property that will perform
the same function as, or functions substantially similar to, the
Property disposed of,
(b) during the period from the date six months after the date of receipt of
such Net Cash Payments to the date 36 months after the date of such
receipt, to the extent that, no later than the first day of such period,
we or any of our Subsidiaries shall have entered into the Replacement
Property Contracts with respect to such Net Cash Payments, and
(c) thereafter, to the extent that on or prior to the date 36 months after
the date of such receipt we or any of our Subsidiaries shall have
actually purchased the replacement Property pursuant to the Replacement
Property Contracts with respect to such Net Cash Payments.
"Permitted Holders" shall mean our creditors receiving our common stock on
the Closing Date, the Voting Trust, GAN and the stockholders of GAN as of the
Closing Date.
"Permitted Liens" shall have the meaning set forth in "--Negative
Covenants--Liens."
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"Permitted Refinancing Indebtedness" shall mean Indebtedness incurred as set
forth in "--Negative Covenants--Indebtedness."
"Permitted Refinancing Indebtedness Proceeds" shall mean the Net Cash
Payments actually received from the incurrence of Permitted Refinancing
Indebtedness that is used to refinance New Loans.
"Person" shall mean an individual, corporation, partnership, association,
limited liability company, joint stock company, trust, unincorporated
organization, governmental authority or other entity of whatever nature.
"Prime Rate" shall mean the rate of interest from time to time announced
by as its prime commercial lending rate for loans to be made in the
United States and denominated in dollars.
"Principal Payment Date" shall mean the last business day of September 2003
and each of the 12 subsequent Payment Dates falling on, or nearest to, the date
six months after the immediately preceding Principal Payment Date.
"Process Agent " means CT Corporation, in its capacity as process agent.
"Projected MICARE Cash Flow From Operations" shall mean the following
amounts with respect to the fiscal year:
Projected MICARE
Cash Flow
FiscalYear From Operations
---------- ----------------
2001............................................. N/A
2002............................................. N/A
2003............................................. N/A
2004............................................. N/A
2005............................................. U.S.$60,207,000
2006............................................. U.S.$61,927,000
2007............................................. U.S.$64,000,000
2008............................................. U.S.$67,000,000
2009............................................. U.S.$70,000,000
"Property" shall mean any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or intangible
(including any right to receive revenues or other payments).
"Registration Rights Agreement " shall mean the Registration Rights
Agreement among .
"Related Person" of any Person means any other Person directly or indirectly
owning 5% or more of the outstanding voting stock of such Person (or, in the
case of a Person that is not a corporation, 5% or more of the equity interest
in such Person).
"Required Lenders" shall mean, at any time, holders of New Loans holding at
least 51% of the then aggregate outstanding principal amount of the New Loans.
"Responsible Officer" shall mean the following persons having knowledge of a
fact or circumstance: (a) the chairman of the board and chief executive officer
of AHMSA, or (b) the chief financial officer of AHMSA (but only after the time
that the chief financial officer informs the chairman of the board and chief
executive officer of AHMSA of such fact or circumstance in writing).
"Restructured Debt" shall mean, collectively, the New Loans and the New
Notes.
"Restructuring Fee" shall mean the restructuring fee described in
"Description of Restructuring Plan--Terms of the Restructuring Plan."
"Reuters Screen LIBO Page" shall have the meaning set forth in the
definition of "LIBO Rate".
"SEN Collateral Documents" shall mean the U.S Security Agreement, each Steel
Supply Contract and the Buyer Consent to the U.S. Security Agreement by each
buyer under a Steel Supply Contract.
"SEN Lenders" shall mean the holders of Tranche SEN-A Loans and Tranche
SEN-B Loans.
"Share Transfer and Voting Agreement" shall mean the Share Transfer and
Voting Agreements among HSBC Financial Services (Cayman) Limited and the
creditors party thereto.
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"Significant Subsidiary" shall mean, as at any date, each of our
Subsidiaries that
(a) are designated as such in the New Credit Agreement;
(b) accounted for at least 5% of consolidated revenues of us and our
Subsidiaries or 5% of consolidated earnings of us and our Subsidiaries
before interest and taxes, in each case ending on the last day of the
last fiscal quarter immediately preceding such date; or
(c) has assets which represent at least 5% of the consolidated assets of us
and our Subsidiaries as of the last day of the last fiscal quarter
immediately preceding such date;
all of which, with respect to clauses (b) and (c), shall be as reflected on our
financial statements for the period, or as of the date, in question; provided
however, that a Person shall no longer be deemed to be a Significant Subsidiary
from and after the date on which it ceases to be our Subsidiary.
"Specified Post-April 1 Committee Expenses" shall mean an amount equal to
the fees and expenses incurred by the Steering Committee and the SEN Committee
as certified by such committees to AHMSA, for each month during the period from
April 1, 2001 through the month in which the closing date of the restructuring
plan occurs, up to a maximum amount of U.S.$200,000 for each such month (less
the amount of any such expenses paid for by the trustee for the Old Notes and
reimbursed separately by or on behalf of AHMSA).
"Steel Supply Contract" means any of (i) the Steel Supply Contract to the
extent entered into on the closing of the restructuring plan between us and
Thyssen, (ii) the Steel Supply Contract to the extent entered into on the
closing of the restructuring plan between us and Ferrostaal, (iii) the Steel
Supply Contract to the extent entered into on the closing of the restructuring
plan between us and Kloeckner and (iv) any Substitute Steel Supply Contract, in
each case as amended, modified and supplemented and in effect from time to
time, but only, in the case of clauses (i), (ii) and (iii), to the extent the
respective buyers agree to enter into such Steel Supply Contracts on or prior
to the closing date.
"Stock Option Agreement" shall mean the Stock Option Agreement among o .
"Subject Assets" see "Description of Restructuring Plan--Sale of Assets."
"Subject Asset Sale Proceeds" shall mean the Net Cash Payments received by
us or any of our Subsidiaries in connection with any Disposition of any Subject
Asset, net of reasonable expenses in connection therewith.
"Subordinated Converted Interest Note" shall have the meaning set forth in
"--Payment of Principal and Interest" or mean a subordinated promissory note to
GAN in the amount of the Converted Interest as compensation to GAN for the
payment of Converted Interest on the New Notes under the New Indenture.
"Subsidiary" shall mean, with respect to any Person, any other Person
(whether now existing or hereafter organized) for which at least a majority of
the Voting Stock is at the time owned or controlled by such first Person or by
one or more Subsidiaries of such first Person or any combination thereof.
"Subsidiary Guarantor" shall mean each of our Subsidiaries party to the
Subsidiary Guaranty.
"Subsidiary Guaranty" shall mean the subsidiary guaranty by each of the
Significant Subsidiaries.
"Substitute Steel Supply Contract" shall mean a contract to sell any product
as set forth in a Steel Supply Contract (a) on terms and conditions
substantially the same as those contained in each Steel Supply Contract and (b)
to (i) a buyer selected by either AHMSA or the Administrative Agent (acting on
the instructions of the holders of a majority of the Tranche SEN Loans) and
reasonably acceptable to AHMSA and the holders of a majority of the Tranche SEN
Loans, (ii) a buyer of a credit quality at least equal to the credit quality at
the closing date of either Thyssen, Ferrostaal and Kloeckner under a Steel
Supply Contract being substituted as determined by the Administrative Agent, or
(iii) any buyer that posts in advance a letter of credit that is a standby
letter of credit in the amount of such buyer's purchase commitment for each
Delivery Period.
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"Supplemental Trust Agreement" shall mean the Supplemental Shares Trust
Agreement by GAN and AHMSA for the benefit of the Collateral Agent and the
Supplemental Trust Trustee.
"Supplemental Trust Trustee" shall mean HSBC Financial Services (Cayman)
Limited and any successor trustee under the Supplemental Trust Agreement.
"Taxes" shall mean all taxes of every kind (including, but not limited to,
gross and net income, gross and net receipts, capital gains, excess profits and
minimum taxes, taxes on tax preferences, capital, net worth, franchise, sales
use, value-added, stamp, documentary, excise, property, asset and other taxes),
charges and withholdings, levies, imposts, duties, fees and deductions now or
hereafter imposed, assessed, levied or collected by any Governmental Authority,
quasi-governmental authority or taxing jurisdiction or authority, together with
all interest, additions to tax, penalties and similar add-ons payable with
respect thereto, but excluding net income taxes and franchise taxes imposed on
the Administrative Agent or any Lender (i) by the Governmental Authority under
the law of which the Administrative Agent or such Lender (as the case may be)
is organized or in which it maintains its Loan Office, or (ii) as a result of a
connection between the Administrative Agent or such Lender and the relevant
taxing jurisdiction other than solely by reason of the Administrative Agent or
such Lender having executed, delivered or performed its obligations under, or
received a payment under, this Agreement or any other Loan Document (provided
that the maintenance of a Loan Office in the relevant taxing jurisdiction by a
Lender shall constitute a connection between the Lender and the relevant taxing
jurisdiction that is not solely by reason of such Lender executing, delivering
or performing its obligations under, or receiving a payment under, this
Agreement or any other Loan Document.)
"Three-Month Interest Fee" shall mean an amount equal to the amount of
interest that will accrue on the New Loans or the New Notes during the period
commencing on the closing date and ending on the first Payment Date of the New
Loans or New Notes (assuming that no payments in respect of the principal of
the New Loans or New Notes will be made during such period). The Three-Month
Interest Fee will be payable in six equal installments on the first six Payment
Dates.
"Thyssen" means Thyssen Handelsunion AG, a German corporation, or any
successor to such entity.
"Unrestricted Subsidiary" shall mean any of our Subsidiaries that:
(a) is not a Significant Subsidiary,
(b) if its earnings, revenues and assets were combined with all our other
Subsidiaries that are Unrestricted Subsidiaries the combined entity
would not constitute a Significant Subsidiary, and
(c) as to which we have furnished to the Administrative Agent (i) a notice
stating that it wishes such Subsidiary to be designated an Unrestricted
Subsidiary and (ii) a certificate of or other independent
public accountants acceptable to the Administrative Agent setting forth
computations in reasonable detail demonstrating the foregoing conditions.
"U.S. Security Agreement" shall mean the U.S. Security Agreement
among .
"Voting Stock" shall mean the capital stock of any Person the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for the
election of directors (or persons performing similar functions) of such Person,
even if the right so to vote has been suspended by the happening of such a
contingency.
"Voting Trust" shall mean the trust created pursuant to the Share Transfer
and Voting Agreement and the AHMSA Creditor Voting Trust Declaration.
"Voting Trust Agreements" shall mean, collectively, the Share Transfer and
Voting Agreement, the AHMSA Creditor Voting Trust Declaration and the Company
Agreement.
"Voting Trust Trustee" shall mean HSBC Financial Services (Cayman) Limited
and any successor trustee under the Voting Trust Agreement.
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DESCRIPTION OF NEW NOTES
General
The New Notes are to be issued under the New Indenture, which will be dated
as of the closing date of the restructuring plan, between AHMSA, the
significant Subsidiaries of AHMSA guaranteeing AHMSA's obligations with respect
to the New Notes, and U.S. Bank, NA, as trustee (the "Indenture Trustee"). A
copy of the New Indenture will be available for inspection during normal
business hours at the corporate trust office of the Indenture Trustee, which is
currently located at 180 East 5th Street, St. Paul, Minnesota 55101.
The following statements relating to the New Notes and the New Indenture are
summaries and are subject to the detailed provisions of the New Indenture, to
which reference is hereby made for a complete statement of those provisions.
Unless otherwise indicated, references under this caption to sections or
articles are references to the New Indenture.
The New Series A Notes will mature on September 30, 2009 and will be limited
to an aggregate principal amount equal to U.S.$1,140.0 million, less the amount
of the Tranche A Loans less the amount of claims which we believe are entitled
to a preference (currently estimated to be U.S.$24.6 million). Interest on the
New Series A Notes will accrue from the date of issue of the New Notes or from
the most recent Payment Date to which interest has been paid, or for which
interest has been duly provided, at an annual rate equal to the three-month
LIBO Rate plus an applicable margin as follows:
Period Applicable Margin
- ------ -----------------
From the closing date of the restructuring plan to the first anniversary
of the closing date.................................................... 3.00%
From the first anniversary of the closing date of the restructuring plan
to the second anniversary of the closing date.......................... 4.00%
From the second anniversary of the closing date of the restructuring
plan to the fourth anniversary of the closing date..................... 4.50%
From the fourth anniversary of the closing date of the restructuring plan
to the seventh anniversary of the closing date......................... 5.00%
From the seventh anniversary of the closing date of the restructuring
plan and at all times thereafter....................................... 5.50%
The New Series B Notes will be limited to an aggregate principal amount
equal to U.S.$180.0 million, less the amount of the Tranche B Loans, less 1.5
times the aggregate amount of net cash proceeds from the sale of Subject Assets
paid to our creditors at the closing of the restructuring plan. Interest on the
New Series B Notes will accrue at the rate per annum of 4% from the date of
issue of the New Notes or from the most recent Payment Date to which interest
has been paid or for which interest has been duly provided. On the day after
the six month anniversary of the closing of the restructuring plan (the
"Consolidation Date"), without any action required on the part of the holders
of the New Series B Notes, the New Series B Notes (other than those subject to
a notice of mandatory redemption) shall be converted into an equal principal
amount of New Series A Notes.
Upon the occurrence and during the continuance of any Event of Default: (i)
we will pay interest on the principal amount of all outstanding New Notes at a
rate per annum equal to 2% in excess of the otherwise applicable rate; and (ii)
all such interest will be payable on demand of the Indenture Trustee or the
person or entity to whom such payment is due.
Interest on the New Notes shall be computed on the basis of the actual
number of days elapsed and a 360-day year. Interest on the New Notes will be
payable in arrears in consecutive quarterly installments on the last business
day of March, June, September and December (each a "Payment Date"), after
withholding for, or on account of, certain Mexican withholding taxes (see
"--Additional Amounts") to the person or entity in whose name such New Note is
registered, until the principal amount thereof has been paid or made available
for payment. Instead of paying interest in cash on the New Notes on the first
three Payment Dates, AHMSA may satisfy its obligation to pay all or a portion
of such interest ("Converted Interest") by causing GAN to transfer a portion of
its rights with respect to shares of AHMSA common stock held pursuant to the
Supplemental Share Trust in an amount equal to 1% of the issued and outstanding
capital stock of AHMSA for each U.S.$6.73
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million in Converted Interest (and a ratable fraction of 1% for any Converted
Interest amount that is less than 1% for any Converted Interest amount that is
less than U.S.$6.73 million). This will be accomplished through the execution
of an exchange agreement among AHMSA, GAN, the Indenture Trustee and the
trustee with respect to the Supplemental Share Trust (the "Supplemental Share
Trustee"), pursuant to which GAN will instruct the Supplemental Share Trustee
to classify shares of common stock contained in the Supplemental Share Trust as
"Converted Interest Shares." As compensation to GAN for the payment of
Converted Interest, AHMSA will issue a subordinated promissory note to GAN in
the amount of the Converted Interest. GAN will have the right to repurchase the
Converted Interest Shares during the four-year period beginning on any Payment
Date on which Converted Interest was paid for a purchase price equal to the
aggregate Converted Interest amount plus interest on such Converted Interest
amount at a rate per annum equal to the interest rate on the New Notes for the
twelve-month period following the first such Payment Date on which Converted
Interest was paid, and thereafter, 20%. Repurchases will be accomplished by GAN
instructing the Supplemental Share Trustee to terminate the classification of
Converted Interest Shares as such.
AHMSA may only elect to pay all or any part of the interest due on any of
the first three Payment Dates in this manner, if:
. no Default is continuing on such Payment Date;
. AHMSA has not paid any management fees, guarantee fees or similar fees
to GAN and its affiliates, unless all previously issued Converted
Interest Shares have been converted back to Supplemental Shares;
. AHMSA is paying interest due on the New Loans in this manner on a pro
rata basis; and
. AHMSA has not previously voluntarily prepaid the New Loans or redeemed
any of the New Notes.
The shares used to pay converted interest on the New Notes will be
transferred to the AHMSA Creditor Voting Trust (which will in turn issue
Converted Interest Series trust interests to the holders of New Loans and New
Notes at such time representing such shares) upon the earlier of (a) a payment
default on the New Loans or the New Notes or (b) the expiration of GAN's option
to repurchase such shares used to pay converted interest.
AHMSA will be required to make the mandatory sinking fund redemptions of the
New Notes described in "--Mandatory Sinking Fund Payments."
Ranking of the Notes
The New Notes will:
. rank pari passu in right of payment among themselves and with the New
Loans, except as provided in "--Security," "Description of New Credit
Agreement--Payment of Principal and Interest" and "Description of New
Credit Agreement--SEN Account and Payments,"
. share pro rata in the collateral for such New Loans, except as provided
in "--Security" and "Description of New Credit Agreement--SEN Account
and Payments," and
. be senior in right of payment to all existing and future subordinated
indebtedness of AHMSA.
Form and Denomination
The New Series A Notes and New Series B Notes offered and sold in their
initial distribution under the New Indenture shall be issued in the form of one
or more permanent global notes in fully registered form without coupons
(collectively, the "Global Notes") and will be registered in the name of The
Depositary Trust Company ("DTC"), as Depositary, or its nominee and deposited
with the Indenture Trustee, as custodian for DTC, for credit by DTC to the
respective accounts of beneficial owners of the New Notes represented thereby
(or such other accounts as they may direct). The aggregate principal amount of
any Global Note may from time to time be increased or decreased by adjustments
made on the records of the Indenture Trustee, as custodian for the Depositary
or its nominee, as hereinafter provided. The New Notes are issuable only in
registered form without coupons in denominations of U.S.$1.00 and any integral
multiple thereof.
AHMSA has agreed to maintain a paying agent and security registrar in the
Borough of Manhattan, The City of New York. AHMSA has initially appointed the
Indenture Trustee at its corporate trust office as principal paying agent,
authenticating agent and security registrar for all New Notes. The security
registrar will keep a
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register in which, subject to such reasonable regulations as AHMSA may
prescribe, AHMSA will provide for the registration of the New Notes and the
registration of transfers of the New Notes.
No service charge will be imposed for any registration of transfer and
exchange of New Notes, but AHMSA may require payment by a holder of a New Note
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
The term "New Note" as used in this Prospectus and Consent Solicitation
means any Global Note and any New Note in registered certificated (i.e.
non-global) form without coupons (each such non-global note, a "Certificated
Note"). See "--Certificated Notes." Only the person or entity or persons or
entities registered as owner of a New Note will be deemed the "holder" of such
New Note under the New Indenture and only Cede & Co. or its
successor-in-interest, as nominee of DTC, will be deemed the holder of New
Notes represented by a Global Note. Prior to due presentment of a New Note for
registration of transfer, AHMSA, the Indenture Trustee and any of their
respective agents may treat the registered holder of a New Note as the absolute
owner thereof (whether or not such New Note may be overdue) for the purpose of
making payment and for all other purposes.
Notice to a holder of a New Note under the New Indenture may be given by
mail to the address of such holder as it appears in any register kept by the
security registrar for such purpose.
Global Notes
The statements set forth herein include summaries of certain rules and
operating procedures of DTC, Euroclear and Clearstream, which affect transfers
of interests in the Global Notes.
Except as set forth below, a Global Note may be transferred, in whole or
part, only to DTC, another nominee of DTC or a successor of DTC or its nominee.
Beneficial interests in a Global Note will be represented, and transfer of
such beneficial interests will be effected, through accounts of financial
institutions acting on behalf of beneficial owners as direct and indirect
participants in DTC. Such beneficial interests will be in denominations of
U.S.$1.00 and integral multiples thereof. Investors may hold such beneficial
interests directly through DTC, Euroclear or Clearstream, if they are
participants in such systems, or indirectly through organizations that are
participants in such systems. Euroclear and Clearstream hold securities on
behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which in turn
hold such securities in customers' securities accounts in the depositories'
names on the books of DTC. ., initially will act as depositary for Euroclear
and Clearstream.
DTC has advised AHMSA that it is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for movement of securities certificates. DTC's participants include
securities brokers and dealers, banks (including the Indenture Trustee), trust
companies, clearing corporations and certain other organizations, some of which
and/or their representatives own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly. Persons who are not participants may beneficially own
securities held by DTC only through participants.
Upon the issuance of the Global Notes, DTC will credit, on its book-entry
registration and transfer system, the respective principal amounts of the New
Notes represented by such Global Notes to the accounts of the participants
designated by AHMSA.
Persons who are not DTC participants may beneficially own New Notes held by
DTC only through direct or indirect participants in DTC (including Euroclear
and Clearstream). So long as Cede & Co., as the nominee of DTC, is the
registered owner of the Global Notes, Cede & Co. for all purposes will be
considered the sole holder of the New Notes represented by the Global Notes
under the New Indenture. Except as provided below, owners
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of beneficial interests in the Global Notes will not be entitled to have New
Notes represented thereby registered in their names, will not receive or be
entitled to receive physical delivery of such New Notes in definitive form and
will not be considered the holders thereof under the New Indenture.
Accordingly, any person or entity owning a beneficial interest in any Global
Note must rely on the procedures of DTC and, to the extent relevant, Euroclear
or Clearstream, and, if such person or entity is not a participant, on the
procedures of the participant through which such person or entity owns its
interest, to exercise any rights of a holder represented thereby. AHMSA
understands that, under existing industry practice, in the event that any owner
of a beneficial interest in a Global Note desires to take any action that Cede
& Co., as the holder of such Global Note, is entitled to take, Cede & Co. would
authorize the participants to take such action, and the participants would
authorize beneficial owners owning through such participants to take such
action or would otherwise act upon the instructions of beneficial owners owning
through them.
DTC may grant proxies or otherwise authorize DTC participants (or persons or
entities holding beneficial interests in the New Notes through such DTC
participants) to exercise any rights of a holder or take any other actions
which a holder is entitled to take under the New Indenture or the New Notes.
Under its usual procedures, DTC would mail an omnibus proxy to AHMSA assigning
Cede & Co.'s consenting or voting rights to those DTC participants to whose
accounts the New Notes are credited on a record date as soon as possible after
such record date. Euroclear or Clearstream, as the case may be, will take any
action permitted to be taken by a holder under the New Indenture or the New
Notes on behalf of a Euroclear participant or Clearstream participant only in
accordance with its relevant rules and procedures and subject to its
depositary' s ability to effect such actions on its behalf through DTC. In
order to attend meetings of holders, owners of beneficial interests in the
Global Notes may obtain a certificate from DTC, a DTC participant, a Euroclear
participant or a Clearstream participant stating the principal amount of New
Notes beneficially owned by such person or entity and deposit such certificate
with AHMSA at least three business days prior to the date on which the relevant
meeting of holders is to be held. AHMSA will then grant the appropriate
receipts of such deposit which will allow such persons or entities to attend
the meeting and to exercise their voting rights in respect of the principal
amount of New Notes beneficially owned by them as stated in their respective
certificate.
The Global Notes will not be exchangeable for Certificated Notes, except as
provided below under "--Certificated Notes."
Certificated Notes
If DTC or any successor depositary is at any time unwilling or unable to
continue as a depositary for a Global Note or ceases to be a "clearing agency"
registered under the Exchange Act or an Event of Default (as defined under
"--Events of Default") has occurred and is continuing with respect to the New
Series A Notes or the New Series B Notes, the Indenture Trustee will complete,
authenticate and deliver New Series A Notes or New Series B Notes, as the case
may be, in certificated, registered form duly executed by AHMSA and deposited
with the Indenture Trustee on the issue date of the New Notes in exchange for
such Global Note.
A holder of Certificated Notes may transfer such notes by surrendering them
at the office or agency maintained by AHMSA for such purpose in the Borough of
Manhattan, The City of New York, which initially will be the office of the
Indenture Trustee, or at the office of any Security Registrar.
If any mutilated Certificated Note of any series is surrendered to the
Indenture Trustee, AHMSA will execute and the Indenture Trustee will
authenticate and deliver in exchange for the mutilated Certificated Note a new
Certificated Note of such series of like tenor and principal amount and bearing
a number not contemporaneously outstanding. If AHMSA and the Indenture Trustee
receive
. evidence to their satisfaction of the destruction, loss or theft of any
Certificated Note of any series and
. such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless,
then, in the absence of notice to AHMSA or the Indenture Trustee that such
Certificated Note has been acquired by a bona fide purchaser, AHMSA will
execute and the Indenture Trustee will authenticate and deliver, in lieu of
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any such destroyed, lost or stolen Certificated Note, a new Certificated Note
of such series (or, if the Consolidation Date shall have occurred, a New Series
A Note will be issued in lieu of any destroyed, lost or stolen New Series B
Note) of like tenor and principal amount and bearing a number not
contemporaneously outstanding. In case any such mutilated, destroyed, lost or
stolen Certified Note has become or is about to become due and payable, AHMSA
in its discretion may, instead of issuing a new Certificated Note, pay such
Certificated Note. Upon the issuance of any new Certificated Note, AHMSA may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation to such issuance and any other expenses
(including the fees and expenses of the Indenture Trustee) connected with such
issuance.
Payment of Principal and Interest
The interest payable on a New Note, including any Additional Amounts (as
defined under "--Additional Amounts"), other than at maturity will be paid on
each Payment Date to the holder in whose name such New Note is registered at
the close of business on each , , or (whether
or not a business day), as the case may be, next preceding such Payment Date
(the "Regular Record Date").
Payments of principal of and any interest due with respect to the New Notes
at maturity will be made in immediately available funds against surrender of
the New Notes at the corporate trust office of the Indenture Trustee or at the
offices of one of the other paying agents appointed pursuant to the New
Indenture.
Payments of interest on the Global Notes to be paid other than at maturity
will be made to DTC or its nominee as the registered owner thereof in
immediately available funds. See "--Global Notes." Upon receipt of any payment
of principal of or interest on a Global Note, DTC will credit DTC participants'
accounts with payment in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC. Payments by DTC participants to owners of beneficial interests in such
Global Note held through such participants will be the responsibility of such
participants, as is the case with securities held for the accounts of customers
registered in "street name." Distributions with respect to New Notes held
through Euroclear or Clearstream will be credited to the cash accounts of
Euroclear participants or Clearstream participants in accordance with the
relevant system's rules and procedures, to the extent received by its
depositary. Neither AHMSA nor the Indenture Trustee will have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
If any New Notes have been issued in the form of Certificated Notes,
payments of interest on such New Notes to be paid other than at maturity will
be made by check to the holder thereof at such holder's address appearing on
the Security Register. Payments of any interest on the New Notes may also be
made, in the case of a holder of at least U.S.$1.0 million aggregate principal
amount of New Notes, by wire transfer to a U.S. dollar account maintained by
the payee with a bank in the United States; provided that such holder elects
payment by wire transfer by giving written notice to the Indenture Trustee or a
paying agent to such effect designating such account no later than 15 days
immediately preceding the relevant due date for payment (or such other date as
the Indenture Trustee may accept in its discretion).
Any monies paid by AHMSA to the Indenture Trustee or any paying agent for
the payment of the principal of or any interest or Additional Amounts on any
New Notes and remaining unclaimed at the end of two years after such principal,
interest or Additional Amounts become due and payable will be repaid to AHMSA
upon its written request, and the holder of such New Note shall thereafter, as
an unsecured general creditor, look only to AHMSA for payment thereof and all
liability of the Indenture Trustee or such Paying Agent with respect thereto
will cease.
If the due date for payment of principal, interest or Additional Amounts in
respect of any New Note is not a business day, the holder thereof will not be
entitled to payment of the amount due until the next succeeding business day
and will not be entitled to any further interest or other payment in respect of
any such delay.
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Additional Amounts
All payments made by AHMSA under or with respect to the New Notes will be
made after withholding or deduction for or on account of any present or future
taxes, duties, assessments or governmental charges of whatever nature imposed,
levied, collected, withheld or assessed by or on behalf of Mexico, any
subdivision thereof or any authority therein or thereof having power to tax
("Mexican Taxes"). AHMSA will pay such additional amounts ("Additional
Amounts") in respect of Mexican Taxes as will result in receipt by the holders
of the New Notes of such amounts as would have been received by them had no
such withholding or deduction been required, except that no such Additional
Amounts will be payable for or on account of:
(1) any Mexican Taxes, to the extent that such Mexican Taxes would not have
been imposed but for the fact that such holder or beneficial owner (A)
was a resident or citizen of Mexico, or maintained a permanent
establishment or fixed base in Mexico or any of its respective
territories or any political subdivision thereof to which the income in
respect of such New Note was attributable or otherwise had some
connection with Mexico other than the mere ownership of, or receipt of
any payment in respect of, such New Note; or (B) presented such New Note
(where presentation is required) more than 30 days after the date on
which the payment in respect of such New Note first became due and
payable or provided for, whichever is later, except to the extent that
the holder or beneficial owner of such New Note would have been entitled
to Additional Amounts in respect of such Mexican Taxes on presenting
such New Note for payment on any date during such 30-day period;
(2) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, duty, assessment or other governmental charge;
(3) any tax, duty, assessment or other governmental charge which is only
payable otherwise than by withholding or deduction from payments in
respect of the New Notes;
(4) any Mexican Taxes that would not have been imposed but for the failure
of the holder or beneficial owner of such New Note to comply with any
certification, identification, information, documentation or other
reporting requirement if (i) such compliance is required by law,
regulation, administrative practice or an applicable treaty as a
precondition to exemption from, or reduction in the rate of, deduction
or withholding of, Mexican Taxes and (ii) at least 60 days prior to the
first Payment Date with respect to which AHMSA applies this clause (4),
AHMSA will have notified the holders of the New Notes that such holders
or beneficial owners of the New Notes will be required to comply with
such requirement;
(5) any Mexican Taxes imposed at a rate in excess of the 4.9% reduced rate
in effect on the date hereof and uniformly applicable in respect of
payments made by AHMSA to all holders or beneficial owners eligible for
the benefits of a treaty for the avoidance of double taxation to which
Mexico is a party without regard to the particular circumstances of such
holders or beneficial owners (provided that, upon any subsequent
increase in the rate of Mexican Taxes that would be applicable to
payments to all such holders or beneficial owners without regard to
their particular circumstances except for the eligibility under any such
treaty, such increased rate will be substituted for the 4.9% rate for
purposes of this clause (5)), but only to the extent that (i) such
holder or beneficial owner has failed to provide on a timely basis, at
the reasonable request of AHMSA (subject to the conditions set forth
below), information, documentation or other evidence (not described in
paragraph (4) above) concerning whether such holder or beneficial owner
is eligible for benefits under a treaty for the avoidance of double
taxation to which Mexico is a party if necessary to determine the
appropriate rate of deduction or withholding of Mexican Taxes under such
treaty or under any law, and (ii) at least 60 days prior to the first
payment date with respect to which AHMSA will make such reasonable
request, AHMSA will have notified the holders of the New Notes, in
writing, that such holders or beneficial owners of the New Notes will be
required to provide such information, documentation or other evidence; or
(6) any combination of items (1), (2), (3), (4) and (5);
189
nor will Additional Amounts be paid with respect to any payment in respect of
the New Notes to any holder who is a fiduciary or partnership or other than the
sole beneficial owner of such payment to the extent such payment would be
required by the laws of Mexico (or any political subdivision or taxing
authority thereof or therein) to be included in the income for tax purposes of
a beneficiary or settlor with respect to such fiduciary or partner in such
partnership or a beneficial owner who would not have been entitled to such
Additional Amounts had it been the holder of the New Note.
Notwithstanding the foregoing, the limitations on AHMSA's obligation to pay
Additional Amounts set forth in clauses (4) and (5) above will not apply if
(a) the provision of information, documentation or other evidence described
in such clauses (4) and (5) would be materially more onerous, in form,
in procedure or in the substance of information disclosed, to a holder
or beneficial owner of a New Note (taking into account any relevant
differences between U.S. and Mexican law, regulation or administrative
practice) than comparable information or other reporting requirements
imposed under U.S. tax law, regulation and administrative practice (such
as IRS Forms 1001, W-8 and W-9) or
(b) Rule 3.32.11 issued by the Secretaria de Hacienda y Credito Publico
(Ministry of Finance and Public Credit) on March 21, 1997 or a
substantially similar successor of such rule is in effect, unless the
provision of the information, documentation or other evidence described
in clauses (4) and (5) is expressly required by statute, regulation,
ruling or administrative practice in order to apply Rule 3.32.11 (or a
substantially similar successor of such rule), AHMSA cannot obtain such
information, documentation or other evidence on its own through
reasonable diligence and AHMSA otherwise would meet the requirements for
application of Rule 3.32.11 (or such successor of such rule).
In addition, such clauses (4) and (5) will not be construed to require that a
non-Mexican pension or retirement fund or a non-Mexican financial institution
or any other holder or beneficial owner of a New Note register with the
Ministry of Finance and Public Credit for the purpose of establishing
eligibility for an exemption from or reduction of Mexican withholding tax.
Furthermore, compliance with any such requirements under clause (4) or requests
under clause (5) will not require the disclosure to AHMSA, any Paying Agent or
any governmental authority of the nationality, residence or identity of the
holder or beneficial owner of a New Note that is not eligible for any exemption
from withholding or deduction of all or any part of such Mexican Taxes (other
than such compliance that can be satisfied by a custodian, nominee or other
agent of such holder or beneficial owner certifying to the effect that such
holder or beneficial owner is not eligible for any exemption from withholding
or deduction of all or any part of such Mexican Taxes, provided that payment by
such custodian, nominee or agent to such holder or beneficial owner is not
otherwise subject to any such requirement).
AHMSA will provide the Indenture Trustee with documentation evidencing the
payment of Mexican Taxes in respect of which AHMSA has paid any Additional
Amounts. Copies of such documentation will be made available to any holder of a
New Note and any relevant Paying Agent upon request therefor.
Any reference herein, in the New Indenture or in the New Notes to principal,
premium, interest, redemption price, repurchase price or any other amount
payable under or with respect to the New Notes will be deemed also to refer to
any Additional Amounts which may be payable under the undertakings referred to
in "--Additional Amounts."
In the event that Additional Amounts actually paid with respect to the New
Notes are based on rates of deduction or withholding of taxes, duties,
assessments or governmental charges in excess of the appropriate rate
applicable to the holder or beneficial owner of a New Note and, as a result
thereof, such holder or beneficial owner is entitled to make a claim for a
refund or credit of such excess, then such holder or beneficial owner will, by
accepting the New Notes, be deemed to have assigned and transferred all right,
title and interest to any such claim for a refund or credit of such excess to
AHMSA. By making such assignment, however, the holder or beneficial owner makes
no representation or warranty that AHMSA will be entitled to receive such claim
for a
190
refund or credit and such holder or beneficial owner incurs no other obligation
with respect thereto, including, without limitation, no obligation to execute
any other instrument of transfer or to incur any expense in connection with
such transfer.
As of the date of this Prospectus and Consent Solicitation, AHMSA is
obligated, as a result of the Mexican withholding tax of 4.9% (provided that
the requirements set forth herein are complied with) to pay Additional Amounts
to holders of the New Notes with respect to all interest payments made on the
New Notes.
Mandatory Sinking Fund Redemptions
On each of the last business day of March and September commencing September
30, 2003 (each, a "Sinking Fund Redemption Date"), AHMSA will be required to
make mandatory sinking fund redemptions of the New Notes
. with respect to the first twelve Sinking Fund Redemption Dates, in an
amount equal to (1) 5.42% of the principal amount of the New Series A
Notes outstanding on the closing date for the restructuring plan, plus
(2) 5.42% of the principal amount of the New Series B Notes outstanding
on the Consolidation Date, minus (3) amounts credited against the
sinking fund on such Sinking Fund Redemption Date pursuant to mandatory
redemptions, and
. with respect to the thirteenth Sinking Fund Redemption Date, in an
amount equal to the unpaid principal of the New Notes.
In lieu of making up to one-half of any of the foregoing mandatory sinking
fund redemptions, AHMSA may deliver to the Indenture Trustee New Notes for
cancellation, in which event, AHMSA will receive as a credit against any such
payment an amount equal to the principal amount of the New Notes delivered for
cancellation (provided that no such credit shall exceed one-half of any
mandatory redemption). AHMSA will be permitted to deliver New Notes according
to this paragraph only if (i) such New Notes were not purchased from an
Affiliate of AHMSA and (ii) such New Notes were purchased within the six month
period preceding the applicable Sinking Fund Redemption Date.
Optional Redemption
AHMSA may, from time to time on any business day, redeem, in whole or in
part, the outstanding principal amount of the New Notes; provided, however, that
. any such redemption shall be made ratably among the New Notes and the
New Loans in the aggregate amount of the Securities Percentage; and
. each such voluntary redemption shall be applied, to the extent of such
redemption, to the outstanding mandatory sinking fund redemptions of the
New Notes in the inverse order thereof.
The redemption price will equal the outstanding principal amount of the New
Notes to be redeemed plus accrued interest on the principal amount redeemed and
any Additional Amounts thereon to the date of redemption. Each such redemption
will be without premium or penalty.
Mandatory Redemption upon Occurrence of Certain Events
AHMSA will be required to redeem the New Notes at a redemption price equal
(except as otherwise expressly indicated) to the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, plus any Additional
Amounts thereon, and without premium, under the circumstances, in the amounts
and at the dates set forth below.
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MICARE Sale Proceeds
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any MICARE Sale Proceeds
after the Tranche MICARE A Loans have been paid in full, AHMSA will redeem New
Series A Notes with an aggregate redemption price equal to the sum of the
Securities Percentage of the aggregate amount of such proceeds less the amount
of Tranche MICARE-A Loans plus the amount, if any, of the Allocated Forgiveness
Amount with respect to the Tranche MICARE-A Loans to be applied as provided in
"--Effect of Mandatory Redemption." To the extent that the aggregate amount of
all such proceeds is greater than or equal to U.S.$300.0 million but less than
U.S.$330.0 million, the redemption price for any redemption shall be a
percentage equal to (x) the amount of such proceeds, divided by (y) U.S.$330.0
million.
Subject Asset Sale Proceeds
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any Subject Asset Sale
Proceeds, AHMSA will redeem the New Notes with an aggregate redemption price
equal to the Securities Percentage of the aggregate amount of such proceeds,
each such redemption to be applied first, to redeem the New Series B Notes and,
second, after the payment in full of the New Series B Notes, to redeem the New
Series A Notes to be applied as provided in "--Effect of Mandatory Redemption."
If each of the following conditions is met at the time that a mandatory
redemption would otherwise be required to be made pursuant to the preceding
paragraph:
. such mandatory redemption would be required to be made on or prior to
the first anniversary of the closing date of the restructuring plan,
. the aggregate amount of Subject Asset Sale Proceeds theretofore received
by AHMSA and its Subsidiaries is at least equal to U.S.$120.0 million,
. all mandatory redemptions theretofore required to be made with respect
to Subject Asset Sale Proceeds have been made, and
. a Year One Cash Flow Deficit Notice has theretofore been given,
then, AHMSA may, by at least ten business days' prior notice to the Indenture
Trustee:
. defer the redemption of up to the Securities Percentage of U.S.$60.0
million in mandatory redemptions otherwise required to be made with
respect to Subject Asset Sale Proceeds (the "Deferred Mandatory
Redemptions") until the first Payment Date following the first
anniversary of the closing date of the restructuring plan;
. reduce the amount of such Deferred Mandatory Redemptions by an amount
equal to the Year One Cash Flow Deficit; and
. on the first Payment Date following the first anniversary of the closing
date of the restructuring plan redeem a principal amount of New Notes
with an aggregate redemption price equal to the Deferred Mandatory
Redemptions less the Year One Cash Flow Deficit.
To the extent that the aggregate amount of Subject Asset Sale Proceeds
available for redemption, together with the aggregate amount of Subject Asset
Sale Proceeds paid to creditors on the closing date of the restructuring plan,
is less than or equal to U.S.$120.0 million, the redemption price for the New
Series B Notes on or prior to the Six Month Date shall be 66 2/3% of the
principal amount thereof.
Other Asset Sale Proceeds
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any Other Asset Sale
Proceeds excluding Other Asset Sale Proceeds required to be applied
192
to repay Tranche A Loans under the Credit Agreement which have a priority claim
to such Other Asset Sale Proceeds, which, when taken together with all Other
Asset Sale Proceeds as to which no mandatory redemption has yet been made (the
"As-yet Unapplied Other Asset Sale Proceeds"), are in an aggregate amount equal
to U.S.$2,500,000 or more, AHMSA will redeem the New Notes with an aggregate
redemption price equal to the Securities Percentage of the aggregate amount of
all such proceeds (including the As-yet Unapplied Other Asset Sale Proceeds),
each such redemption to be applied as provided in "--Effect of Mandatory
Redemption."
Permitted Refinancing Indebtedness Proceeds
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any Permitted Refinancing
Indebtedness Proceeds, AHMSA will redeem the New Notes with an aggregate
redemption price equal to the Securities Percentage of the aggregate amount of
such proceeds, each such redemption to be applied as provided in "--Effect of
Mandatory Redemption."
Equity Proceeds
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any Equity Proceeds, AHMSA
will redeem the New Notes with an aggregate redemption price equal to the
Securities Percentage of the aggregate amount of such Equity Proceeds, each
such redemption to be applied as provided in "--Effect of Mandatory Redemption."
Insurance Recoveries
Within the time period set forth in "--Notice of Redemption" after the day
on which AHMSA or any of its Subsidiaries receives any Insurance Proceeds,
which, when taken together with all other such proceeds as to which no
mandatory redemption has yet been made (the "As-yet Unapplied Insurance
Proceeds"), are in an aggregate amount equal to U.S.$2,500,000 or more, AHMSA
will redeem the New Notes with an aggregate redemption price equal to the
Securities Percentage of the aggregate amount of such Insurance Proceeds
(including the As-yet Unapplied Insurance Proceeds), each such redemption to be
applied as provided in "--Effect of Mandatory Redemption."
Excess Cash Flow
On the first Payment Date occurring at least 155 days after the last day of
each fiscal year of AHMSA, AHMSA will redeem the New Notes with an aggregate
redemption price equal to the following:
. if such fiscal year is 2002 or 2003, an amount equal to the Securities
Percentage of the Excess Cash Flow for such fiscal year minus the
aggregate amount of payments made (or concurrently being made) by AHMSA
to GAN as a mandatory repayment of Subordinated Converted Interest Notes
in respect of Excess Cash Flow for such fiscal year (but only to the
extent that such payments are used by GAN to repurchase shares of
capital stock of AHMSA paid to the creditors as converted interest); and
. for any other fiscal year, an amount equal to 70% of the Securities
Percentage of the Excess Cash Flow for such fiscal year minus the
aggregate amount of payments made (or concurrently being made) by AHMSA
to GAN as a mandatory repayment of Subordinated Converted Interest Notes
in respect of Excess Cash Flow for such fiscal year (but only to the
extent that such payments are used by GAN to repurchase shares of
capital stock of AHMSA paid to the creditors as converted interest),
each such redemption to be applied as provided in "--Effect of Mandatory
Redemption."
Effect of Mandatory Redemption
With respect to each mandatory redemption pursuant to "--MICARE Sale
Proceeds," "--Subject Asset Sale Proceeds," "--Other Assets Sale Proceeds,"
"--Permitted Refinancing Indebtedness Proceeds," "--Equity Proceeds,"
"--Insurance Recoveries" and "--Excess Cash Flow," such proceeds shall be
applied: first, to redeem
193
the New Series A Notes and second, after the New Series A Notes have been paid
in full, to redeem the New Series B Notes (provided that in the case of Subject
Asset Sale Proceeds, for the avoidance of doubt, Subject Asset Sale Proceeds
are applied first to redeem the New Series B Notes and second, after the New
Series B Notes have been paid in full, to redeem the New Series A Notes). Upon
any mandatory redemption of New Series A Notes, the sinking fund redemption
payments will be adjusted as follows:
. with respect to any such mandatory redemption to be made on a Payment
Date occurring on or prior to the second Sinking Fund Redemption Date,
such redemption shall be credited against the Sinking Fund Amounts
first, to reduce the Sinking Fund Amount on the first Sinking Fund
Redemption Date, second, to reduce the Sinking Fund Amount on the second
Sinking Fund Redemption Date, and finally, to reduce the Sinking Fund
Amount for the balance of the Sinking Fund Redemption Dates in the
inverse order thereof.
. with respect to any such mandatory redemption to be made on a Payment
Date occurring after the second Sinking Fund Redemption Date such
redemption shall reduce the Sinking Fund Amount for the balance of the
Sinking Fund Redemption Dates in the inverse order thereof.
Notice of Redemption
AHMSA is required to give notice of redemption by first-class mail, postage
paid, mailed not less than 30 nor more than 60 days prior to the redemption
date (which in the case of a redemption pursuant to "--Mandatory Redemption
Upon Occurrence of Certain Events" must be the first Payment Date at least 35
days after the date on which the Indenture Trustee receives proceeds described
under "--Mandatory Redemption Upon Occurrence of Certain Events" pursuant to
the Intercreditor Agreement), to each holder of New Notes to be redeemed, at
his address appearing in the Security Register.
Repurchase at the Option of the Holders
In the event that a Change of Control occurs then, each holder of New Notes
will have the right, at the holder's option to require AHMSA to repurchase all
of such holder's New Notes, or any portion of the principal amount thereof that
is equal to U.S.$1,000 or any integral multiple of U.S.$1,000 in excess
thereof, on the date (the "Holder Repurchase Date") that is 60 days after the
date of the occurrence of the Change of Control at a repurchase price equal to
the sum of (i) 100% of the principal amount of the New Notes being repurchased,
(ii) the accrued and unpaid interest thereon to the Holder Repurchase Date and
(iii) any Additional Amounts which would otherwise be payable.
Within seven business days after the occurrence of a Change of Control,
AHMSA will mail to the Indenture Trustee and to all holders at their addresses
on the Security Register (and to beneficial owners as required by applicable
law) a notice regarding the occurrence of the Change of Control stating, among
other things,
(1) the Holder Repurchase Date,
(2) the date by which the repurchase right must be exercised,
(3) the repurchase price,
(4) a description of the procedure which a holder must follow to exercise a
repurchase right, and the place or places where New Notes are to be
surrendered for payment of the repurchase price and accrued interest, if
any,
(5) that on the Holder Repurchase Date the repurchase price, including
accrued interest, if any, will become due and payable upon each New Note
designated by the holder to be repurchased, and that interest on such
New Notes shall cease to accrue on and after that date, and
(6) the place or places where the certificate of election, indicating the
holder's election to have the New Notes repurchased, must be delivered.
No failure of AHMSA to give the foregoing notices will limit any holder's
right to exercise a repurchase right or affect the validity of the proceedings
for the repurchase of New Notes.
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To exercise this right, the holder must deliver a written notice (a "Holder
Repurchase Notice") to the Indenture Trustee or any Paying Agent prior to the
close of business on the Holder Repurchase Date. The Holder Repurchase Notice
must state (i) the name of the holder, (ii) the principal amount of New Series
A Notes or New Series B Notes to be repurchased (and if any New Note is to be
repurchased in part, the portion of the principal amount thereof to be
repurchased and the name of the person in which the portion thereof to remain
outstanding after such repurchase is to be registered) and (iii) a statement
that an election to exercise the repurchase right is being made thereby.
Any Holder Repurchase Notice may be withdrawn by the holder by a written
notice of withdrawal delivered to the Indenture Trustee or to any other office
or agency maintained for that purpose on or prior to the Holder Repurchase
Date. The notice of withdrawal will state the principal amount as to which the
withdrawal notice relates and the principal amount, if any, that remains
subject to the original Holder Repurchase Notice.
Payment of the repurchase price for a New Note for which a Holder Repurchase
Notice has been delivered and not withdrawn is conditioned upon delivery of the
New Note to the Indenture Trustee or to any other office or agency maintained
for that purpose, at any time (whether prior to, on or after the Holder
Repurchase Date) after delivery of the Holder Repurchase Notice. Payment of the
repurchase price for the New Note will be made promptly following the later of
the Holder Repurchase Date or the time of delivery of the New Note. If the
Indenture Trustee holds, in accordance with the New Indenture, money sufficient
to pay the repurchase price of the New Note on the Holder Repurchase Date,
then, on and after the Holder Repurchase Date, the New Note will cease to be
outstanding and interest thereon will cease to accrue, whether or not the New
Note is delivered to the Indenture Trustee or to any other office or agency
maintained for that purpose, and all other rights of the holder will terminate
(other than the right to receive the repurchase price upon delivery of the New
Note).
Certain Covenants
The New Indenture contains, among others, the following covenants:
Limitation on Incurrence of Indebtedness
AHMSA will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, issue, guarantee or in any
manner become directly or indirectly liable for or with respect to the payment
of (collectively, to "incur") any Indebtedness, except for Permitted
Indebtedness; provided that AHMSA and any of its Restricted Subsidiaries shall
be permitted to incur Indebtedness if, at the time of such incurrence and after
giving pro forma effect to the incurrence of such Indebtedness, the EBITDA to
Interest Expense Ratio of AHMSA for the immediately preceding four fiscal
quarters for which financial statements are available, taken as one period,
would exceed (A) from the closing date for the restructuring plan
through but excluding , (B) from through but excluding
, (C) from through but excluding , and (D)
from and after .
"Permitted Indebtedness" means the following:
(1) Indebtedness consisting of the following:
(A) the New Notes and the New Subordinated Notes, including the
guarantees provided by Significant Subsidiaries for the New Notes and
the New Subordinated Notes;
(B) Indebtedness consisting of the New Loans, including the guarantees
provided by Significant Subsidiaries for the New Loans;
(C) Indebtedness to the extent outstanding on the closing date of the
restructuring plan;
(D) Indebtedness consisting of amounts owed to suppliers prior to the
filing for suspension of payments;
(E) Indebtedness consisting of Capital Leases outstanding on the closing
date of the restructuring plan;
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(F) Indebtedness consisting of the Bancomext Obligation to the extent
outstanding on the closing date of the restructuring plan;
(G) Indebtedness consisting of take-or-pay contracts entered into in
connection with the sale of Subject Assets;
(H) Indebtedness consisting of the Subordinated Converted Interest Notes;
and
(I) Indebtedness in an aggregate principal amount not to exceed U.S.$50.0
million consisting of Base Debt that has not been restructured
pursuant to the Restructuring Agreement.
(2) Indebtedness in an aggregate principal amount at any one time
outstanding not to exceed U.S.$200.0 million consisting of the following:
(A) Indebtedness (other than Capitalized Lease Obligations) in an
aggregate principal amount not to exceed U.S.$150.0 million at any
one time outstanding;
(B) Indebtedness incurred in respect of Capitalized Lease Obligations in
an aggregate principal amount not to exceed U.S.$50.0 million at any
one time outstanding;
(C) Capital Expenditure Indebtedness in an aggregate principal amount in
any one fiscal year not to exceed U.S.$50.0 million (which may be in
the form of Capitalized Lease Obligations);
(D) Indebtedness secured by Liens permitted under clause (2) of the
definition of Permitted Liens in an aggregate principal amount not to
exceed U.S.$40.0 million at any one time outstanding; and
(E) Acquired Indebtedness; provided that (x) the aggregate principal
amount of all such Indebtedness incurred pursuant to this clause (E)
shall not exceed U.S.$40.0 million at any one time outstanding and
(y) the holder of such Indebtedness has no recourse to any Property
of AHMSA or any of its Subsidiaries other than the Subsidiary so
acquired or the Property so acquired.
(3) Indebtedness consisting of the following:
(A) Hedging Obligations (other than Hedging Obligations in respect of
prices of raw material and inputs into the steel manufacturing
process), so long as the aggregate notional principal amount of all
Hedging Obligations does not exceed U.S.$100.0 million at any one
time outstanding;
(B) Hedging Obligations in respect of prices of raw material and inputs
into the steel manufacturing process so long as they are not entered
into for speculative purposes; and
(C) Indebtedness in respect of commercial letters of credit outstanding
(and reimbursement obligations thereunder) in an aggregate amount not
to exceed U.S.$60.0 million at any one time outstanding;
(4) Indebtedness the proceeds of which are applied solely to repay the Base
Debt described in clause (1)(I) of the definition of "Permitted
Indebtedness," so long as:
(A) either (1) such Base Debt shall have been determined to be due and
payable pursuant to an unappealable final judgment of a Mexican court
of competent jurisdiction, or (2) the issuance of such Indebtedness
is approved by a majority of the Trust Directors,
(B) AHMSA shall have used its commercially reasonable best efforts to
oppose the validity of such repayment, and
(C) neither AHMSA nor any of its Subsidiaries shall have settled any
litigation with respect to such repayment without the prior consent
of a majority of the Trust Directors.
(5) Indebtedness, the proceeds of which are used solely to refinance
Indebtedness of the types described in clauses (1)(A), (1)(B), (1)(D),
(1)(E), (1)(F), (2)(B), (2)(C), (2)(E), and (4) of the definition of
"Permitted Indebtedness," but only so long as:
(A) the Average Life to maturity of such Indebtedness is at least six
months longer than the Average Life of the Indebtedness being
refinanced, and, in the case of refinancing indebtedness of the type
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set forth in clause (1)(A) or (1)(B) of the definition of "Permitted
Indebtedness," the final maturity of such Indebtedness occurs after
the final maturity of the New Notes, and
(B) the interest rate, covenants, defaults and other terms of such
Indebtedness are not materially more favorable to the holders thereof
than the Indebtedness being refinanced.
(6) Indebtedness in respect of Customer Advances (and in respect of any
refinancing of any Customer Advances), provided that the aggregate
principal amount of such Customer Advances (and any refinancing thereof)
outstanding during the following respective periods shall not exceed the
respective amounts set forth opposite such periods:
Period Maximum Amount
------ ------------------
Closing Date through December 30, 2003.......... U.S.$260.0 million
December 31, 2003 through December 30, 2004..... U.S.$160.0 million
December 31, 2004 through December 30, 2005..... U.S.$120.0 million
December 31, 2005 and all times thereafter...... U.S.$60.0 million;
(7) Indebtedness of any Subsidiary of AHMSA owing to AHMSA or any other
Restricted Subsidiary of AHMSA, and any Indebtedness of AHMSA owing to
any of its Restricted Subsidiaries provided that repayment of any such
Indebtedness owed by AHMSA is fully subordinated to payment of the New
Notes;
(8) Indebtedness that is a Contingent Obligation with respect to
Indebtedness permitted pursuant to the provisions of the definition of
"Permitted Indebtedness" (except to the extent that any such provision
expressly contemplates that the Indebtedness permitted thereby not be
guaranteed); and
(9) Indebtedness, in an aggregate principal amount not to exceed U.S.$10.0
million at any one time outstanding, incurred on behalf of employees of
AHMSA and its Subsidiaries for employee housing constructed pursuant to
the terms of the AHMSA's and its Subsidiaries' collective bargaining
agreements.
Limitation on Restricted Payments
AHMSA shall not, and shall not permit any of its Restricted Subsidiaries to,
make, directly or indirectly, any Restricted Payment unless:
(A) no Default or Event of Default has occurred and is continuing at the
time of, or after giving effect to, such Restricted Payment;
(B) immediately after giving effect to such Restricted Payment, AHMSA would
be able to incur at least U.S.$1.00 of Indebtedness (other than
Permitted Indebtedness) pursuant to the proviso to "--Limitation on
Incurrence of Indebtedness"; and
(C) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (excluding Restricted
Payments pursuant to clauses (2), (5), (6), (7), (8), (10), (11) and
(12) below) declared or made after the closing date of the restructuring
plan would not exceed an amount equal to the sum of (1) 50% of the
Consolidated Net Income (or, in the event such aggregate Consolidated
Net Income is a loss, minus 100% of such loss) of AHMSA and its
Restricted Subsidiaries accrued on a cumulative basis during the period
(treated as a single accounting period) commencing on the first day of
the quarter after the quarter in which the New Notes are issued and
ending on the last day of AHMSA's fiscal quarter immediately preceding
the date of such proposed Restricted Payment for which financial
statements are available, plus (2) 100% of the aggregate Net Cash
Payments received by AHMSA on or after the closing date of the
restructuring plan that constitute Equity Proceeds of AHMSA, plus (3) to
the extent not otherwise included in Consolidated Net Income of AHMSA
and its Restricted Subsidiaries, an amount equal to the net reduction in
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Investments in any person or entity made by AHMSA on or after the
closing date of the restructuring plan resulting from the payment in
cash or in property of distributions accounted for as returns of
capital, repayment of loans or advances or other transfers of assets, in
each case to AHMSA or any of its Restricted Subsidiaries from such
person or entity.
For purposes of determining the amount expended for Restricted Payments,
cash distributed will be valued at the face amount thereof and property other
than cash will be valued at its Fair Market Value.
So long as no Event of Default has occurred or is continuing, the New
Indenture does not preclude:
(1) repurchases by less than wholly-owned Restricted Subsidiaries of their
equity interests held by persons or entities other than the AHMSA and
its Affiliates;
(2) Restricted Payments to AHMSA or any Subsidiary Guarantor;
(3) at any time after December 31, 2004, AHMSA from declaring and making
dividend payments in cash in respect of its Capital Stock, to the extent
consistent with Applicable Law and Mexican GAAP, and subject to the
satisfaction of each of the following conditions on the date of such
dividend payment and after giving effect thereto:
(A) no Default shall have occurred and be continuing,
(B) the aggregate amount of such dividend payments made during the period
commencing on January 1, 2005 and ending on the date of such dividend
payment shall not exceed an amount equal to 30% of the cumulative
Excess Cash Flow for the period commencing on January 1, 2004 and
ending on the last day of the fiscal year most recently ended prior
to the date of such dividend payment, and
(C) AHMSA shall have delivered to the Indenture Trustee, at least ten
business days prior to the date of such proposed Restricted Payment,
a certificate of Arthur Andersen or other internationally recognized
independent public accountants setting forth computations in
reasonable detail demonstrating satisfaction of the conditions set
forth in paragraph (B) above as of the date of such certificate;
(4) AHMSA from making payments in respect of management fees, guarantee fees
or similar fees to an Affiliate of AHMSA in an aggregate amount, in any
fiscal quarter, not to exceed the Maximum Guarantee Fee Amount for such
fiscal quarter, subject to the satisfaction of the following conditions
on the date of such payment and after giving effect thereto:
(A) no Default of the type described in "--Events of Default (1), (2) or
(3)" shall have occurred and be continuing,
(B) no Default (other than a Default of the type described in "--Events
of Default (1), (2) or (3)") shall have occurred and be continuing
for more than 90 consecutive days,
(C) the maximum amount of the Guarantee Fees that may be paid in any
fiscal quarter to any person or entity other than GAN (and creditors
of GAN in payment of Indebtedness owed by GAN to such creditors)
shall not exceed the sum of (x) the aggregate amount of Guarantee
Fees paid in such fiscal quarter minus (y) the GAN Amount for such
fiscal quarter,
(D) AHMSA shall not have made an election to pay Converted Interest as
described in "--General" with respect to the Payment Date occurring
in the fiscal quarter with respect to which such Guarantee Fee is
paid, and
(E) AHMSA shall have delivered to the Indenture Trustee, at least ten
business days prior to the date of such proposed Guarantee Fee, a
certificate of Arthur Andersen or other internationally-recognized
independent public accountants setting forth computations in
reasonable detail demonstrating satisfaction of the foregoing
conditions as of the date of such certificate;
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provided that any such payment to be made in any fiscal quarter that was
not made in such fiscal quarter because one or more of the foregoing
conditions was not satisfied may be made subsequent to such fiscal
quarter so long as, both prior to making such payment and after giving
effect thereto, each of such conditions is satisfied;
(5) AHMSA from exercising its option under the Stock Option Agreement;
(6) AHMSA from performing its obligations under the Company Agreement and
the Registration Rights Agreement;
(7) Investments by AHMSA in its Restricted Subsidiaries (or in an entity
that following such Investments will become a Restricted Subsidiary)
consisting of Indebtedness, Investments by Restricted Subsidiaries of
AHMSA in other Restricted Subsidiaries of AHMSA (or in an entity that
following such Investments will become a Restricted Subsidiary)
consisting of Indebtedness, and Investments by Restricted Subsidiaries
of AHMSA in AHMSA consisting of Indebtedness, provided that such
Indebtedness shall be subordinated to the prior payment in full of the
obligations of AHMSA and Restricted Subsidiaries under the New Indenture;
(8) any Restricted Payment by any Restricted Subsidiary to the holders of
its equity interests on a pro rata basis;
(9) Investments received by AHMSA or any Restricted Subsidiary on an arm's
length basis in connection with Dispositions permitted by "--Limitation
on Certain Dispositions";
(10) other Restricted Payments in an aggregate amount not to exceed U.S.$5.0
million;
(11) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration the payment of such dividend
would have been permitted (for purposes of the calculation required by
subparagraph (C) of the first paragraph under "--Limitation on
Restricted Payments," such payment shall be deemed to have been paid on
such date of declaration);
(12) payments or distributions to persons or entities that are not Affiliates
of AHMSA or any of its Subsidiaries in the nature of satisfaction of
dissenters' rights pursuant to or in connection with a consolidation,
merger or transfer that complies with the provisions of the New
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of AHMSA;
(13) Investments made by AHMSA or any of its Consolidated Subsidiaries (a) in
any joint venture or partnership or other person or entity primarily
engaged in a Permitted Line of Business, and (b) of any kind up to
U.S.$5.0 million, provided that the total amount of Investments (other
than Permitted Investments) made by AHMSA or any of its Consolidated
Subsidiaries under this clause (13) does not exceed U.S.$15.0 million at
any one time outstanding.
Limitation on Liens
AHMSA will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of
any kind, except for Permitted Liens, on or with respect to any property or
assets of AHMSA or any of its Restricted Subsidiaries (including Capital Stock
of any Subsidiary of AHMSA held by AHMSA or any Subsidiary of AHMSA), whether
owned at the date of the New Indenture or thereafter acquired, or any income,
profits or proceeds therefrom, or assign or otherwise convey any right to
receive income thereon. In addition, AHMSA will not, and will not permit any of
its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any
of the German Contract Receivables, except for Liens securing the Tranche SEN
Loans and other Restructured Debt and interest thereon.
As used in the New Indenture, "Permitted Liens" means the following types of
Liens:
(1) Liens securing the New Notes and the New Loans;
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(2) Liens upon real and/or tangible personal Property acquired after the
date of the New Indenture (by purchase, construction or otherwise) by
AHMSA or any of its Subsidiaries, each of which Liens was created solely
for the purpose of securing Indebtedness permitted by clause (2)(D) of
the definition of "Permitted Indebtedness" representing, or incurred to
finance, refinance or refund the cost (including the cost of
construction) of such Property; provided that (i) no such Lien shall
extend to or cover any Property of AHMSA or such Subsidiary other than
the Property so acquired and improvements thereon and (ii) the principal
amount of Indebtedness secured by any such Lien shall at no time exceed
the fair market value (as determined in good faith by the chief
financial officer of AHMSA or a majority of the members of the Board of
Directors of AHMSA) of such Property at the time it was acquired (by
purchase, construction or otherwise);
(3) Liens on accounts receivable in an aggregate principal amount not to
exceed U.S.$300.0 million at any one time outstanding securing
Indebtedness incurred pursuant to clauses 2(A) consisting of working
capital credit facilities, (3) and (4) of the definition of "Permitted
Indebtedness";
(4) Liens securing Indebtedness incurred pursuant to clause (9) of the
definition of "Permitted Indebtedness", but only so long as such Liens
cover the employee housing financed by such Indebtedness;
(5) Liens securing Indebtedness incurred pursuant to the following clauses
of the definition of Permitted Indebtedness:
(A) clauses (1)(C), (1)(E), (1)(F), and (1)(I) but only to the extent
existing on the closing date of the restructuring plan;
(B) clauses (2)(B) and (2)(C), but only to the extent that such Lien
covers the Property acquired with the proceeds of such Indebtedness;
(C) clause (2)(E), but only to the extent that such Lien existed prior to
the acquisition of the Property (and was not created in contemplation
or anticipation of such acquisition) referred to in such clause;
(D) Clause (3), but only so long as (i) in the case of subclause (A) or
(B) of such clause (3), such Lien is either (x) created under the
Collateral Documents, or (y) covers solely cash and cash equivalents
in an aggregate principal amount not to exceed [U.S.$20.0 million]
(and provided that the principal amount thereof that secures
obligations owed to persons or entities other than Petroleos
Mexicanos does not exceed U.S.$5.0 million) and (ii) in the case of
subclause (C) of such clause (3), such Lien covers solely cash or
cash equivalents and the value of such cash or cash equivalents does
not exceed 110% of the face amount of the letters of credit secured
thereby;
(E) clause (5), but only to the extent that (1) such Lien would have been
permitted to secure the Indebtedness being refinanced by the
Indebtedness referred to in such clause, and (2) if the Indebtedness
being refinancing is Restructured Debt, such Lien is junior and
subordinate to the Restructured Debt;
(6) Liens for taxes, assessments or other governmental charges or levies not
at the time delinquent or thereafter payable without penalty or being
diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with Mexican GAAP shall have been
set aside on its books;
(7) Liens existing on the date of the New Indenture;
(8) any minor imperfection of the title with respect to any Property which
does not materially adversely affect the value of such Property or
materially interfere with the present use and the continuation of such
present use of such Property;
(9) The following: (a) Liens incurred in the ordinary course of business in
favor of Governmental Authorities in connection with social security
obligations, unemployment insurance or other forms of
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governmental insurance or benefits, (b) Liens securing the performance
of tenders, statutory obligations, leases and contracts (other than for
borrowed money), including the designation of loss payees or
beneficiaries or similar arrangements under insurance contracts in
respect to tangible Property in favor of holders of Indebtedness (but
only to the extent such Indebtedness is permitted to be secured by such
tangible Property as described in "--Limitations on Liens") entered into
in the ordinary course of business, and (c) Liens securing obligations
on surety or appeal bonds;
(10) Liens customarily granted or incurred in the ordinary course of business
with regard to services rendered by carriers, warehouses, suppliers of
materials and equipment, mechanics and repairmen and other similar Liens
imposed by Applicable Law;
(11) Liens arising out of attachments, judgments or awards either (x)
relating to Indebtedness permitted by clauses (1)(D) or (1)(I) of the
definition of "Permitted Indebtedness" or (y) as to which an appeal or
other appropriate proceedings for contest or review are timely commenced
(and as to which foreclosure and other enforcement proceedings shall not
have been commenced (unless fully bonded or otherwise effectively
stayed)), and as to which appropriate reserves have been established in
accordance with Mexican GAAP to the extent any such reserves are
required by Mexican GAAP;
(12) Liens arising by virtue of any statutory or common law provision
relating to banker's liens, rights of set off or similar rights with
respect to deposit accounts;
(13) Liens incurred in the ordinary course of business with respect to
obligations that do not exceed U.S.$10.0 million at any one time
outstanding and that are not incurred in connection with Indebtedness or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(14) Rights of first refusal, options or other contractual rights to sell,
assign or otherwise dispose of any Property or interest therein, which
right of first refusal, option or contractual right is in connection
with a Disposition permitted as described in "--Limitation on Certain
Dispositions."
Limitation On Certain Dispositions
AHMSA will not, and will not permit any of its Restricted Subsidiaries to,
sell, transfer, lease, contribute or otherwise convey (including leaseback
transactions, sale or discounts of accounts receivable and Capital Stock of
AHMSA or any of its Subsidiaries), all or any material part of its Property to
any person or entity (in each case, a "Disposition"), or grant an option or
enter into a contract for a Disposition, except for:
(1) Dispositions of inventory in the ordinary course of its business;
(2) Dispositions of Subject Assets for a consideration consisting solely of
cash (provided that, in connection with any such Disposition, AHMSA and
its Subsidiaries may enter into sale lease-back arrangements, supply
agreements and similar or related agreements), subject to the condition
that AHMSA shall have delivered to the Indenture Trustee, at least five
business days prior to the date of such proposed Disposition of Subject
Assets, a certificate of Arthur Andersen or other internationally
recognized independent public accountants setting forth computations in
reasonable detail demonstrating that the proposed decrease in EBITDA as
a result of such Disposition (together with all prior Dispositions of
Subject Assets) will not be greater than U.S.$20.0 million per year;
(3) Dispositions of worn-out, obsolete or not-in-service assets;
(4) Dispositions of real property not used for mining purposes or not
forming part of AHMSA's production facilities in Monclova, so long as at
least 75% of the consideration therefor consists of cash, and any
balance consists of Indebtedness payable within one year after the date
of such Disposition;
(5) A sale of MICARE for a consideration consisting solely of cash and
assumption of Assumed MICARE Debt, so long as (A) the Gross MICARE Sale
Proceeds resulting therefrom are at least equal to U.S.$300.0 million
and (B) AHMSA gives the Indenture Trustee at least five business days
prior notice
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of such sale (which notice shall specify the amount of Gross MICARE Sale
Proceeds then expected to result from such sale);
(6) Dispositions among AHMSA and the Subsidiary Guarantors or Dispositions
by any Subsidiary of AHMSA to AHMSA or any Subsidiary Guarantor;
(7) Other Dispositions at fair market value so long as the Other Asset Sale
Proceeds, if any, therefrom are applied as required under "--Mandatory
Redemption Upon Occurrence of Certain Events--Other Asset Sale Proceeds";
(8) Dispositions expressly permitted in the definition of "Permitted Liens";
and
(9) Sales of accounts receivables, so long as the aggregate face amount of
all accounts receivable that have been sold and not yet paid by the
respective account debtor [or less than [ ] days past due] shall not
exceed U.S.$50.0 million at any one time;
provided that in no event will AHMSA or any of its Subsidiaries effect
any Disposition of any of the German Contract Receivables (other than to
the extent permitted by the Collateral Documents). Upon any Disposition
permitted by this "--Limitation On Certain Dispositions" (other than
subparagraph (6) above), the Lien on the Collateral securing the New
Notes shall be released.
Limitation on Transactions with Affiliates
AHMSA will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, in one transaction or any series of related
transactions, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase or lease any property or assets from
(including any sale and leaseback transactions), or enter into any contract,
agreement (including any sales or discounts of receivables agreements),
understanding, loan, advance or guarantee with, or make any payment, loan,
advance or capital contribution to, or for the benefit of, an Affiliate of
AHMSA other than AHMSA and its Restricted Subsidiaries (such transaction or
series of transactions, an "Affiliate Transaction") unless (a) such Affiliate
Transaction is on terms that are no less favorable to AHMSA or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
arm's-length transaction with an unaffiliated person or entity, (b) with
respect to an Affiliate Transaction involving aggregate consideration greater
than U.S.$2.0 million, such Affiliate Transaction is approved by a majority of
the board of directors, including a majority of the disinterested directors,
and evidenced by a board resolution delivered to the Indenture Trustee, and (c)
with respect to an Affiliate Transaction involving aggregate consideration
greater than U.S.$15.0 million, an opinion as to the fairness (from a financial
point of view) of such Affiliate Transaction to AHMSA or such Restricted
Subsidiary, as the case may be, is issued to AHMSA by an independent investment
banking firm of international standing or an independent consulting,
engineering or accounting firm internationally recognized as an expert with
experience in evaluating or appraising the terms and conditions of transactions
similar to the Affiliate Transaction for which such opinion is required.
Notwithstanding the foregoing, Affiliate Transactions shall not include:
(1) the payment of the Guarantee Fee;
(2) the reimbursement of reasonable expenses of each non-employee member of
the Board of Directors of AHMSA in connection with his duties as a
member of the Board of Directors, and the payment of annual director's
fees of U.S.$40,000 to each such non-employee voting member of the Board
of Directors provided that no such payment will be made to an alternate
director, statutory auditors and non-voting members of the Board of
Directors;
(3) the following transactions: (A) the purchase of magnetite supply from
Compania Minera el Baztan, S.A. de C.V. pursuant to , (B)
compensation arrangements with officers in the ordinary course of
business consistent with industry practice approved by the Board of
Directors including a majority of the Trust Directors, (C) the
Registration Rights Agreement, the Stock Option Agreement,
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the Company Agreement and other transactions with the Voting Trust
approved by a majority of the Board of Directors of AHMSA, (D) dividend
payments or other distributions in respect of AHMSA's Capital Stock paid
pro rata to the holders thereof and in accordance with the terms of the
New Indenture, (E) the execution, delivery, performance, payment and
prepayment of the Exchange Agreements and the Subordinated Converted
Interest Notes, (F) the Banamex Transaction, and (G) so long as no
Default has occurred and is continuing, the reimbursement of
professional fees incurred by GAN (to the extent payable by GAN to
persons or entities that are not Affiliates of AHMSA or of GAN), in the
ordinary course of business, not to exceed U.S.$800,000 in any fiscal
year;
(4) other transactions so long as the aggregate consideration or other
payments to be made with respect to all such transactions in any fiscal
year does not exceed U.S. $5.0 million; and
(5) the Transaction Documents;
provided that each such arrangement or contract is on an arm-length basis and
on terms no more favorable to such Affiliate than would be the case for similar
arrangements between unaffiliated persons or entities.
Maintenance of Office or Agency
AHMSA will maintain in the borough of Manhattan, the City of New York, New
York an office or agency where New Notes may be surrendered for registration of
transfer, exchange or repurchase and where notices and demands to or upon AHMSA
in respect of the New Notes and the New Indenture may be served.
Existence
Subject to the provisions described under "--Merger, Consolidations and
Certain Sales and Purchases of Assets" below, AHMSA will, and will cause each
Material Subsidiary of AHMSA to, do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights (charter and
statutory) and franchises; provided, however, that AHMSA or any Material
Subsidiary will not be required to preserve the existence of any Material
Subsidiary or any such right or franchise if in the judgment of AHMSA the
preservation thereof is no longer desirable in the conduct of the business of
AHMSA or such Material Subsidiary, as the case may be, and the loss thereof is
not disadvantageous in any material respect to the holders of the New Notes.
Maintenance of Properties
AHMSA will cause all properties used or useful in the conduct of its
business or the business of any Subsidiary of AHMSA to be maintained and kept
in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
AHMSA may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; provided, however,
that nothing in this paragraph will prevent AHMSA from discontinuing the
operation or maintenance of any of such properties if such discontinuance is,
in the judgment of AHMSA, desirable in the conduct of its business or the
business of any Subsidiary and not disadvantageous in any material respect to
the holders of the New Notes.
Payment of Taxes and Other Claims
AHMSA will pay or discharge or cause to be paid or discharged, (a) before
the same becomes delinquent, all material taxes, assessments and governmental
charges imposed it or upon its property except to the extent being diligently
contested in good faith by appropriate proceedings and for which adequate
reserves in accordance with Mexican GAAP shall have been set aside on its
books, and (b) all lawful claims for labor, materials and supplies, which are
for at least U.S.$1.0 million and remain unpaid for at least 60 days after the
due
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date therefor and which, if unpaid, might by law become a lien upon the
property of AHMSA or any Subsidiary; except to the extent such claim is being
contested in good faith by appropriate proceedings for which adequate reserves
in accordance with Mexican GAAP shall have been set aside on its books.
Maintenance of Insurance
AHMSA will, and will cause each of its Material Subsidiaries to, keep at all
times all of their properties which are of an insurable nature insured against
loss or damage with insurers believed by AHMSA to be responsible to the extent
that property of similar character is usually so insured by Mexican
corporations similarly situated and owning like properties in accordance with
good business practice.
Maintenance of Books and Records
AHMSA will, and will cause each of its Subsidiaries to, maintain books,
accounts and records in accordance with Mexican GAAP.
Upstreaming of MICARE Cash Flow
(a) By no later than five days prior to each Payment Date, AHMSA will cause
MICARE to make a payment to AHMSA in respect of Indebtedness owed by
MICARE to AHMSA in an amount equal to the principal of and interest on
the MICARE Loans due on such Payment Date.
(b) By no later than five days prior to each day on which AHMSA is obligated
to make a mandatory prepayment of New Subordinated Notes arising out of
a sale of MICARE, AHMSA will cause MICARE to make a payment to AHMSA in
respect of Indebtedness owed by MICARE to AHMSA in an amount equal to
such mandatory prepayment to the extent that MICARE receives Gross
MICARE Sale Proceeds.
(c) By no later than five days prior to each day on which AHMSA is obligated
to make a mandatory prepayment of New Subordinated Notes arising out of
MICARE Operating Cash Flow exceeding Projected Micare Cash Flow From
Operations, in respect of any fiscal year, AHMSA will cause MICARE to
make a payment to AHMSA in respect of Indebtedness owed by MICARE to
AHMSA in an amount equal to (x) the amount of such mandatory prepayment,
minus (y) the aggregate amount of payments made to AHMSA by MICARE
pursuant to clause (d) below in respect of such fiscal year.
(d) By no later than the date fifteen Business Days after the last day of
each fiscal quarter, AHMSA will cause MICARE to make a payment in
respect of Indebtedness owed by MICARE to AHMSA in an amount equal to
the excess (if any) of (x) the aggregate amount of cash on hand and in
bank accounts, and the aggregate amount of all Cash Equivalent
Investments, held by MICARE and its Subsidiaries on the last day of such
fiscal quarter, over (y) U.S.$5.0 million.
----
Defense of Voting Trust. AHMSA will:
(a) at all times uphold, protect and defend the AHMSA Creditor Voting Trust
from and against any claim in any litigation or other legal proceedings
to which AHMSA or any of its Subsidiaries is a party challenging the
validity of any vote of the Voting Trust Trustee as being the vote of
all shares held in the AHMSA Creditor Voting Trust asserted to have been
voted by the Voting Trust Trustee; provided that this paragraph will not
obligate AHMSA to seek to overturn any applicable law; and
(b) cooperate in all reasonable respects with the Collateral Agent and the
Voting Trust Trustee (and their counsel) in connection with any claim in
any litigation or other legal proceeding challenging the validity or
existence of the AHMSA Creditor Voting Trust, or the validity of any
vote of the Voting Trust Trustee as being the vote of all shares held in
the AHMSA Creditor Voting Trust; provided that this paragraph shall not
obligate AHMSA to seek to overturn any applicable law.
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Further Assurances
AHMSA will, and will cause each of its Significant Subsidiaries to, at its
and their own cost and expense, execute and deliver to the Indenture Trustee
all such other documents, instruments and agreements and do all such other acts
and things as may be reasonably required in the opinion of the Indenture
Trustee, to enable the Indenture Trustee to exercise and enforce its rights
under the New Indenture and under the documents, instruments and agreements
required under the New Indenture and to carry out the intent of the New
Indenture.
Provision of Financial Statements and Reports
AHMSA will furnish, or will cause to be furnished, to the Indenture Trustee
copies of the annual reports, interim reports and other documents which AHMSA
files with or furnishes to (a) the Securities and Exchange Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, or would have been required to file with or furnish to the Commission
pursuant to such Section 13(a) or 15(d) or any successor provisions thereto if
AHMSA were required to be subject to such Sections, or (b) the Mexican Comision
Nacional Bancaria y de Valores, the Mexican Bolsa Mexicana de Valores or any
other national securities exchange on which AHMSA's securities are traded, in
each case, within 15 days of the respective dates on which AHMSA is required to
(or would have been required to) file such documents.
Together with the annual audited financial reports to be delivered pursuant
to the above paragraph, for any fiscal year, an Excess Cash Flow Certificate
for such fiscal year, signed by the chief financial officer of AHMSA and by
Arthur Andersen or other internationally recognized independent public
accountants (to the extent that such accountants are willing to provide that
type of certificate and report), showing (in reasonable detail), the amount of
Excess Cash Flow for such fiscal year.
Merger, Consolidations and Certain Sales and Purchases of Assets
AHMSA may not, in a single transaction or a series of related transactions,
consolidate with or merge into any other person or entity or permit any other
person or entity to consolidate with or merge into AHMSA, or directly or
indirectly dispose of all or substantially all of its properties and assets as
an entirety, unless (a) in case AHMSA shall consolidate with or merge into
another person or entity or transfer, convey, sell, lease or otherwise dispose
of all or substantially all of its properties and assets to any person or
entity, the person or entity formed by such consolidation or into which AHMSA
is merged or the person or entity which acquires by conveyance or transfer, or
which leases, all or substantially all of the properties and assets of AHMSA
shall be a corporation, partnership or trust, shall be organized and validly
existing under the laws of the United States, any State thereof or the District
of Columbia or Mexico or any State thereof and shall expressly assume, by an
indenture supplemental to the New Indenture, executed and delivered to the
Indenture Trustee, in form reasonably satisfactory to the Indenture Trustee,
the due and punctual payment of the principal of and any premium and interest
on the New Notes and the performance or observance of every covenant of the New
Indenture and New Notes on the part of AHMSA to be performed or observed; (b)
immediately before and after giving effect to such transaction or transactions,
no Default or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or transactions on a
pro forma basis (assuming that the transaction or transactions occurred on the
first day of the four-quarter period immediately prior to the consummation of
such transaction or transactions) with the appropriate adjustments with respect
to the transaction or transactions being included in such pro forma
calculation, AHMSA could incur at least U.S.$1.00 of additional Indebtedness
(other than Permitted Indebtedness) under "--Limitation on Incurrence of
Indebtedness"; (d) AHMSA or the successor entity to AHMSA shall expressly agree
to indemnify each holder of a New Note (or holder of a beneficial interest
therein) against any tax, levy, assessment or governmental charge payable by
withholding or deduction thereafter imposed on such holder solely as a
consequence of such transaction with respect to payments in respect of' the New
Notes or any purchase thereof by AHMSA; and (e) AHMSA shall have delivered to
the Indenture Trustee an officers' certificate and an opinion of counsel (as to
matters of law), each stating that such consolidation, merger, conveyance,
transfer, or lease and, if a
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supplemental indenture is required in connection with such transaction, such
supplemental indenture, complies with the provisions of the New Indenture and
that all of the conditions precedent provided for relating to such transaction
have been complied with.
Events of Default
The following "Events of Default" under the New Indenture will apply
separately to New Notes of each series:
(1) default in the payment when due of any interest on any New Note of that
series or any other amount, other than amounts covered by clauses (2) or
(3) below, payable under the New Indenture or the New Notes to that
series, and continuance of such default for a period of 15 days; or
(2) default in the payment when due of any principal of any New Note of that
series; or
(3) default in the payment of the redemption price or repurchase price of
any New Note of that series when it becomes due and payable upon
redemption or repurchase of the New Notes of that series; or
(4) default in the performance, or breach, of any covenant or warranty of
AHMSA in the New Indenture (other than a covenant or warranty a default
in whose performance or whose breach is elsewhere in "--Events of
Default" specifically dealt with or which has expressly been included in
the New Indenture solely for the benefit of a series of New Notes other
than that series), and continuance of such default or breach for a
period of 30 days after there has been given, by registered or certified
mail, to AHMSA by the Indenture Trustee or to AHMSA and the Indenture
Trustee by the holders of at least 25% in aggregate principal amount of
the outstanding New Notes of that series a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the New Indenture; or
(5) default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by AHMSA or any Restricted Subsidiary
(other than Base Debt that was not restructured pursuant to the
Restructuring Agreement) in an amount equal to or exceeding U.S.$30.0
million (or the equivalent thereof in other currency or currency units)
or under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness
for money borrowed by AHMSA or any Restricted Subsidiary in an amount
equal to or exceeding U.S.$30.0 million (or the equivalent thereof in
other currency or currency units), whether such indebtedness now exists
or shall hereafter be created, which default shall constitute a failure
to pay any portion of the principal (or any premium relating thereto)
of, or any interest or additional amounts on, such indebtedness when due
and payable after the expiration of any applicable grace period with
respect thereto, without such indebtedness having been discharged within
a period of 15 days after there shall have been given, by registered or
certified mail, to AHMSA by the Indenture Trustee or to AHMSA and the
Indenture Trustee by the holders of at least 25% in principal amount of
the outstanding New Notes of that series a written notice specifying
such default and requiring AHMSA to cause such indebtedness to be
discharged and stating that such notice is a "Notice of Default"; or
(6) default (other than a default specified in clause (5) above) under the
terms of any bond, debenture, note or other evidence of indebtedness for
money borrowed by AHMSA or any Restricted Subsidiary or under any
mortgage, indenture or instrument under which there may be issued,
secured or evidenced any indebtedness for borrowed money of AHMSA or any
Restricted Subsidiary, whether such indebtedness now exists or shall
hereafter be created (other than Base Debt that was not restructured
pursuant to the Restructuring Agreement), which default shall have
resulted in any such indebtedness of AHMSA or any Restricted Subsidiary
having an outstanding principal amount equal to or in excess of
U.S.$30.0 million (or the equivalent thereof in other currency or
currency units) becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, without
such acceleration having been rescinded or annulled within a period of
15 days after there shall have been given, by registered or certified
mail, to AHMSA by the Indenture Trustee or to AHMSA
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and the Indenture Trustee by the holders of at least 25% in principal
amount of the outstanding New Notes of that series a written notice
specifying such default and requiring AHMSA to cause such acceleration
to be rescinded or annulled and stating that such notice is a "Notice of
Default"; or
(7) AHMSA or any of its Restricted Subsidiaries shall:
(i) become insolvent or generally fail to pay, or admit in writing its
inability or unwillingness to pay, debts as they become due;
(ii) apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator, sindico, interventor or other custodian for
AHMSA or any of its Restricted Subsidiaries or any property of any
thereof, or make a general assignment for the benefit of creditors;
(iii) in the absence of such application, consent or acquiescence, permit or
suffer to exist the appointment of a trustee, receiver, sequestrator,
sindico, interventor or other custodian for AHMSA or any of its
Restricted Subsidiaries or for a substantial part of the property of
any thereof, and such trustee, receiver, sequestrator, sindico,
interventor or other custodian shall not be discharged within 150
days;
(iv) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law, including the Mexican Ley de
Concursos Mercantiles or any dissolution, winding up or liquidation
proceeding, in respect of AHMSA or any of its Restricted Subsidiaries
and, if any such case or proceeding is not commenced by AHMSA or such
Restricted Subsidiary, such case or proceeding shall be consented to
or acquiesced in by AHMSA or such Restricted Subsidiary or shall
result in the entry of an order for relief or shall remain for 150
days undismissed; or
(8) all or a substantial part of the property and assets or shares of AHMSA
and its Subsidiaries taken as a whole, or of any Material Subsidiary and
its Subsidiaries taken as a whole, are nationalized or expropriated by
any governmental authority; or
(9) the rendering of a final judgment or judgments (not subject to appeal by
a court or courts of competent jurisdiction or with respect to which the
right to appeal has expired) against AHMSA or any Restricted Subsidiary
in an amount in excess of U.S.$10.0 million (or the equivalent thereof
in other currency or currency units) which remains undischarged or
unstayed for a period of 60 days after the date on which the right to
appeal has expired (other than (x) a judgment as to which, and only to
the extent, a reputable insurance company has acknowledged coverage of
such claim in writing or (y) a judgment relating to Base Debt that has
not been restructured pursuant to the Restructuring Agreement or
relating to any of the Indebtedness described in clause (1)(D) of the
definition of "Permitted Indebtedness" or (z) a judgment which reduces
the amount of outstanding Base Debt that has not been restructured
pursuant to the Restructuring Agreement); or
(10) or any license, permit or other authorization material to the conduct of
the business of AHMSA and its Subsidiaries taken as a whole is revoked,
and such revocation has not been stayed, vacated or suspended within a
period of 60 days (or, if stayed or suspended, thereafter ceases to be
stayed or suspended); or
(11) it has become unlawful for AHMSA to perform or comply with its
obligations under the New Indenture or the New Notes of that series; or
(12) the occurrence of any of the following: (A) any Transaction Document
shall, in whole or in part, terminate, cease to be effective or cease to
be the legally valid, binding and enforceable obligation of any party
thereto except (i) in accordance with its terms, and (ii) to the extent
that any Transaction Documents to which the Voting Trust or the Voting
Trust Trustee is a party terminates, is not effective, or is not legally
valid, binding or enforceable as a result of a determination that the
Voting Trust is an unregistered investment company under the U.S.
Investment Company Act of 1940; (B) any of the direct or indirect
beneficial controlling shareholders of GAN as of the closing date of the
restructuring
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plan, GAN (but only for so long as the current direct or indirect
controlling shareholders of GAN continue to control GAN) AHMSA or any
Subsidiary of AHMSA shall, directly or indirectly, contest in any manner
the effectiveness, validity, binding nature or enforceability of any
transaction document; or (C) any Lien securing any New Note shall, in
whole or in part, cease to be a perfected first priority Lien, subject
only to those exceptions expressly permitted by the Transaction Document
pursuant to which such Lien was intended to be created, provided, that
no such defect pursuant to clause (C) above with respect to a Lien
granted or purported to be granted by any of the Transaction Documents
shall give rise to an Event of Default under this clause (12) unless
such defect shall affect Collateral that is or should be subject to a
Lien in favor of the Collateral Agent having an aggregate value in
excess of U.S.$ o .
The New Indenture provides that if an Event of Default (other than an Event
of Default arising from certain events of bankruptcy, insolvency, receivership
or reorganization) shall occur and be continuing with respect to any series of
New Notes, the Indenture Trustee or the holders of at least 25% of the
outstanding aggregate principal amount of the New Notes of such series may
declare to be due and payable immediately the sum of (a) the outstanding
principal amount of and any premium on the New Notes of such series, (b) the
accrued and unpaid interest thereon to the date of such declaration and (c) any
Additional Amounts which would otherwise be payable with respect thereto. If
any Event of Default arising from certain events of bankruptcy, insolvency,
receivership or reorganization occurs, all outstanding New Notes will ipso
facto become immediately due and payable without any declaration or other act
on the part of the Indenture Trustee or any holder of New Notes.
The New Indenture contains a provision entitling the Indenture Trustee,
subject to the duty of the Indenture Trustee to act with the required standard
of care during default, to be indemnified by the holders of the New Notes of
any series before proceeding to exercise any right or power under the New
Indenture at the request of holders of such series. The New Indenture provides
that the holders of a majority in outstanding aggregate principal amount of any
series of New Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee with respect
to the New Notes of such series, provided that such direction does not conflict
with any rule of law or with the New Indenture, and provided that the Indenture
Trustee may take any other action deemed proper by the Indenture Trustee which
is not inconsistent with such direction.
Governing Law and Submission to Jurisdiction
The New Indenture and the New Notes will be governed by the laws of the
State of New York (not including the State of New York's conflict of law
provisions other than Section 5-1401 of the New York General Obligations Law).
Each of the parties to the New Indenture will submit to the jurisdiction of
Federal and State courts located in the Borough of Manhattan, City and State of
New York and each party will submit to the jurisdiction of the courts of its
own corporate domicile (domicilio social), for purposes of all legal actions
and proceedings instituted in connection with the New Notes and the New
Indenture. AHMSA has appointed CT Corp., as its agent for service of process
upon which process may be served in any such action.
Currency Indemnity
U.S. dollars are the sole currency of account and payment for all sums
payable by AHMSA under or in connection with the New Notes, including damages,
and AHMSA is not entitled to make any payments with respect to the New Notes in
any currency other than U.S. dollars. Any amount received or recovered in a
currency other than U.S. dollars (whether as a result of, or of the enforcement
of, a judgment or order of a court of any jurisdiction, in the winding-up or
dissolution of AHMSA or otherwise) by any holder of a New Note in respect of
any sum expressed to be due to it from AHMSA shall only constitute a discharge
to AHMSA to the extent of the U.S. dollar amount which the recipient is able to
purchase with the amount so received or recovered in that other currency on the
date of that receipt or recovery (or, if it is not practicable to make that
purchase on that date, on the first date on which it is practicable to do so).
If that U.S. dollar amount is less than the U.S.
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dollar amount expressed to be due to the recipient under any New Note, AHMSA
will indemnify it against any loss sustained by it as a result. In any event,
AHMSA will indemnify the recipient against the cost of making any such
purchase. For the purposes of this paragraph, it will be sufficient for the
holder of a New Note to certify in a satisfactory manner (indicating the
sources of information used) that it would have suffered a loss had an actual
purchase of U.S. dollars been made with the amount so received in that other
currency on the date of receipt or recovery (or, if a purchase of U.S. dollars
on such date had not been practicable, on the first date on which it would have
been practicable, it being required that the need for a change of date be
certified in the manner mentioned above). These indemnities constitute a
separate and independent obligation from AHMSA's other obligations, will give
rise to a separate and independent cause of action, will apply irrespective of
any indulgence granted by any holder of a New Note and will continue in full
force and effect despite any other judgment, order, claim or proof for a
liquidated amount in respect of any sum due under any New Note. See "Risk
Factors--Exchange Rates."
Security
The payment of the principal, premium and interest on the New Notes when it
is due and payable, whether on a Payment Date, at maturity, by acceleration,
repurchase, redemption or otherwise, interest on the overdue principal of and
interest (to the extent permitted by law), if any, on the New Notes and
performance of all other obligations of AHMSA to the holders of the New Notes
and the Indenture Trustee, will be secured as provided in the Mortgage and the
other Mexican security documents, the Intercreditor Agreement, the Supplemental
Trust Agreement, the Subsidiary Pledge Agreement, the U.S. Security Agreement,
and the other collateral documents. The security under the New Indenture will
be ratable to that granted under the New Credit Agreement, except that
. the Tranche SEN Loans will have a first priority claim to the German
Contract Receivables;
. the Trance MICARE Loans will have a first priority claim to the equity in
and the assets of MICARE;
. the New Class B Loans and the New Series B Notes will have a first
priority claim to the Subject Assets; and
. the holders of Liens recognized by the Mexican Bankruptcy Court will have
a first priority claim to the assets subject to such liens to the extent
recognized by the Mexican Bankruptcy Court.
Guaranty
The New Notes are irrevocably and unconditionally guaranteed by the
Significant Subsidiaries of AHMSA that execute and deliver a counterpart to the
New Indenture. The guarantee of each Significant Subsidiary will be released
upon the sale or other disposition of such Significant Subsidiary in accordance
with the New Indenture to an entity which is not AHMSA or a Restricted
Subsidiary of AHMSA.
Modification of the New Indenture
Without the consent of any holders of New Notes, AHMSA, when authorized by a
board resolution, and the Indenture Trustee, at any time and from time to time,
may enter into one or more indentures supplemental to the New Indenture, in
form satisfactory to the Indenture Trustee, for any of the following purposes
(which purpose will be confirmed to the Indenture Trustee in a written order
signed by AHMSA or opinion of counsel):
(1) to evidence the succession of another person or entity to AHMSA and the
assumption by any such successor of the covenants of AHMSA in the New
Indenture and in the New Notes;
(2) to add to the covenants of AHMSA for the benefit of the holders of all
or any series of New Notes (and if such covenants are to be for the
benefit of less than all series of New Notes, stating that such
covenants are expressly being included solely for the benefit of such
series), or to surrender any right or power conferred upon AHMSA in the
New Indenture;
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(3) to secure further the New Notes;
(4) to make provision with respect to the repurchase obligations of AHMSA
pursuant to the requirements under "--Repurchase at the Option of the
Holders";
(5) to cure any ambiguity, to correct or supplement any provision in the New
Indenture which may be inconsistent with any other provision in the New
Indenture, or to make any other provisions with respect to matters or
questions arising under the New Indenture which shall not be
inconsistent with the provisions of the New Indenture, provided that
such action pursuant to this clause (5) shall not adversely affect the
interests of the holders of New Notes of any series;
(6) to correct any mistake in any provision of the New Indenture;
(7) to add the Subsidiary Indenture Guaranty of a Subsidiary created or
acquired after the date of the New Indenture; or
(8) to make any other change that does not adversely affect the rights of
any holder of New Notes of any series in any material respect.
With the consent of the holders of at least 51% of the aggregate principal
amount of the outstanding New Notes of each series affected by such
supplemental indenture, AHMSA, when authorized by a board resolution, and the
Indenture Trustee may enter into an indenture or indentures supplemental to the
New Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the New Indenture in respect of
New Notes of such series or of modifying in any manner the rights of the
holders of New Notes of such series under the New Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the holders
of at least 62-2/3% of the outstanding New Notes of such series, change or
modify the obligation of AHMSA to make a mandatory redemption in accordance
with "--Mandatory Redemption Upon Occurrence of Certain Events" or release any
collateral security for the New Notes (except as otherwise specifically
provided in any transaction document), release any Subsidiary Guarantor from
its obligations under the Subsidiary Indenture Guaranty, or reduce or limit the
obligations of any Subsidiary Guarantor under the New Indenture or any of the
transaction documents (except, in each case, as otherwise specifically provided
in the New Indenture or any transaction document) and provided, further, that
no such supplemental indenture shall, without consent of the holder of each
outstanding New Note affected thereby,
(1) change the stated maturity of the principal of, or any premium or
installment of interest on, any New Note, or reduce the principal amount
thereof or the rate of interest thereon or the amount payable upon the
redemption, repurchase or acceleration thereof or the amount thereof
payable in bankruptcy, or change the place of payment where, or the coin
or currency in which, any New Note or any premium or interest thereon is
payable, or impair the right to institute suit for the enforcement of
any such payment on or after the stated maturity thereof (or, in the
case of redemption or repurchase, on or after the redemption date or
holder repurchase date, as the case may be ), or
(2) reduce the percentage in principal amount of the outstanding New Notes
of any series, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for
any waiver (of compliance with certain provisions of the New Indenture
or certain defaults under the New Indenture and their consequences)
provided for in the New Indenture, or
(3) modify any of the provisions of this paragraph, the provisions with
respect to waiver of past defaults in the New Indenture or the
provisions of the New Indenture with respect to waiver of certain
covenants, except to increase any such percentage or to provide that
certain other provisions of the New Indenture cannot be modified or
waiver without the consent of the holder of each outstanding New Note
affected thereby.
It shall not be necessary for any holder of New Notes under "--Modification
of the New Indenture" to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if the requisite holders of
New Notes approve the substance thereof.
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Defeasance and Discharge
AHMSA may elect to defease and discharge all its obligations with respect to
all of the New Notes (except for certain obligations to exchange or register
the transfer of New Notes, to replace stolen, lost or mutilated New Notes, to
maintain paying agencies and to hold moneys for payment in trust) upon the
deposit in trust for the benefit of the holders of New Notes of cash,
Government Securities or both, which (through the payment of principal and
interest in respect thereof in accordance with their terms) will provide money
in an amount sufficient to pay the principal of and any premium and interest on
the New Notes at maturity thereof in accordance with the terms of the New
Indenture and the New Notes. Such defeasance and discharge may occur only if,
among other things, AHMSA has elected to redeem all of the New Notes pursuant
to the New Indenture and prepay all of the New Loans pursuant to the New Credit
Agreement, AHMSA has delivered to the Indenture Trustee an opinion of counsel,
or there has been published by the United States Internal Revenue Service a
ruling, in either case, to the effect that holders of such notes will not
recognize gain or loss for U.S. federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to U.S. federal income
tax on the same amount, in the same manner and at the same times as would have
been the case if such deposit, defeasance and discharge had not occurred.
Concerning the Indenture Trustee
AHMSA and its Subsidiaries may maintain deposit accounts and conduct other
banking transactions with the Indenture Trustee in the ordinary course of
business.
Releases
Both
. AHMSA, on behalf of itself and its Subsidiaries and affiliates, will
release and forever discharge each holder (including beneficial owners) of
New Notes and its affiliates and each member of any steering committee or
similar committee of creditors of AHMSA and its affiliates, and
. each holder (including beneficial owners) of New Notes, on behalf of
itself and its affiliates, will release and forever discharge AHMSA, its
Subsidiaries and Affiliates, GAN, and each member of any steering
committee or similar committee of creditors of AHMSA and its affiliates,
and each of their respective past, present, and future Affiliates,
stockholders, controlling persons, directors, officers, employees,
subsidiaries, successors and assigns and their respective advisors and
representatives from any and all claims, demands, proceedings, causes of
action, orders, obligations, contracts, agreements, debts, Liens, and
liabilities whatsoever, whether known or unknown, suspected or unsuspected,
both at law and in equity, which each of such party has, has ever had or may
hereafter have against the other parties on account of or arising out of any
matter occurring at the time of or prior to the closing date of the
restructuring plan, relating to the Base Debt or AHMSA, its Subsidiaries and
Affiliates, but this release will not relieve any obligations under the New
Indenture and the related bond documents.
Certain Definitions
Defined terms used but not defined in "Description of New Notes" are defined
in "Description of New Credit Agreement--Certain Definitions." Set forth below
is a summary of certain of the defined terms used in the New Indenture.
Reference is made to the New Indenture for the full definition of all such
terms.
"Acquired Indebtedness" means Indebtedness of any person or entity existing
at the time such person or entity became a Subsidiary or assumed in connection
with the acquisition of assets from such person or entity and not incurred in
connection with, or in contemplation of, such person or entity becoming a
Subsidiary or such acquisition.
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"Average Life" means, with respect to any Indebtedness, as of the date of
determination thereof, the quotient, expressed as a number of years, of (A) the
sum of the products obtained by multiplying (x) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof by (y)
the number of years (calculated to the nearest one-twelfth) then remaining
until the date of each such payment, divided by (B) the total principal amount
of such Indebtedness then outstanding.
"Bank Debt" means, without duplication, the Indebtedness of AHMSA and the
Restricted Subsidiaries arising under the Credit Agreement and the Subsidiary
Guaranty.
"Capital Expenditure Indebtedness" means Indebtedness of AHMSA or any of its
Consolidated Subsidiaries incurred to finance the purchase or construction,
after the date of issuance of the New Notes, of any property of AHMSA or any of
its Consolidated Subsidiaries used or to be used in the business of AHMSA or
any of its Consolidated Subsidiaries (to the extent that the purchase price or
construction cost does not exceed the fair market value (such determination to
be evidenced by a certificate of an officer of AHMSA) of the property acquired
or constructed, plus applicable duties and construction period interest at
customary rates), provided that (i) the cost of such property is or should be
included in "addition to property, plant and equipment" in accordance with
Mexican GAAP, (ii) the acquisition or construction of such property is not part
of any acquisition of any person or entity or all or substantially all of
another business entity and (iii) such Indebtedness is incurred not more than
180 days after the acquisition or completion of construction of such property.
"Consolidated Net Income" of any person or entity means, for any period, the
aggregate of net income (or loss) of such person or entity and its Subsidiaries
for such period determined on a consolidated basis in accordance with Mexican
GAAP; provided that (a) the net income (or loss) of any person or entity (other
than a Subsidiary of such person or entity) accounted for by the equity method
of accounting shall be excluded except to the extent of the amount of cash
dividends or distributions paid to such person or entity or its Restricted
Subsidiaries by such other person or entity in such period; (b) the net income
of any Subsidiary (other than a Subsidiary Guarantor) that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions (including distributions in the form of loans or advances) by
operation of the terms of its charter or by any applicable agreement,
instrument, judgment, decree, order or government regulation shall be excluded
to the extent of such restriction or limitation in such period; (c) the net
income of any person or entity acquired in a pooling-of-interests transaction
for any period prior to the date of such acquisition shall be excluded; (d) any
net after-tax extraordinary gains or losses shall be excluded; (e) any net
after-tax gains or losses attributable to any disposition of assets other than
in the ordinary course of business shall be excluded; (f) the net income (or
loss) from discontinued operations shall be excluded and (g) minority interests
in the income (or loss) of such person or entity's Restricted Subsidiaries
shall be excluded.
"Consolidated Subsidiary" means any Subsidiary whose accounts are
consolidated with AHMSA's accounts in accordance with Mexican GAAP.
"Contingent Obligation" means, with respect to any person or entity, any:
(a) performance bond (including a fianza), guaranty endorsement or aval for
which such person or entity has a reimbursement or payment obligation
that is then due and payable (in each case, without limitation of clause
(c) below),
(b) obligations of such person or entity under agreements providing for
swaps, caps, collars, contingent participations or other hedging
mechanisms with respect to the payment of interest or the convertibility
of currency, and
(c) obligation of such person or entity guaranteeing or intending to
guarantee any Indebtedness ("primary obligations") of any other person
or entity (the "primary obligor") in any manner, whether directly or
indirectly, including any obligation of such person or entity, whether
or not contingent: (i) to purchase
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any such primary obligation or any property constituting direct or
indirect security therefore, (ii) to advance or supply funds: (A) for
the purchase or payment of any such primary obligation or (B) to
maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor,
(iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary
obligation or (iv) otherwise to assure, indemnify or hold harmless the
owner of such primary obligation against loss in respect thereof (other
than indemnity obligations arising in the ordinary course of business);
provided that the term "Contingent Obligation" shall not include
endorsements of instruments for deposit or collection in the ordinary
course of business or obligations under take-or-pay-contracts. The amount
of any Contingent Obligation shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such person or entity is required to perform
thereunder) as determined in good faith.
"Debt Service" means, for any period, an amount in U.S. dollars equal to the
total amount of Interest Expense for AHMSA and principal paid or scheduled or
required to be paid by AHMSA and each of its Subsidiaries, determined on a
consolidated basis, in respect of Indebtedness during such period.
"EBITDA" means, for any period and for any person or entity, the sum of the
following for such person or entity and its Subsidiaries (calculated on a
consolidated basis in accordance with Mexican GAAP):
(a) operating income for such period, calculated before Interest Expense
(net of any interest income), cash taxes paid, and depreciation and
amortization, minus
(b) any net non-cash gains (or plus any net non-cash losses) to the extent
included in determining operating income for such period.
"EBITDA to Interest Expense Ratio" means, at any date of determination, the
ratio of the following (determined on a consolidated basis in accordance with
Mexican GAAP):
(a) EBITDA of AHMSA for the four consecutive fiscal quarters ending on, or
most recently ended prior to, such date divided by
(b) the aggregate Interest Expense of AHMSA scheduled or required to be paid
in cash during such four fiscal quarters (other than any Interest
Expense in respect of Customer Advances).
"Excess Cash Flow" means, for any period, the sum of the following for AHMSA
and its Subsidiaries (determined on a consolidated basis in accordance with
Mexican GAAP):
(1) EBITDA for such period, minus
(2) Capital Expenditures made during such period (other than Capital
Expenditures to the extent financed with the proceeds of Indebtedness),
plus
(3) decreases (or minus increases) in working capital for such period
(including as a result of the payment of Customer Advances permitted
pursuant to clause (6) of the definition of "Permitted Indebtedness"),
minus
(4) Debt Service for such period (including the aggregate amount of payments
made by AHMSA to GAN in respect of Subordinated Converted Interest Notes
during such period (unless such payment was a mandatory repayment made
in respect of Excess Cash Flow for the preceding fiscal year), but only
to the extent that such payments were used by GAN to repurchase shares
of Capital Stock of AHMSA paid to creditors as Converted Interest, but
excluding any Converted Interest on the New Loans or the New Notes,
provided that in the case of any redemption of New Notes ("Prepaid
Securities") made under "--Mandatory Sinking Fund Redemptions" with
other New Notes purchased at a discount from
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the face amount thereof (the "Securities Purchased at a Discount"), the
principal amount paid in respect of such Prepaid Securities shall, for
purposes of this definition, be the purchase price for such Securities
Purchased at a Discount), and banking fees paid during such period, minus
(5) the aggregate amount of the Aggregate Restructuring Fee and the Three
Month Interest Fee paid during such period, minus
(6) an amount equal to the lesser of the following: (A) U.S.$15.0 million
and (B) the aggregate amount of cash on hand and in bank accounts and
Cash Equivalent Investments on the last day of such period, in each
case, less the amount of any Deferred Mandatory Redemptions, As-yet
Unapplied Other Asset Sale Proceeds, As-yet Unapplied Insurance Proceeds
and any other amounts on deposit in the Collateral Account, minus
(7) an amount paid in cash during such period by AHMSA or any of its
Subsidiaries in respect of purchase price adjustments or indemnity
payments in connection with any Disposition permitted pursuant to
"--Limitation on Certain Dispositions", minus
(8) [List of properly authorized cash items, such as income taxes, severance
payments, asset taxes, penalties on taxes, statutory profit sharing,
restructuring expenses, severance payments and advisor fee], minus
(9) payments made in respect of the Guarantee Fee during such period, minus
(10) the aggregate amount of mandatory prepayments of the New Subordinated
Notes made in such fiscal year.
Notwithstanding anything to the contrary contained in this Prospectus and
Consent Solicitation or in any Transaction Document, Excess Cash Flow for the
fiscal year that includes the closing date of the restructuring plan will be
measured for the period from (but excluding) the closing date of the
restructuring plan to the end of such fiscal year.
"Fair Market Value" with respect to any asset or property means the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy, as determined by AHMSA in good faith and in
the case of a sale for consideration in excess of U.S.$1,000,000, as evidenced
in a resolution of the Board of Directors provided to the Indenture Trustee.
"Government Securities" means
. any evidence of indebtedness denominated in U.S. dollars, maturing not
more than one year after the date of purchase, issued or fully
guaranteed or insured by the United States, or an instrumentality or
agency thereof or
. repurchase agreements and reverse repurchase agreements with respect to
marketable obligations directly or indirectly issued or unconditionally
guaranteed by the United States or issued by any agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition, provided,
however, that the terms of such repurchase and reverse repurchase
agreements comply with the guidelines set forth in Sections A, B and C
of Part III (Guidelines for Controlling Collateral for Securities
Purchased Under Agreement to Resell) of the Federal Financial
Institutions Examination Council Supervisory Policy: Repurchase
Agreements of Depositary Institutions with Securities Dealers and
Others, as modified and restated February 5, 1998, 63 Fed. Reg. 6935
(1998), and as adopted by the Comptroller of the Currency in OCC
Bulletin 98-6 (February 19, 1998).
"Indebtedness" means, for any person or entity (without duplication):
(1) all indebtedness (including principal, interest, fees and charges) of
such person or entity for borrowed money,
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(2) all obligations of such person or entity for the deferred purchase price
of goods or services (other than trade accounts payable arising, and
accrued expenses incurred, in the ordinary course of business),
(3) all obligations of such person or entity evidenced by bonds (other than
surety, performance or appeal bonds for which such person or entity does
not have a reimbursement or payment obligation that is then due and
payable), debentures, convertible debentures, notes, commercial paper,
bills of exchange or other similar instruments,
(4) the available amount of all letters of credit issued for the account of
such person or entity and all outstanding reimbursement obligations of
such person or entity with respect to letters of credit,
(5) all Indebtedness (as that term is defined in the other clauses of this
definition) of others secured by any Lien on any Property owned by such
person or entity, which Indebtedness has not been otherwise assumed by
such person or entity (provided that, for purposes of the New Indenture,
the amount of such Indebtedness shall be an amount equal to the lesser
of (i) the amount of such Indebtedness and (ii) the fair market value of
such Property),
(6) all Capitalized Lease Obligations of such person or entity,
(7) all net obligations under agreements providing for swaps, caps, collars,
contingent participation or other hedging mechanisms with respect to the
payment of interest or the convertibility of currency,
(8) all obligations under any conditional sale agreement or other title
retention agreement, and
(9) all Contingent Obligations of such person or entity,
For the purpose of determining the amount of Indebtedness of such person or
entity outstanding at any time, each of the items described in clauses (1)
through (8) above shall be excluded from Indebtedness to the extent such items
would be eliminated as intercompany items on the consolidated balance sheet of
such person or entity prepared in accordance with Mexican GAAP. Notwithstanding
the foregoing, "Indebtedness" does not include (A) any liability for
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business or (B) any indebtedness that
has been defeased or satisfied in accordance with the terms governing such
indebtedness. In addition, if a person or entity holding peso-denominated
Indebtedness enters into an agreement with respect to such Indebtedness whereby
the nominal principal amount of such Indebtedness is periodically increased as
a result of and in proportion to the devaluation of the peso against the
U.S. dollar or the rate of inflation in Mexico during such period, such
increase shall be deemed not to be " incurred" for purposes of "Certain
Covenants--Limitation on Incurrence of Indebtedness" but such Indebtedness will
be deemed outstanding for purposes of the calculation of the EBITDA to Interest
Expense Ratio.
"Interest Expense" means, for any period and with respect to any person or
entity, determined on a consolidated basis for such person or entity and each
of its Subsidiaries (and without duplication) all interest (or similar) expense
on Indebtedness, including: (i) fees payable in connection with Indebtedness
(including commitment fees), (ii) net payments made (less net payments
received) under any interest rate protection agreements or other hedging
agreements, (iii) the interest portion of any deferred payment obligations,
(iv) all fees and charges owed with respect to letters of credit (but excluding
any interest in respect of fianzas), (v) all accrued or capitalized interest
(but excluding any interest in respect of Customer Advances), (vi) any
amortization of debt discount, and (vii) the interest component of Capitalized
Lease Obligations.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Material Subsidiary" means any Subsidiary which (a) owns, directly or
indirectly, any part of either of the Steelmaking Facility or the Steam Coal
Facility having an aggregate book value in excess of 20% of the total aggregate
book value of the Steelmaking Facility or the Steam Coal Facility, as the case
may be, or
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(b) contributes in excess of 20% of the total consolidated revenues of AHMSA
during any fiscal quarter
within the four fiscal quarters ending immediately prior to the date when the
determination is made.
"Maximum Guarantee Fee Amount" means, for any fiscal quarter, an amount
equal to the sum of the following:
(a) the lesser of the following amounts (the "GAN Amount" for such fiscal
quarter);
(i) the aggregate amount payable or to be paid in cash in respect of
principal of or interest on Indebtedness of GAN during such fiscal
quarter, and
(ii) U.S.$4.45 million; and
(b) U.S.$550,000.
"Permitted Investment" means the following:
(1) Investments existing as of the closing date of the restructuring plan in
Subsidiaries existing as of the closing date of the restructuring plan
and other Investments existing as of the closing date of the
restructuring plan;
(2) Cash Equivalent Investments;
(3) Investments in any joint venture or partnership or other person or
entity having an aggregate fair market value (measured on the date each
such Investment is made and without giving effect to subsequent changes
in value) which, when taken together with all other Investments made
pursuant to this clause (3) that are at the time outstanding, do not
exceed U.S.$75.0 million; provided that of such U.S.$75.0 million no
more than U.S.$25.0 million of Investments may be made in Persons which
are not principally engaged in a Permitted Line of Business;
(4) Property received in connection with any good faith settlement of any
claims of AHMSA or its Subsidiaries or in connection with Dispositions
permitted as described in "--Limitation on Certain Dispositions";
(5) prepaid expenses, deposits and advances to suppliers and similar items
in the ordinary course of business;
(6) the following: (A) loans made to employees of AHMSA in the ordinary
course of business; provided that (a) the aggregate outstanding amount
of all loans made after July 31, 2000 to any one employee shall not
exceed U.S.$250,000 and (b) the aggregate outstanding amount of all such
loans made after July 31, 2000 shall not exceed U.S.$5.0 million, (B)
50-day salary advances to employees made in the ordinary course of
business and (C) Investments consisting of loans made to employees
(pursuant to AHMSA's and its Subsidiaries' collective bargaining
agreements) to finance employee housing, in an aggregate principal
amount not to exceed U.S.$10.0 million at any one time outstanding;
(7) endorsements of negotiable instruments and other similar negotiable
documents for collection in the ordinary course of business;
(8) Investments in New Notes which are delivered to the Indenture Trustee
for cancellation;
(9) Investments by AHMSA in Restricted Subsidiaries; and
(10) Investments to the extent made in exchange for Capital Stock of AHMSA;
provided that such investments are made in joint ventures, Persons, or
assets, which are principally engaged in, or used for, a Permitted Line
of Business.
"Permitted Line of Business" means a business engaged in by AHMSA and its
Restricted Subsidiaries as of the closing date of the restructuring plan (which
is deemed to include the production and distribution of energy and gases), and
any other business substantially related, ancillary or complementary to the
foregoing.
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"Permitted Refinancing Indebtedness Proceeds" means the Net Cash Payments
actually received from the incurrence of Indebtedness of the type described in
clause (5) of the definition of Permitted Indebtedness that is used to
refinance the New Notes.
"Restricted Payment" means any of the following:
(w) the declaration or payment of any dividend or distribution (in cash,
property or obligations) on any shares of any class of Capital Stock
(now or hereafter outstanding) of AHMSA or any Restricted Subsidiary or
on any warrants, options or other rights with respect to any shares of
any class of Capital Stock (now or hereafter outstanding) of AHMSA or
any Restricted Subsidiary (other than dividends or distributions payable
in its common stock or warrants to purchase its common stock or
splitups, escision or reclassifications of its stock into additional or
other shares of its common stock) or
(x) the application by AHMSA or any Restricted Subsidiary of any of its
funds, property or assets to the purchase, redemption, sinking fund or
other retirement of, or the agreement by AHMSA or any Restricted
Subsidiary to purchase or redeem, any shares of any class of Capital
Stock (now or hereafter outstanding) of AHMSA or any Restricted
Subsidiary, or warrants, options or other rights with respect to any
shares of any class of Capital Stock (now or hereafter outstanding) of
AHMSA or any Restricted Subsidiary or
(y) payment or agreement to pay or accrue to be paid any management,
guarantee fee or similar fee to any Affiliate of AHMSA (other than AHMSA
and the Subsidiary Guarantors) or
(z) the making of any investment in a person or entity (other than a
Permitted Investment).
"Restricted Subsidiary" means any subsidiary of AHMSA which is not an
Unrestricted Subsidiary.
"Securities Percentage" means, at any time, 100% minus the Bank Percentage.
"Significant Subsidiary" means, as at any date, each Subsidiary of AHMSA that
(a) is designated as such on a schedule to the New Indenture;
(b) accounted for at least 5% of consolidated revenues of AHMSA and its
Subsidiaries or 5% of consolidated earnings of AHMSA and its
Subsidiaries before interest and taxes, in each case ending on the last
day of the last fiscal quarter immediately preceding such date; or
(c) has assets which represent at least 5% of the consolidated assets of
AHMSA and its Subsidiaries as of the last day of the last fiscal quarter
immediately preceding such date;
all of which with respect to clauses (2) and (3), will be as reflected on the
financial statements of AHMSA for the period, or as of the date, in question;
provided, however, that a person or entity will no longer be deemed to be a
Significant Subsidiary from and after the date on which it ceases to be a
Subsidiary of AHMSA.
"Steam Coal Facility" means all facilities (whether or not in operation) and
property of AHMSA and its Subsidiaries, including MICARE, used in the business
of the exploration, development, mining and processing of steam coal, and any
business ancillary thereto or supportive thereof, including, without
limitation, the production, processing or treatment of by-products and process
wastes resulting from the production of steam coal.
"Steelmaking Facility" means all facilities (whether or not in operation)
and property located in Monclova or Mexico City used in AHMSA's business of the
manufacture and processing of steel, and any business ancillary thereto or
supportive thereof, including, without limitation, the production or processing
of raw materials (including iron ore and metallurgical coal) and the treatment
and processing of water and process wastes resulting from the manufacture of
steel.
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"Unrestricted Subsidiary" means any Subsidiary of AHMSA that:
(a) is not a Significant Subsidiary,
(b) if its earnings, revenues and assets were combined with all other
Subsidiaries of the Company that are Unrestricted Subsidiaries, the
combined entity would not constitute a Significant Subsidiary, and
(c) as to which AHMSA has furnished to the Indenture Trustee (1) a notice
stating that it wishes such Subsidiary to be designated an Unrestricted
Subsidiary and (2) a certificate of Arthur Andersen or other independent
public accountants acceptable to the Indenture Trustee setting forth
computations in reasonable detail demonstrating the foregoing conditions.
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DESCRIPTION OF NEW SUBORDINATED NOTES
Classification
The New Subordinated Notes are classified into two series, Series D and
Series E, which are identical in all respects other than (a) the original
stated principal amount (U.S. $35.5 million for Series D and U.S. $27.7 million
for Series E), and (b) the discharge of the Series E Notes upon the exercise by
GAN of the Purchase Option. However, AHMSA can only exercise the MICARE Share
Repurchase Option to the extent that we have repaid the New Series E Notes
prior to the time of exercise of the MICARE Share Repurchase Option. See
"Description of AHMSA Creditor Voting Trust--MICARE Share Repurchase Option."
Interest and Maturity
From the closing of the restructuring plan through the third anniversary of
the closing of the restructuring plan, the New Subordinated Notes will not bear
interest. From the third anniversary of the closing of the restructuring plan
until eight and one-half years from the closing of the restructuring plan the
New Subordinated Notes will accrue interest, which will be added to principal
at the three-month LIBO rate plus 1% per annum. From eight and one-half years
after the closing of the restructuring plan and thereafter, the New
Subordinated Notes will bear interest, payable in cash, quarterly in arrears at
the three-month LIBO rate plus 2% per annum.
The New Subordinated Notes will mature on the date that is 11.5 years after
the closing of the restructuring plan.
Prepayment
After payment in full of all amounts due with respect to the New Loans and
the New Notes, AHMSA may prepay the New Subordinated Notes at any time. In
addition, AHMSA will be required to prepay the New Subordinated Notes from the
following:
. one half of the amount by which the net proceeds from a sale of MICARE
exceed U.S. $330.0 million; and
. from and after January 1, 2005 until MICARE is sold, 65% of the amount by
which the MICARE Cash Flow From Operations exceeds the Projected MICARE
Cash Flow (see "Description of New Credit Agreement--Certain Definitions").
Payments with respect to the New Subordinated Notes will be applied one-half
to the New Series D Notes and one half to the New Series E Notes, until the New
Series E Notes are paid in full.
Discharge of the Subordinated Promissory Notes, Series E
Upon the exercise by GAN of the Purchase Option, the Subordinated Promissory
Notes, Series E shall be deemed to be paid in full and discharged without any
further payment thereon required by us, and regardless of the price obtained by
the AHMSA Creditor Voting Trust for the underlying shares of common stock.
Subordination
The payment of the principal of, premium, if any, and interest on the New
Subordinated Notes, including amounts payable on any prepayment of the New
Subordinated Notes, will be subordinated in right of payment to the extent set
forth in the New Subordinated Notes to the prior full and final payment in cash
of all Senior Debt of AHMSA. "Senior Debt" means the principal of, and premium,
if any, and interest, including all interest accruing subsequent to the
commencement of any bankruptcy, insolvency or similar proceedings, whether or
not a claim for post-petition interest is allowable as a claim in any such
proceedings, on, and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the New Subordinated Notes or thereafter
created, incurred or assumed:
(a) indebtedness of AHMSA evidenced by a credit or loan agreement, note,
bond, debenture or other written obligation,
(b) all obligations of AHMSA for money borrowed,
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(c) all obligations of AHMSA evidenced by a note or similar instrument given
in connection with the acquisition of any businesses, properties or
assets of any kind,
(d) obligations of AHMSA (1) as lessee under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles and (2) as lessee under other leases for
facilities, capital equipment or related assets, whether or not
capitalized, entered into or leased for financing purposes,
(e) all obligations of AHMSA under interest rate and currency swaps, caps,
floors, collars, hedge agreements, forward contracts or similar
agreements or arrangements,
(f) all obligations of AHMSA with respect to letters of credit, bankers'
acceptances and similar facilities, including reimbursement obligations
with respect to the foregoing,
(g) all obligations of AHMSA issued or assumed as the deferred purchase
price of property or services, but excluding trade accounts payable and
accrued liabilities arising in the ordinary course of business,
(h) all obligations of the type referred to in clauses (a) through (g) above
of another person and all dividends of another person, the payment of
which, in either case, AHMSA has assumed or guaranteed, or for which
AHMSA is responsible or liable, directly or indirectly, jointly or
severally, as obligor, guarantor or otherwise, or which is secured by a
lien on the property of AHMSA, and
(i) renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange for,
any such indebtedness or obligation described in clauses (a) through (h)
of this paragraph;
provided, however, that Senior Debt shall not include the New Subordinated
Notes or any such indebtedness or obligation if the terms of such indebtedness
or obligation, or the terms of the instrument under which, or pursuant to which
it is issued expressly provide that such indebtedness or obligation is not
superior in right of payment to the New Subordinated Notes.
No payment in respect of the New Subordinated Notes, whether on account of
principal of or premium, if any, or interest on, or prepayment of, the New
Subordinated Notes or otherwise (other than with the money, securities or
proceeds held under any defeasance trust established in accordance with the New
Subordinated Notes provided that the establishment of such defeasance trust is
permitted by the terms of all Senior Debt) may be made by AHMSA if
(1) a default in the payment of principal, premium, if any, or interest,
including a default under any redemption or repurchase obligation, or
other amounts with respect to Senior Debt occurs or
(2) any other default occurs and is continuing with respect to Senior Debt
that permits the holders thereof to accelerate (with notice, lapse of
time or both) the maturity thereof.
Payments on the New Subordinated Notes may and shall be resumed
(a) in the case of a payment default, upon the date on which such default is
cured or waived and
(b) in the case of a nonpayment default, the date on which such nonpayment
default is cured or waived if the maturity of such Senior Debt has not
been accelerated.
In addition, upon any acceleration of the principal due on the New
Subordinated Notes as a result of an event of default or payment or
distribution of assets of AHMSA to creditors upon any dissolution, winding up,
liquidation or reorganization, whether voluntary or involuntary, marshaling of
assets, assignment for the benefit of creditors, or in bankruptcy, insolvency,
receivership or other similar proceedings, of AHMSA, all principal premium, if
any, interest and other amounts payable on all Senior Debt must be indefeasibly
paid in full in cash before the holders of the New Subordinated Notes are
entitled to receive any payment (other than with the money, securities or
proceeds held under any defeasance trust established in accordance with the
notes indenture
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provided that the establishment of such defeasance trust occurs after the
payment in full of all Senior Debt). By reason of such subordination, in the
event of insolvency, creditors of AHMSA who are holders of Senior Debt may
recover more, ratably, than the holders of the New Subordinated Notes and such
subordination may result in a reduction or elimination of payments to the
holders of the New Subordinated Notes.
Subsidiary Guarantees
The New Subordinated Notes are irrevocably and unconditionally guaranteed on
a subordinated basis by the subsidiaries of AHMSA that provide guarantees with
respect to the New Loans and the New Notes. The guarantee of each such
subsidiary will be released upon the sale of such subsidiary in accordance with
the terms of the New Subordinated Notes.
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DESCRIPTION OF COMMON STOCK
Set forth below is certain information concerning AHMSA's capital structure
and a description of certain provisions of the by-laws ("Estatutos") of AHMSA
as currently in effect, the new by-laws of AHMSA (the "new Estatutos") as
proposed to be adopted by the closing date of the restructuring plan and
applicable Mexican law. This description does not purport to be complete and is
qualified in its entirety by reference to the Estatutos, the new Estatutos and
the provisions of applicable Mexican law. A copy of the Estatutos and the new
Estatutos together with an English translation thereof have been filed as an
exhibit to the Registration Statement.
Outstanding Common Stock
AHMSA has authorized a total of 458,375,502 shares of Common Stock, no par
value, for issuance and has a total of 388,375,502 shares of Common Stock
issued and outstanding, constituting one series of shares of Common Stock.
Foreign Investment Legislation
The Foreign Investment Law (the "Foreign Investment Law") provides that
foreign investors may own up to 100% of the capital stock of Mexican companies,
without the approval of the foreign investment authorities, if certain
requirements are satisfied. However, the Foreign Investments Law provides that
in the event the amount of assets of a company is higher than the annual
threshold determined by the National Commission of Foreign Investments (the
"CNIE"), then foreign investors may only hold more than 49% of the capital
stock of the company, if prior approval from the CNIE is obtained. The current
amount of the Company's assets, would require that such approval be obtained
prior to foreign investors holding more than 49% of its capital stock. As a
general rule, shares representing the capital stock of a Mexican company that
may be owned by foreign investors may be identified as a class and
differentiated from shares that may only be owned by Mexican investors.
The Foreign Investment Law also requires that AHMSA register any foreign
owner of its shares with the National Registry of Foreign Investment maintained
by the Ministry of Economy.
Registration and Transfer
The certificates representing the Common Stock meet the requirements set
forth in Article 125 of the Mexican General Law of Commercial Companies, may
cover more than one share, are consecutively numbered and signed by two
directors, and have numbered coupons attached thereto evidencing the exercise
of any applicable dividend rights. Shareholders of AHMSA may either hold their
shares of Common Stock directly, in the form of physical certificates, or
indirectly, through book entries with institutions that have accounts with
Indeval. Accounts may be maintained at Indeval by brokers, banks, other
financial institutions or other entities approved by the CNBV ("Indeval
Participants"). AHMSA maintains a stock registry, and only those persons listed
in the stock registry and those holding certificates issued by Indeval and any
relevant Indeval Participant indicating ownership are recognized as
shareholders by AHMSA.
Shareholders' Meetings and Voting Rights
Each share of Common Stock entitles the holder thereof to one vote at any
shareholders' meeting of AHMSA. In order to attend a shareholders' meeting or
to vote, a shareholder must obtain an admission card by depositing shares or
certificates of deposit issued by a bank, brokerage house or Indeval at the
place indicated in the respective notice or, in the absence of such
designation, with the Company Secretary.
General shareholders' meetings may be ordinary or extraordinary meetings.
Extraordinary general meetings are meetings called to consider redemption and
other matters specified in Article 182 of the Mexican General Law of Commercial
Companies including, principally, changes in the share capital and other
amendments to the Estatutos, issuance of preferred stock, liquidation, merger,
transformation from one type of company to another,
222
change in nationality and change of corporate purpose. Under the terms of the
new Estatutos, so long as the debt issued under the restructuring plan is
outstanding, or the right of first refusal over AHMSA common stock in favor of
the special purpose vehicle created by GAN has not expired or been waived,
extraordinary general meetings will also be called to consider the following
items, requiring a favorable 61% shareholder vote:
. declaration of dividends not authorized by the terms of the documents
governing our indebtedness;
. creation of an audit committee;
. issuance of equity or securities convertible into or exercisable for
equity securities, other than certain permitted issuances to our employees;
. repurchases of our common stock or their conversion to treasury shares;
. filing for protection under applicable insolvency law or the sale of the
majority of our assets (unless as a result of such transaction, all of our
financial obligations will be paid concurrently therewith);
. capital increase or reduction, as well as the merger, spin-off,
dissolution or liquidation of us;
. approval of any matter requiring a supermajority vote of our board of
directors that is submitted to the stockholders for their approval;
. granting and revocation of power of attorney for any matter requiring a
supermajority shareholder vote or supermajority vote of our board of
directors;
. approval of compensation, fees and reimbursement of expenses for the board
of directors, secretaries of the board, examiners and their respective
alternates in excess of certain specified limits;
. any amendment to the new Estatutos; and
. the adoption of certain anti-takeover provisions.
General meetings called to consider all other matters are ordinary meetings.
An annual ordinary general meeting must be held during the four months
following the end of each fiscal year to consider the approval of the report of
the Board of Directors regarding the performance of AHMSA during the preceding
fiscal year, the appointment of the members of the Board of Directors not
otherwise appointed in accordance with the current Estatutos or the new
Estatutos and the remuneration of directors.
Under the new Estatutos, the quorum for ordinary general meetings pursuant
to a first call is 55% of the outstanding shares of Common Stock, and action
may be taken by a majority of the shares present, except that with respect to
the appointment of the Chairman of the Board of Directors approval by
resolution of the holders of shares representing at least 50% of the
outstanding common stock is required at all times. If a quorum is not present,
a subsequent meeting may be called at which action may be taken by holders of a
majority of the shares of Common Stock present, regardless of the percentage of
outstanding shares of Common Stock represented at such meeting, except that
with respect to the appointment of the Chairman of the Board of Directors
approval by resolution of the holders of shares representing at least 50% of
the outstanding capital stock is required at all times. The quorum for
extraordinary general meetings is 75% of the outstanding shares of Common
Stock. If a quorum is not present, a subsequent meeting may be called and the
quorum for the subsequent meeting is 61% of the outstanding shares. Action at
an extraordinary general meeting may only be taken by holders of at least 61%
of the outstanding shares of Common Stock.
Shareholders' meetings may be called by the Board of Directors acting
through a delegate, the Chairman of the Board, the Secretary of the Board or
any statutory auditor and must be called by the Board of Directors acting
through a delegate, the Chairman of the Board, the Secretary of the Board or
any statutory auditor upon the written request of 10% or more of AHMSA's
outstanding shares of Common Stock provided that the request relates to matters
on which the requesting shareholder(s) is (are) entitled to vote. In addition,
the Board of Directors acting through a delegate, the Chairman of the Board,
the Secretary of the Board or any statutory auditor must call a shareholders'
meeting at the written request of any shareholder if no shareholders' meeting
223
has been held for two consecutive years or if the shareholders' meetings held
during such period have not considered the preceding year's Board of Directors'
report, financial statements and distribution of profits or elected directors
or a statutory auditor. Under the new Estatutos, notice of meetings must be
published in any two of Excelsior, Reforma and El Universal, which are
newspapers in Mexico City with broad circulation in Monclova, and in the
official gazette of the Mexican federation. A shareholder may be represented at
a shareholders' meeting by a proxy signed before two witnesses or by a general
or special power of attorney or by standard form proxies prepared by AHMSA
pursuant to the Mexican Stock Market Law.
Under Mexican law, holders of 33% of the outstanding shares of Common Stock
may have any shareholder action set aside (other than those relating to
liabilities of directors or statutory auditors) by filing a complaint with a
court of law within 15 days after the close of the meeting at which such action
was taken and by showing that the challenged action violates Mexican law or the
Estatutos (or the new Estatutos, as the case may be). Relief under these
provisions is only available to holders (i) who were entitled to vote on, or
whose rights as shareholders were adversely affected by, the challenged
shareholder action and (ii) whose shares were not represented when the action
was taken or, if represented, were voted against it.
Under Mexican law, an action for civil liabilities against directors may be
initiated by a shareholders' resolution. In the event shareholders decide to
bring such an action, the persons against whom such action is brought will
immediately cease to be directors. Additionally, shareholders representing not
less than 33% of the outstanding shares of Common Stock may directly exercise
such action against the directors, provided that (i) such shareholders have not
approved the resolution at the relevant shareholders' meeting to release the
directors from liability for exercising such action at the relevant
shareholders' meeting, and (ii) the claim covers all of the damage alleged to
have been caused to the Company and not merely the damage suffered by the
plaintiffs. Any recovery of damages with respect to such action will be for the
benefit of the Company and not for the shareholders bringing the action.
Board of Directors
Under the new Estatutos, so long as the debt issued under the restructuring
plan is outstanding or the right of first refusal over our common stock in
favor of the special purpose vehicle created by GAN has not expired or been
waived, the Board of Directors will be comprised of twelve (12) individuals, at
least three of whom must be "Independent Directors" as defined in the new
Estatutos. In accordance with the new Estatutos,
. shareholders holding at least 50% of AHMSA's outstanding capital stock
(or, in their absence, shareholders holding a plurality of the shares
present or represented at an ordinary shareholders' meeting) are entitled
to elect six directors; and
. the remaining directors are elected by the other stockholders.
As a matter of Mexican law, each shareholder owning 10% or more of our voting
capital stock is entitled to elect one director for each 10% owned. Initially
after the closing of the restructuring plan, the AHMSA Creditor Voting Trust
shall be entitled to elect four directors because it will own 40% of our
outstanding capital stock.
Under the terms of the Acknowledgment, Consent, Indemnification and
Cooperation Agreement to be entered into by GAN, the trustee of the AHMSA
Creditor Voting Trust and us, six (or after a payment default under the New
Loans or the New Notes, three) of the directors will be nominated by GAN, and
four (or after a payment default on the New Loans or the New Notes, seven) of
the directors will be nominated by the trustee of the AHMSA Creditor Voting
Trust.
Of the directors nominated by GAN, at least one of them is required to be
independent. Of the directors nominated by the trustee of the AHMSA Creditor
Voting Trust, at least one of them is considered to be independent.
Under the terms of the new Estatutos, so long as the debt issued under the
restructuring plan is outstanding, or the right of first refusal over our
common stock in favor of the special purpose vehicle created by GAN has not
224
expired or been waived, the vote of a majority of the Board of Directors,
including at least three of the Directors nominated by the AHMSA Creditor
Voting Trust, is required to approve certain actions, including:
. the acquisition of new subsidiaries not permitted by the documents
governing our indebtedness;
. the issuance of guarantees or granting of liens in excess of amounts
provided for in the annual budget;
. extension of loans by us, other than loans to any of our executives,
directors or employees after July 31, 2000 as set forth below, whether or
not guaranteed or secured;
. the appointment and removal of our external auditors;
. the approval of the annual business plan and budget, including specific
limitations on investments, expenditures, liens, indebtedness and
guarantees, and any action resulting in a greater than 10% variation from
the annual business plan;
. the incurrence of indebtedness equal to or in excess of 110% of the amount
set forth in the annual business plan;
. the issuance of any guarantee or bond or granting of any lien equal to or
in excess of 110% of the amount set forth in the annual business plan;
. transactions with GAN, its successors or shareholders or any of our
subsidiaries or affiliates, except for: (i) transactions which as a whole
do not exceed U.S.$2,500,000.00 per year, (ii) payment of a management fee
to GAN subject to the restrictions provided for under the documents
governing AHMSA's indebtedness, (iii) purchase of magnetite supplies from
Compania Minera el Braztan, S.A. de C.V. pursuant to the Supply Agreement
dated November 1, 1999, (iv) consideration payable to officers of AHMSA in
the ordinary course of business permitted by the new Estatutos, and (v)
the reimbursement to GAN of fees for services rendered to GAN by
independent advisors in the ordinary course of business up to U.S.$400,000
per year provided that such reimbursement is permitted under the documents
governing AHMSA's indebtedness;
. annual compensation to any employee in excess of U.S.$400,000 or the
hiring of employees on terms contrary to our General Hiring Policies as
approved by a majority of our board of directors;
. loans to any of our executives, directors or employees after July 31, 2000
which total more than U.S.$100,000 per person or U.S.$1.5 million in the
aggregate;
. the voting of shares of stock in a subsidiary at extraordinary shareholder
meetings;
. the purchase, sale or transfer of assets contrary to the terms of the
documents governing our indebtedness;
. entering into operating leases, as lessee, contrary to the terms of the
documents governing our indebtedness;
. extending advances to suppliers, not included in our annual business plan;
. repurchases of our own shares and the conversion of our shares to treasury
shares;
. the appointment and dismissal of our internal auditor and the
determination of his authority and compensation;
. the opening and closing of bank and investment accounts, as well as the
appointment of authorized signatories, provided that at least the
signatures of two signatories will be required;
. the appointment of the secretary and alternate secretary of our board of
directors;
. the appointment and dismissal of our chief financial officer, his
compensation, and the scope of his duties;
. the creation, composition and granting of functions to committees of our
board of directors, including the audit committee;
. any change in the line of business permitted by the new Estatutos; and
. the granting and revocation of powers of attorney relating to any matter
that requires a supermajority board vote.
225
Dividend Rights
At the Company's annual ordinary general shareholders' meeting, the Board of
Directors submits to the shareholders for their approval the financial
statements of the Company for the preceding fiscal year. After deducting all
expenses such as remuneration of the Directors and statutory auditors, any
remaining net profits must be applied according to the following rules. First,
five percent of the Company's net earnings must be allocated to a legal reserve
fund, until the legal reserve fund reaches an amount equal to at least 20% of
the Company's capital stock. The allocation to the legal reserve is determined
without reference to inflation adjustments of capital stock under Mexican GAAP.
Second, shareholders may allocate additional amounts to other reserve funds
including a reserve to repurchase shares. Third, the remaining balance, if any,
is applied as resolved by the shareholders' meeting. As a result of
restrictions contained in the New Indenture and the New Credit Agreement, if
the restructuring plan is consummated, AHMSA does not anticipate that it will
be paying dividends for the foreseeable future.
Changes in Share Capital; Preemptive Rights
The fixed portion and variable portion of the Company's capital stock may
only be increased or decreased by resolution of an extraordinary general
shareholders' meeting. Any change in the fixed portion requires an amendment of
the current Estatutos or the new Estatutos, as the case may be. See
"Shareholders' Meetings and Voting Rights" above and "Variable Capital and
Withdrawal Rights" below.
An increase of share capital may be effected through the issuance of new
shares for payment in cash or in kind, by capitalization of indebtedness or by
capitalization of certain items of stockholders' equity.
In the event of a capital increase through the issuance of new shares for
payment, each holder of outstanding Common Stock generally has a preferential
right to subscribe for a number of new shares sufficient to maintain the
holder's existing proportionate holding of shares. Preemptive rights must be
exercised within 15 to 30 days after publication of a notice of the capital
increase in the official gazette of the corporate domicile of the Company and
in one of the newspapers of broad circulation of such domicile; otherwise such
rights lapse as determined by an extraordinary shareholders' meeting. Shares of
Common Stock designated for issuance pursuant to a preemptive rights offering,
with respect to which preemptive rights have not been exercised, may be sold by
the Company on terms previously approved by the shareholders or the Board of
Directors, but in no event below the price at which they were offered to
shareholders.
Article 81 of the Mexican Securities Law permits the issuance and sale of
shares through a public offering without granting shareholders preemptive
rights, if permitted by the corporate charter and upon, among other things,
express authorization of the CNBV and express waiver of preemptive rights by
shareholders at an extraordinary shareholders' meeting. The current Estatutos
and the new Estatutos of the Company permit the issuance and sale of shares in
a public offering in accordance with Article 81 of the Mexican Securities Law.
Such offer may not take place if shareholders representing 25% or more of the
Common Stock vote against such issuance. Any shareholder that votes against
such issuance has the right to demand that the Company sell such shareholder's
shares to the public at the same price at which the newly issued shares are to
be sold.
A reduction of capital stock may be effected to absorb losses or to repay
shareholders. A reduction of capital stock to absorb losses is effected by
reducing the value of all outstanding shares of Common Stock. Any reduction in
the variable portion of the capital stock (except reductions from the exercise
of withdrawal rights) must be effected by reimbursing holders of shares of
Common Stock pro rata.
Only those shares duly subscribed and paid for may be redeemed. Any shares
intended to be redeemed shall be purchased on the Mexican Stock Exchange,
subject to the terms and conditions established by the extraordinary general
shareholders' or the Board of Directors' meeting, as the case may be.
226
Variable Capital and Withdrawal Rights
Under the Estatutos and the new Estatutos and CNBV regulations, variable
capital may not be greater than 10 times the minimum fixed portion of AHMSA's
capital stock (the "Minimum Capital") specified in the Company's Estatutos.
The outstanding variable portion of AHMSA's capital stock, if any, may be
fully or partially withdrawn by the shareholders. The Minimum Capital cannot be
withdrawn. A holder of shares representing AHMSA's stock that wishes to effect
a total or partial withdrawal of its shares must notify AHMSA in an
authenticated written notice to that effect. Given the fact that the capital
stock of AHMSA is represented by a single series of shares, such withdrawal
will be effective to the extent that the remaining capital stock will not be
less than the Minimum Capital. If notice of withdrawal is received prior to the
last quarter of the fiscal year, the withdrawal becomes effective at the end of
the fiscal year in which the notice is given. Otherwise, the withdrawal becomes
effective at the end of the following fiscal year.
Reimbursement of withdrawn shares of Common Stock is made at the lower of:
(i) 95% of the average share price quoted on the Mexican Stock Exchange during
the 30 business days prior to the date on which the withdrawal becomes
effective or (ii) the book value per share as calculated from AHMSA's financial
statements (as approved at the annual ordinary general meeting) for the fiscal
year at the end of which the withdrawal becomes effective. Any such amount to
be paid by AHMSA becomes due on the day following the annual ordinary general
meeting referred to in clause (ii) above.
Purchase by the Company of its Common Stock
AHMSA may temporarily redeem its own shares pursuant to the current
Estatutos and the new Estatutos and other applicable laws and regulations. For
such purpose, AHMSA must approve a reduction in its capital stock with the
prior resolution of the extraordinary general shareholders or the Board of
Directors.
Repurchases in the Event of Delisting
In accordance with the current Estatutos and the new Estatutos and as
required by Mexican securities regulations, those shareholders that effectively
control AHMSA are obligated to make a public offer to purchase the shares owned
by minority holders in the event that the listing of the Common Stock on the
Mexican Stock Exchange is cancelled, whether by resolution of AHMSA or by an
order of the CNBV. Unless a different price is approved by the CNBV, the shares
must be purchased by such controlling shareholders at the higher of (i) the
average quotation price for the 30 days prior to the date of the offer or (ii)
the book value, as reflected in the last quarterly report filed with the CNBV
and the Mexican Stock Exchange prior to the date of the offer.
Holders of the majority of the shares are not bound to make such a public
offer to purchase if the cancellation of the listing is approved by all of the
shareholders of AHMSA. This provision, contained in AHMSA's Estatutos and the
new Estatutos, may not be amended without the consent of holders of at least
95% of the outstanding shares of Common Stock and the prior approval of the
CNBV.
Other Provisions
Duration
The duration of the Company's existence is 99 years from April 29, 1992.
Shareholders' Conflicts of Interest
Under Mexican law, any shareholder that has a conflict of interest with
respect to any transaction must abstain from voting thereon at the relevant
shareholders' meeting. A shareholder that votes on a transaction in which its
interest conflicts with that of AHMSA may be liable for damages in the event
the relevant transaction would not have been approved without such
shareholder's vote.
227
Directors' Conflicts of Interest
Under Mexican law, any director who has a conflict of interest with AHMSA in
any transaction must disclose such fact to the other directors and abstain from
participating in the corresponding discussion. Any director who violates such
provision will be liable for damages. Additionally, the directors and statutory
auditors of AHMSA may not represent other shareholders in the shareholders'
meetings. The Estatutos and the new Estatutos contain a similar provision. See
"Related Party Transactions".
Appraisal Rights
Whenever the shareholders approve a change of corporate purpose, change of
nationality or transformation from one type of corporate form to another, any
shareholder that is entitled to vote on such change or transformation and has
voted against such change or transformation has the right to withdraw from
AHMSA and receive the amount calculated as specified under Mexican law
attributable to its shares, provided that such shareholder exercises its right
to withdraw within 15 days following the adjournment of the meeting at which
the change or transformation was approved.
Liquidation
Upon dissolution of AHMSA as provided in Chapter XI of the Mexican General
Law of Commercial Companies, one or more liquidators must be appointed at an
extraordinary shareholders' meeting to wind up its affairs. All fully paid and
outstanding shares will be entitled to participate equally in any distribution
upon liquidation. Partially paid shares participate in any distribution in the
same proportion that such shares have been paid at the time of the distribution.
Purchase of Common Stock by Subsidiaries of AHMSA
The Estatutos and the new Estatutos prohibit the purchase of Common Stock by
subsidiaries of AHMSA.
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DESCRIPTION OF AHMSA CREDITOR VOTING TRUST
The AHMSA Creditor Voting Trust is an irrevocable trust created under the
Special Trust (Alternate Regime) Law of 1997 of the Cayman Islands as a trust
for the sole benefit of AHMSA's creditors pursuant to a declaration of trust
executed by AHMSA and HSBC Financial Services (Cayman) Limited, who will
initially serve as co-trustees, on , 2002. After the registration
statement, of which this Prospectus and Consent Solicitation is a part, is
declared effective by the SEC and prior to the closing of the restructuring
plan, we will resign as trustee and HSBC Financial Services will be the sole
trustee. The trust will be governed by the declaration of trust and the Share
Transfer and Voting Agreement and the Acknowledgment, Consent, Indemnification
and Cooperation Agreement (the "Company Agreement"). Under Cayman Islands Law,
the AHMSA Creditor Voting Trust is not technically a legal entity but rather
the creation of a contractual, fiduciary relationship between the trustees and
the beneficiaries.
Purpose of the AHMSA Creditor Voting Trust
The purpose of the AHMSA Creditor Voting Trust will be (i) the holding of
the shares of AHMSA common stock issued to AHMSA's creditors on the closing
date of the restructuring plan and the shares of AHMSA common stock transferred
to the trust from the Supplemental Shares Trust (and other property, including
additional shares of common stock, or cash which may be distributed by AHMSA to
its shareholders, the "Trust Shares"), (ii) obtaining legal title in the common
stock to be held in the name of its trustee, and (iii) providing to its trustee
the right to exercise any and all rights derived from or pertaining to the
Trust Shares including the right to vote or otherwise represent all of the
Trust Shares and the right to grant options in the Trust Shares. Under the
terms of the AHMSA Creditor Voting Trust, its trustee will hold the Trust
Shares in its name and exercise all such rights of the Trust Shares pursuant to
the terms of the Declaration of Trust and Share Transfer and Voting Agreement.
Voting of Our Common Stock; Voting Trust Interest holder vote
The AHMSA Creditor Voting Trust will vote all shares of our common stock
held by it as a block at the direction of the majority of the outstanding
voting trust interests. Material decisions, such as any permitted release of
shares, amendments to the agreements governing the voting trust, and changes to
the term of the voting trust, must be approved by a vote of the majority of
holders of voting interests and the majority of holders of all voting and
nonvoting interests in the voting trust.
Duration of the AHMSA Creditor Voting Trust
The AHMSA Creditor Voting Trust will terminate and the shares of AHMSA
common stock held by it will be released upon the earliest of
. consummation of a sale (including as a result of an exercise of the
Purchase Option by the special purpose vehicle created by GAN) or
release of all shares held in the AHMSA Creditor Voting Trust;
. both (1) termination or expiration of (a) the Purchase Option (as
defined below), (b) the Right of First Refusal (as defined below) and
(c) the MICARE Repurchase Option (as defined below) and (2) after
payment in full in cash of the New Loans and the New Notes and all other
amounts owing under the other transaction documents including fees,
expenses and indemnities payable by AHMSA ("Repayment in Full") ; or
. after the termination or expiration of (a) the Purchase Option (as
defined below), (b) the Right of First Refusal (as defined below) and
(c) the MICARE Repurchase Option (and prior to Repayment in Full), upon
the affirmative vote of the majority of the holders of voting interests
and the holders of a majority of the voting and nonvoting interests
combined.
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Trust Interests
Series of Trust Interests
Each person who deposits shares of our common stock into the AHMSA Creditor
Voting Trust will receive an equal number of interests in the AHMSA Creditor
Voting Trust in one of three series:
. MICARE Series--to be issued to depositors with respect to indebtedness
they held of MICARE on the closing date of the restructuring plan,
representing beneficial ownership of certain of our shares of common
stock. The shares of our common stock corresponding to the MICARE Series
of trust interests will be subject to the MICARE Share Repurchase Option
and the Purchase Option described below.
. Closing Date Series--to be issued to depositors with respect to our
indebtedness that they held other than with respect to indebtedness of
MICARE on the closing date of the restructuring plan, representing
beneficial ownership of certain of our shares of common stock. The
shares of our common stock corresponding to the Closing Date Series of
trust interests will be subject to the Purchase Option and the Right of
First Refusal described below.
. Converted Interest Series--upon the transfer to the AHMSA Creditor
Voting Trust of our common stock that was used by GAN to pay Converted
Interest on our behalf from the Supplemental Share Trust, the holders of
such indebtedness will be issued Converted Interest Series trust
interests, representing beneficial ownership of certain of our shares of
common stock.
Voting and Non-Voting Trust Interests
Under the terms of the Share Transfer and Voting Agreement, the interests in
the AHMSA Creditor Voting Trust will consist of both voting and non-voting
classes of beneficial interests, which will be identical in every respect
except voting rights. Voting interests will have exclusive voting rights
relating to corporate governance and the voting of shares of AHMSA Common
Stock. The approval of a majority of holders of voting interests and the
majority of holders of all voting and nonvoting interests in the trust is
required to approve material decisions and amendments relating to the voting
trust itself (except as discussed below). All creditors initially receiving
trust interests upon closing of the restructuring plan or initial issuance of
the Converted Interest Series will receive voting interests. In the event of
any transfer of any voting interest to a person other than
. an affiliate of the transferor or
. another person holding voting interests at such time or an affiliate
thereof or
. a transferee who acquires a proportional amount of our New Loans and New
Notes,
then such voting interest will automatically convert into a nonvoting interest
of the same series as the corresponding voting interest. Non-voting interests
may be converted into voting interests in the event that nonvoting interests
are transferred to a holder of voting interests, up to the maximum allowable
voting interests for such holder. Except in connection with the acquisition of
additional New Loans and New Notes or initial issuance of Converted Interest
Series trust interests, all trust interests held by a creditor with a voting
interest in excess of two times the voting interest held on the closing of the
restructuring plan or the date the creditor first acquired trust interests will
be automatically converted into non-voting interests.
Restrictions on Transfer
Under the Share Transfer and Voting Agreement, we, GAN, shareholders of GAN
and their affiliates are ineligible to be a transferee of beneficial interests
of the AHMSA Creditor Voting Trust (and all such purported transfers will be
null and void), except only if and where both (a) the AHMSA Creditor Voting
Trust were deemed to be an unregistered investment company so that the purchase
option and/or the MICARE share repurchase option are not enforceable against
the AHMSA Creditor Voting Trust and (b) the applicable option holder (AHMSA, in
the case of the MICARE Share Repurchase Option, and the special purpose vehicle
created
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by GAN in the case of the Purchase Option) desires to exercise the option (in
which case the holders of the trust interests will transfer the applicable
number of underlying trust shares or its trust certificate representing the
applicable number of underlying trust shares in order to permit the applicable
option holder to exercise its option).
Governance of the AHMSA Creditor Voting Trust
Under the terms of the declaration, the AHMSA Creditor Voting Trust's
business and affairs will be conducted by its trustee, pursuant to the terms of
the Declaration of Trust, the Share Transfer and Voting Agreement and the
related agreements. Any two or more holders of 25% or more of the voting
interests in the AHMSA Creditor Voting Trust will be entitled to recommend to
the trustee:
. a course of action or inaction by the trustee; and
. candidates for our directors and an examiner of us to be nominated by
the trustee.
Following any such recommendation, holders of voting trust interests will
vote whether to approve or disapprove such recommendation. A plurality of the
votes cast will be determinative.
Transfer of Shares held by the AHMSA Creditor Voting Trust
Shares Corresponding to the Converted Interest Series
There are no restrictions on the AHMSA Creditor Voting Trust's transfer of
our shares corresponding to the Converted Interest Series.
Shares Corresponding to the MICARE Series
Other than pursuant to the exercise of the Purchase Option, the AHMSA
Creditor Voting Trust is prohibited from transferring our common stock
corresponding to the MICARE Series of trust interests prior to the expiration
or termination of the MICARE Share Repurchase Option described below under
"MICARE Share Repurchase Option".
Prior to the Third Anniversary of the Closing of the Restructuring Plan
The AHMSA Creditor Voting Trust is prohibited from transferring our common
stock prior to the third anniversary of the closing of the restructuring plan.
Prior to the Expiration of the Right of First Refusal
After the expiration of the three-year purchase option in favor of the
special purpose vehicle created by GAN, but prior to the expiration of the
two-year additional right of first refusal period, the AHMSA Creditor Voting
Trust may sell to a third party all of the shares of our common stock held by
it corresponding to the Closing Date Series upon the affirmative vote of the
holders of a majority of the voting trust interests of such Series and a
majority of the voting and non-voting interests of such Series combined. Any
such transfer shall be subject to the right of first refusal described below.
After the Termination or the Expiration of the Right of First Refusal until
termination of the Special Equity Rights Period
After the termination or the expiration of the right of first refusal
period, but before the expiration of the Special Equity Rights Period, the
AHMSA Creditor Voting Trust may sell or release all, or any portion of the
shares of AHMSA common stock held by it corresponding to a particular Series
(other than those shares
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corresponding to the MICARE Series of trust interests) upon the affirmative
vote of the holders of a majority of the voting trust interests of such Series
and a majority of the voting and non-voting interests of such Series combined.
The "Special Equity Rights Period" will end on the later of (a) the date of
Repayment in Full and (b) the earliest of
. expiration or termination of the right of first refusal;
. sale of all AHMSA shares subject to the AHMSA Creditor Voting Trust
(other than those shares corresponding to the MICARE Series of trust
interests);
. waiver by the holder of the right of first refusal of the right of first
refusal; and
. consummation of an exercise of the three-year purchase option.
After the Expiration of the Special Equity Rights Period
After the expiration of the Special Equity Rights Period, the AHMSA Creditor
Trust must transfer all of the shares of our common stock held by it (other
than those shares corresponding to the MICARE Series of trust interests) to the
holders of the corresponding series of trust interests in full satisfaction of
such interests.
Special Equity Rights
Selection and Retention of Chief Financial Officer
The AHMSA Creditor Voting Trust and the Trust Directors nominated by it will
be entitled to certain veto rights over our actions, and the Trust Directors
will have the right to control the selection and retention of the Chief
Financial Officer of AHMSA and all officers reporting to the chief financial
officer (other than the tax planning officer), our internal and external
auditors and the secretary of our Board of Directors.
Under the Company Agreement, the majority of the Board of Directors
designated by the AHMSA Creditor Voting Trust (i.e., the Trust Directors) will
have the right to terminate the Chief Financial Officer of AHMSA (the "CFO").
All officers and employees within AHMSA's finance department will report to the
CFO and all such officers and employees other than the tax director may only be
terminated by the CFO or, in the event that any such officer or employee
commits a criminal act against the Company, which legally constitutes a crime
pursuant to applicable criminal legislation ("Cause"), by the Chief Executive
Officer of AHMSA the ("CEO"). The tax director of AHMSA, and all officers and
employees reporting to the tax director, will be appointed by the CEO of AHMSA,
in his sole discretion, and may be terminated only by him in his sole
discretion or by the CFO for Cause. The right of the Trust Directors to
terminate the CFO will terminate following the expiration of Special Equity
Rights Period.
The CFO at the time of the consummation of the restructuring plan (the
"Initial CFO") and any subsequent CFO (a "Subsequent CFO") appointed prior to
the First CEO Removal (as defined herein), may only be removed from such
position by a decision of (a) the CEO of AHMSA, if such decision is ratified
within 17 days by a majority of the entire board of directors of the Company,
(b) a majority of the entire board of directors of the Company (any such
removal pursuant to (a) or (b) but in the case of (b) only to the extent such
removal was without the consent of a majority of the Trust Directors, the
"First CEO Removal"), or (c) a majority of the Trust Directors. After the First
CEO Removal and prior to the Second CEO Removal (as defined herein), the
Subsequent CFO may only be removed from such position by (i) the CEO, if such
decision is ratified within 17 days by a majority of the entire board of
directors of the Company including at least one Trust Director, (ii) a majority
of the entire board of directors of AHMSA including at least one Trust Director
(any such removal pursuant to (i) or (ii) but in the case of (ii) only to the
extent such removal was without the consent of a majority of the Trust
Directors, the "Second CEO Removal"), or (iii) a majority of the Trust
Directors. After the Second CEO Removal, any Subsequent CFO may only be removed
by a majority of the Trust Directors.
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Any CFO appointed to replace the Initial CFO or any Subsequent CFO shall be
appointed in the following manner. Prior to the First CEO Removal, the Trust
Directors shall nominate two CFO candidates, the directors nominated by GAN
(the ''GAN Directors") may veto one such candidate and the second shall become
the Subsequent CFO. If the GAN Directors fail to exercise such veto right
within 17 days of written notice to the GAN Directors of the CFO candidates
nominated by the Trust Directors, the Trust Directors may select a Subsequent
CFO among such CFO candidates, without the CEO or the board of directors of
AHMSA or any other person or entity having any consent right. After the Second
CEO Removal, the Trust Directors shall select the Subsequent CFO, without the
CEO or the board of directors of AHMSA or any other person or entity having any
consent right.
Resolution of Accounting Issues
With respect to changes in accounting treatments, the CEO may require a
change in AHMSA's accounting treatment so long as his proposal is in accordance
with Mexican GAAP consistently applied. If the CFO of AHMSA believes the
proposal of the CEO is not in accordance with Mexican GAAP consistently
applied, he may refer the issue to the Company's external auditors whose
determination, as to whether such proposal is in accordance with Mexican GAAP
consistently applied, will be conclusive.
Super Majority Board Votes
Under the terms of the new Estatutos, so long as the debt issued under the
restructuring agreement is outstanding, or the right of first refusal over
AHMSA common stock in favor of the special purpose vehicle created by GAN has
not expired or been waived, the vote of a majority of the Board of Directors,
including at least three of the Directors elected by the AHMSA Creditor Voting
Trust, is required to approve certain actions, described above under
"Description of Common Stock--Board of Directors."
Additional Provisions Relating to the AHMSA Creditor Voting Trust
As long as the AHMSA Creditor Voting Trust is required to remain a reporting
entity under the Exchange Act or could exercise registration rights under the
Securities Act, we are required to remain a reporting entity under the Exchange
Act and are not permitted to deregister, even if permitted to do so under the
Exchange Act.
We will reimburse HSBC Financial Services (Cayman) Limited, as trustee, for
any expenses of professionals incurred in preparing or reviewing reports for
the AHMSA Creditor Voting Trust under the Exchange Act.
HSBC Financial Services (Cayman) Limited, as trustee, will not be required
to execute on behalf of the AHMSA Creditor Voting Trust any registration
statements under the Securities Act subsequent to the closing of the
restructuring plan unless HSBC is satisfied that it will not have liability
under Section 11 of the Securities Act with respect thereto.
Assets of the AHMSA Creditor Voting Trust
Upon the consummation of the restructuring plan, the Trust Shares (and other
property, including additional shares of common stock, or cash which may be
distributed by AHMSA to our shareholders) will be the sole assets of the AHMSA
Creditor Voting Trust. The Trust Shares held in the AHMSA Creditor Voting Trust
(other than shares of AHMSA Common Stock transferred ("Converted Interest
Shares") as payment of Converted Interest on the New Loans and the New Notes)
will be subject to a three-year purchase option (the "Purchase Option") and an
additional two year right of first refusal in favor of a special purpose
vehicle of our parent company, and in the case of shares to be issued to the
creditors of MICARE a nine-year purchase option (the "MICARE Share Repurchase
Option") in our favor.
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Payments and dividends made upon the shares of AHMSA common stock held by
the AHMSA Creditor Voting Trust and payments and reimbursements made under the
Company Agreement will be the sole revenue of the AHMSA Creditor Voting Trust.
Pursuant to the Company Agreement, AHMSA has agreed to reimburse the trustee
for the reasonable fees and expenses related to administering the AHMSA
Creditor Voting Trust. The Share Transfer and Voting Agreement provides that
the AHMSA Creditor Voting Trust will indemnify its trustee. Upon the
consummation of the restructuring plan, two million dollars (U.S.$2,000,000) of
the Restructuring Fee will be deposited with the trustee of the AHMSA Creditor
Voting Trust to fund the AHMSA Creditor Voting Trust's obligation to indemnify
the trustee.
Obligations of Holders of Trusts and Interests
Each holder of a trust interest must provide to the trustee of the AHMSA
Creditor Voting Trust information (including telephone number, fax number,
e-mail and address) for an individual to act as its representative in dealing
with the trustee. Such representative shall have the exclusive right to vote
all the trust interests of such holder. Each holder may from time to time
change such representative.
Stock Option Agreement
Grant of Two Purchase Options
Pursuant to the Stock Option Agreement, the AHMSA Creditor Voting Trust will
grant an option on our shares of common stock (other than those corresponding
to the Converted Interest Series of trust interests):
. to us to purchase shares (the "MICARE Trust Shares") corresponding to the
MICARE Series of trust interests (the "MICARE Share Repurchase Option");
and
. to a special purpose vehicle created by GAN to purchase all (but not less
than all) of the shares of common stock held by it, including the shares
subject to the MICARE Share Repurchase Option (the "Purchase Option").
The MICARE Share Repurchase Option
Shares Subject to MICARE Share Repurchase Option
If the New Subordinated Notes, Series E have been paid or deemed to have
been paid in full, then the MICARE Share Repurchase Option may be exercised in
full. Otherwise, the number of MICARE Trust Shares subject to the option will
be equal to the product of (x) the number of MICARE Trust Shares outstanding at
the closing date of the restructuring plan and (y) a fraction, the numerator of
which is the payments that have been made in respect of the principal amount of
the New Subordinated Notes, Series E that has been repaid prior to the date of
exercise of the option and the denominator of which is the sum of the then
outstanding principal amount of the New Subordinated Notes, Series E, and the
previously repaid principal amount of the New Subordinated Notes, Series E.
Exercise Period and Exercise Price
The MICARE Share Repurchase Option may be exercised from time to time
following payment in full of all indebtedness under the New Credit Agreement
and the New Indenture and all other amounts in respect of fees, expenses and
indemnities by us under the transaction documents (other than the Company
Agreement, the Registration Rights Agreement and the Stock Option Agreement)
until the earlier of (a) the ninth anniversary of the closing of the
restructuring plan or (b) the exercise of the Purchase Option. The exercise
price of the MICARE Share Repurchase Option is U.S.$1 per 10,000 shares.
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Purchase Option
Exercise Period
The Purchase Option may be exercised after payment in full in cash of all
indebtedness under the New Credit Agreement or the New Indenture and all other
amounts in respect of fees, expenses and indemnities by us under the
transaction documents (other than the Company Agreement, the Registration
Rights Agreement and the Stock Option Agreement) until the third anniversary of
the closing of the restructuring plan.
Shares Subject to Purchase Option
The shares subject to the Purchase Option will be all (and only all) shares
subject to the AHMSA Creditor Voting Trust (other than the shares corresponding
to the Converted Interest Series).
Exercise Price
Prior to the first anniversary of the closing of the restructuring plan, the
exercise price of the Purchase Option will be an amount equal to a
pre-negotiated price based on (a) our enterprise value and whether MICARE and
certain assets have been sold less (b) the principal amount of the New Loans
and the New Notes. The exercise price if MICARE has not been sold and the asset
sales have not been completed will be U.S.$223.2 million. The exercise price if
MICARE has not been sold but the asset sales have been completed will be
U.S.$269.2 million. The exercise price if MICARE has been sold but the asset
sales have not been completed will be U.S.$211.2 million. The exercise price if
MICARE has been sold and the asset sales have been completed will be U.S.$257.2
million.
Following the first anniversary of the closing of the restructuring plan,
the exercise price will be the greater of the applicable option price in the
first year and 40% of the sum of (i) six times EBITDA for AHMSA for the prior
year less (ii) outstanding funded indebtedness at the time of exercise of the
Purchase Option plus (iii) cash on hand, where funded indebtedness equals the
sum of (a) the New Loans, (b) the New Notes, (c) indebtedness the proceeds of
which will be applied solely to repay the New Loans and the New Notes, (d) the
Old Loans and Old Notes that have not been restructured pursuant to the
restructuring plan, (e) the Bancomext Obligation, (f) the New Subordinated
Notes, Series D and (g) the indebtedness (in an aggregate amount not to exceed
U.S.$100 million) permitted under the New Credit Agreement that is described in
item (2) in "Description of New Credit Agreement--Negative
Covenants--Indebtedness."
Right of First Refusal
Under the Stock Option Agreement, the special purpose vehicle created by GAN
that holds the Purchase Option will be granted a right to purchase any of our
shares held by the AHMSA Creditor Voting Trust (other than shares corresponding
to the Converted Interest Series of trust interests) that are proposed to be
purchased by a third party, on the same terms as proposed by the third party.
Right of First Refusal Period
The Right of First Refusal Period will be from the termination of the
Purchase Option until the earlier of (a) the fifth anniversary of the closing
of the restructuring plan or (b) waiver of the right of first refusal by AHMSA,
provided that our indebtedness issued under the terms of the restructuring plan
and all other amounts in respect of fees, expenses and indemnities by us under
the transaction documents (other than the Company Agreement, the Registration
Rights Agreement and the Stock Option Agreement) have been paid in full in cash.
Non-cash consideration
If the consideration proposed to be paid for shares consists of something
other than cash, then GAN's special purpose vehicle is obligated to pay the
cash equivalent of such consideration (as agreed to by the
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AHMSA Creditor Voting Trust and GAN's special purpose vehicle is, or as
determined pursuant to the appraisal procedure set forth in the Stock Option
Agreement). Debt instruments delivered by the special purpose vehicle will be
considered cash for purposes of this analysis to the extent that the
instruments are guaranteed by an investment grade company (meaning a company
with a senior, unsecured, U.S. dollar-based, noncredit enhanced debt rating
equal to or greater than "BBB-").
Obligation of Holders of Trust Interests
If for any reason either of the two purchase options or the right of first
refusal is not enforceable against the AHMSA Creditor Voting Trust, each
individual holder of Trust Interests agrees to have the two purchase options
and the right of first refusal with respect to block trades (meaning a
transaction or series of transactions where at least 5% of the issued and
outstanding shares are sold) apply directly to its interest in the AHMSA
Creditor Voting Trust.
Supplemental Shares Trust Agreement
The AHMSA Creditor Voting Trust may receive additional shares of AHMSA
common stock subsequent to the closing date of the restructuring plan under the
terms of the Supplemental Shares Trust Agreement. Pursuant to such terms GAN
will create a trust by transferring in trust and delivering to the Supplemental
Shares Trustee all legal right, title and interest in 20% of the outstanding
shares of AHMSA common stock, the initial "Supplemental Shares." If GAN
acquires additional AHMSA shares it must deposit such shares in the
Supplemental Shares Trust as necessary to maintain the 20% requirement. GAN
must also deliver additional shares of AHMSA Common Stock to the extent they
are received as distributions in respect of the initial Supplemental Shares.
In lieu of paying interest on the new loans and the new notes in cash, on
any of the first three Payment Dates, AHMSA may elect to satisfy its obligation
to pay all or a portion of such interest by causing GAN to pay the holders of
new loans and new notes with AHMSA common stock. Upon such election, GAN will
direct the Supplemental Share Trustee to deem Supplemental Shares representing
1% of the outstanding shares of AHMSA common stock for each U.S.$6.73 million
in Converted Interest (and a ratable fraction of 1% for any Converted Interest
amount that is less than U.S.$6.73 million) as Converted Interest Shares within
the Supplemental Shares Trust. With respect to Supplemental Shares, unless a
payment default on the New Notes or the New Loans exists, GAN will have the
right to exercise all voting rights and to receive and retain cash dividends.
With respect to Converted Interest Shares while they are held in the
Supplemental Shares Trust, GAN will have the right to exercise all voting
rights but the Supplemental Shares Trustee (on behalf of the holders of our New
Notes and New Loans) will receive and retain all dividends, which dividends
will be distributed to such holders of New Notes and New Loans from time to
time. GAN will have an option to repurchase the Converted Interest Shares for
the GAN Option Exercise Price (see "Description of New Notes--General") from
time to time up until the fourth anniversary of the applicable Converted
Interest payment date, at which time if the option has not been exercised the
corresponding Converted Interest Shares would be transferred to the AHMSA
Creditor Voting Trust and the creditors under the New Credit Agreement and New
Indenture at such time would be issued Converted Interest Series trust
interests. If GAN exercises the option, the corresponding Converted Interest
Supplemental Shares purchased would once again be deemed Supplemental Shares
within the Supplemental Shares Trust. If (i) we fail to pay any amount of (a)
principal when due under the New Loans or New Notes or (b) interest or fees
later than any allowed cure periods under the New Loans or New Notes or (c) any
redemption amounts or repurchase amounts when due under the New Notes or (ii)
our payment obligations are accelerated after an event of default under the New
Loans or New Notes, then, all Converted Interest Shares will be transferred to
the AHMSA Creditor Voting Trust and our creditors at such time under the New
Credit Agreement and New Indenture will receive Converted Interest Series Trust
Interests in respect of such shares.
Upon a payment default on the New Loans or the New Notes, the trustee of the
Supplemental Shares Trust will have the right to exercise any and all remedies
available with respect to the shares of our common stock held
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in the Supplemental Share Trust, including selling such shares, distributing
such shares to our creditors at the time, and retaining the shares and
exercising all rights of ownership, subject to the direction of the trustee of
the AHMSA Creditor Voting Trust in the case of voting.
Registration Rights Agreement
Upon the consummation of the restructuring plan, we, the AHMSA Creditor
Voting Trust, the Supplemental Share Trust and each creditor who consents the
restructuring plan will enter into a Registration Rights Agreement which will
provide for, among other things:
Registration of Trust Interests by the AHMSA Creditor Voting Trust
We have agreed to provide all information required under applicable Mexican
or U.S. law in connection with up to two registrations of trust interests by
the AHMSA Creditor Voting Trust, subject to customary blackout provisions. We
have also agreed to pay certain fees and expenses in connection with such
registrations, including up to U.S.$150,000 for fees and expenses for counsel
to the trustee of the AHMSA Creditor Voting Trust for the first registration,
and up to U.S.$50,000 for fees and expenses for counsel to the voting trust
trustee for the second registration.
Demand Registration Rights
We have also agreed to register the following securities under applicable
Mexican or U.S. law, subject to customary blackout periods described below; but
in the case of registrations under paragraphs (a), (b) and (c), no more than a
total of two such demands may be made, and in the case of registrations under
paragraph (d) no more than two such demands may be made as follows:
(a) after the expiration of the purchase option, any of the shares subject
to the AHMSA Creditor Voting Trust, other than the shares corresponding
to the MICARE Series of trust interests and the Converted Interest
Series of trust interests;
(b) at any time after the expiration of the MICARE Share Repurchase Option,
the shares corresponding to the MICARE Series of trust interests;
(c) at any time, the shares used to pay interest on our loans (i.e., the
Converted Interest Shares); and
(d) after a payment default, any of the shares held in the Supplemental
Share Trust.
We have also agreed to pay certain fees and expenses in connection with each
such registration, including up to U.S.$75,000 for fees and expenses for
counsel to the Voting Trust Trustee, up to U.S.$50,000 for fees and expenses
for counsel to the Supplemental Trust Trustee, and up to U.S.$125,000 for fees
and expenses for counsel to holders of trust interests.
Piggyback Registration Rights
We have also granted customary piggyback registration rights in connection
with any registration by us of our own securities.
Blackout periods
The foregoing registration rights are subject to certain conditions and
limitations including:
. our right to delay for 90 days our obligation to provide information in
connection with a registration of Trust Interests;
. our right to delay for up to 90 days the filing or effectiveness of a
registration statement pursuant to a demand for registration;
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. our right to delay for up to 90 days the effectiveness of a registration
statement filed in connection with a registration by us of our own
securities;
. our right to require the trustee of the AHMSA Creditor Voting Trust, the
trustee of the Supplemental Share Trust or the certificate holders to
halt for up to 90 days the sale or distribution of securities in
connection with a registration of Trust Interests, a demand for
registration or a registration pursuant to Piggyback rights if we
reasonably determine that such registration, sale or distribution would
have a material adverse effect on any proposal or plan by us to engage
in any financing, acquisition of assets or any merger, consolidation,
tender offer or other significant transaction.
We may not exercise our rights to delay registrations more than twice in any
period of twelve consecutive months or if any occurrence of an event of default
under the New Credit Agreement or the New Indenture has occurred and is
continuing. Additionally, any of the blackout periods described above will
terminate upon the occurrence of an event of default under the New Credit
Agreement or the New Indenture or if the significant transaction that caused
the delay in registration either is consummated or we believe that the delay is
no longer necessary.
In the case of demand or piggyback registrations, the underwriters in any
underwritten offering may limit the number of shares of common stock to be
included in such registration.
Indemnities
We have agreed to indemnify the holders of registration rights in connection
with demand and piggyback registrations under certain circumstances. We have
also agreed to indemnify the AHMSA Creditor Voting Trust and the trustee of the
AHMSA Creditor Voting Trust in respect of information we provide to the AHMSA
Creditor Voting Trust in connection with its request for information in order
to register trust interests
The place of business and the telephone number of the AHMSA Creditor Voting
Trust is HSBC House, 4th Floor, Mary Street, P.O. Box 1109 GT, George Town,
Grand Cayman, Cayman Islands and .
HSBC Financial Services (Cayman) Limited's legal advisors are Quin &
Hampson, as to the laws of the Cayman Islands, and Pryor Cashman Sherman &
Flynn LLP, as to the laws of the United States.
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PROPOSED AMENDMENTS TO THE OLD NOTE INDENTURES
Holders of outstanding Old Senior Notes and Old Discount Convertible Notes
who vote to accept the restructuring plan will be deemed to have consented to
. amendments to the indenture governing the Old Senior Notes (the "Old
Senior Note Indenture") and the indenture governing the Old Discount
Convertible Notes (the "Old Discount Convertible Note Indenture" and,
together with the Old Senior Note Indenture, the "Old Indentures") that
on the date of the lifting of suspension of payments will have the
effect described below (the "Proposed Amendments"); and
. the execution and delivery of the supplemental indentures to effect the
Proposed Amendments.
Pursuant to the terms of the Old Indentures, the holders of Old Senior Notes
and Old Discount Convertible Notes are not required to approve the particular
form of any proposed supplemental indenture or amendment, but only the
substance thereof. With respect to those provisions of the Old Indentures which
will be amended, "Annex III--Form of Supplemental Indenture for Old Senior
Notes" and "Annex IV--Form of Supplemental Indenture for Old Discount
Convertible Notes" set forth the form of the provisions as proposed to be
amended by the Proposed Amendments. "Annex I--Description of Old Senior Notes"
and "Annex II--Description of Old Discount Convertible Notes" set forth a
description of the terms of the Old Senior Notes and Old Discount Convertible
Notes before giving effect to the Proposed Amendments. While the substance of
the Proposed Amendments will conform with the description set forth below, the
form of the Proposed Amendments, which will be set forth in supplement
indentures, is subject to change from the forms included as Annex III and Annex
IV. All statements herein regarding the substance of any provision of the
Proposed Amendments and the Old Indentures are qualified in their entirety by
reference to the form of Supplemental Indentures and to the Old Indentures.
The Proposed Amendments.
The Proposed Amendments would eliminate or amend the following provisions of
the Old Indentures:
Provision Amended
or Deleted Indenture Section Effect of Amendment
- ----------------- ----------------- -------------------
Compliance Certificates (S) 1004 - Both The elimination of the "Compliance Certificate" covenant would
Old Indentures terminate the contractual obligation of AHMSA to deliver annual
compliance certificates and certificates reporting events of default.
Existence (S) 1005 - Both The elimination of the "Existence" covenant would permit
Old Indentures termination of the existence of AHMSA or any of its Subsidiaries.
Maintenance of Properties (S) 1006 - Both The elimination of the "Maintenance of Properties" covenant
Old Indentures would terminate the contractual obligation of AHMSA to maintain
its properties and assets and those of its Subsidiaries and to make
necessary repairs.
Payment of Taxes and (S) 1007 - Both The elimination of the "Payment of Taxes and Other Claims"
Other Claims Old Indentures covenant would terminate the contractual obligation of AHMSA to
pay prior to delinquency all material undisputed taxes and similar
governmental charges.
Listing of Securities and (S) 1008 - The elimination of the "Listing of Securities and ADSs" covenant
ADSs Old Discount would terminate the contractual obligation of AHMSA to list its
Convertible Old Discount Convertible Notes and ADSs in the New York Stock
Note Indenture Exchange.
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Provision Amended
or Deleted Indenture Section Effect of Amendment
- ----------------- ----------------- -------------------
Maintenance of (S) 1008 - Old The elimination of the "Maintenance of Insurance" covenant from the
Insurance Senior Note Old Senior Note Indenture and the Old Discount Convertible Note
Indenture Indenture would terminate the contractual obligation of AHMSA to
(S) 1009 - Old maintain insurance as is customarily carried by companies engaged in
Discount similar businesses and owning similar assets.
Convertible Note
Indenture
Provision of (S) 1010 - Old The elimination of the "Provision of Financial Statements and
Financial Statements Senior Note Records" covenant would terminate the contractual obligation of
and Records Indenture AHMSA to provide the trustee and the holders of Old Senior Notes
with annual reports, quarterly reports and other information that a
reporting issuer is required to file.
Currency Indemnity (S) 1010 - Old The elimination of the "Currency Indemnity" covenant would
Discount terminate the contractual obligation of AHMSA to make payments on
Convertible the Old Notes in U.S. Dollars and to indemnify holders for losses
Note Indenture from currency risk with respect to payments in any currency other
(S) 1011 - Old than U.S. Dollars.
Senior Note
Indenture
Limitation on (S) 1012 - Old The elimination of the "Limitation on Incurrence of Indebtedness"
Incurrence of Senior Note covenant would permit AHMSA and its Subsidiaries to issue,
Indebtedness Indenture assume, guarantee, incur or otherwise become liable for indebtedness
without any conditions or limitations.
Limitations on the (S) 1013 - Old The elimination of the "Limitations on the Issuance of Capital Stock
Issuance of Capital Senior Note of Subsidiaries" covenant would permit AHMSA and its Subsidiaries
Stock of Subsidiaries Indenture to issue capital stock without any conditions or limitations.
Limitation on (S) 1014 - Old The elimination of the "Limitation on Restricted Payments" covenant
Restricted Payments Senior Note would permit AHMSA or any of its Subsidiaries to declare or pay
Indenture distributions or dividends, purchase, repurchase, redeem, defease or
otherwise acquire for value any of their capital stock or subordinated
debt or to make investments of any nature or size without any
conditions or limitations.
Limitation on Liens (S) 1015 - Old The elimination of the "Limitation on Liens" covenant would permit
Senior Note AHMSA and any of its Subsidiaries to create, incur, assume or suffer
Indenture to exist liens on any of their assets, including liens to secure
indebtedness other than the Old Senior Notes.
Limitation on Sale (S) 1016 - Old The elimination of the "Limitation on Sale and Leaseback
and Leaseback Senior Note Transactions" covenant would permit AHMSA and any of its
Transactions Indenture Subsidiaries to sell and leaseback their assets.
Limitation on Certain (S) 1017 - Old The amendment of the "Limitation on Certain Asset Dispositions"
Asset Dispositions Senior Note covenant would remove the restriction that at least 75% of the value
Indenture of the consideration for such "Asset Disposition" be in the form of
certain permitted consideration. The portion of the proceeds of an
"Asset Disposition" that are required to be applied to an offer to
redeem the Old Senior Notes is not intended to be reduced as a result
of this modification.
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Provision Amended
or Deleted Indenture Section Effect of Amendment
- ----------------- ----------------- -------------------
Limitation (S) 1018 - Old The elimination of the "Limitation Concerning Distributions and Transfers
Concerning Senior Note by Subsidiaries" covenant would permit AHMSA and any of its
Distributions and Indenture Subsidiaries to place restrictions on the ability of Subsidiaries to (a) pay
Transfers by dividends to AHMSA or any other Subsidiary, (b) make loans to AHMSA
Subsidiaries or any other Subsidiary, or (c) transfer assets to AHMSA or any other
Subsidiary without any conditions or limitations.
Limitation on (S) 1019 - Old The elimination of the "Limitation on Issuances of Guarantees by
Issuances of Senior Note Subsidiaries" covenant would permit Subsidiaries of AHMSA to guarantee
Guarantees by Indenture indebtedness without any conditions or limitations.
Subsidiaries
Limitation on (S) 1020 - Old The elimination of the "Limitation on Transactions With Affiliates"
Transactions With Senior Note covenant would permit AHMSA or any of its Subsidiaries to enter into any
Affiliates Indenture agreement or arrangement with an affiliate without regard to the nature of
such agreement or arrangement.
Events of Default (S) 501 - Both The amendment of the "Events of Default" provision would eliminate all
Old Indentures Events of Default other than nonpayment of principal of, interest on, or
redemption payment with respect to, the Old Notes and certain bankruptcy
events.
Company May (S) 801 - Both The amendment of the "Company May Consolidate, Etc., Only on Certain
Consolidate, Etc., Old Indentures Terms" covenant would remove all restrictions on the ability of AHMSA
Only on Certain to consolidate or merge or sell, assign, transfer, lease, convey or otherwise
Terms dispose of all or substantially all of its properties or assets, other than that
the successor entity assume all of the obligations of AHMSA as part of
such transaction.
Execution and Effectiveness.
The Proposed Amendments will be set forth in the supplemental indentures. If
the requisite consents for the Old Senior Notes or Old Discount Convertible
Notes are obtained, on the closing date of the restructuring plan, AHMSA and
the indenture trustees under the related Old Indentures will execute
supplemental indentures amending the terms of such Old Indentures. Such
supplemental indentures will become effective and the Proposed Amendments to
such Old Indentures will become operative upon execution. If AHMSA does not
receive the requisite consents for the Proposed Amendments for each issue of
Old Notes, then the Proposed Amendments will not become effective and AHMSA
will not consummate the restructuring plan. If the supplemental indentures are
executed and the Proposed Amendments become operative, the holders of
untendered Old Notes will be bound thereby regardless of whether they consented
to the Proposed Amendments. See "Risk Factors--Holders of Old Notes who do not
accept the restructuring plan will have the terms of their securities altered."
AHMSA is seeking consents to all the Proposed Amendments as a single
proposal. Accordingly, a consent purporting to consent to only some of the
Proposed Amendments will not be valid.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain United States federal income tax
considerations is for general information only and is based on the U.S. federal
income tax law now in effect, which is subject to change, possibly
retroactively. This summary does not discuss all aspects of U.S. federal income
taxation which may be important to particular holders of our outstanding
indebtedness in light of their individual investment circumstances or to
certain types of holders subject to special tax rules (including, but not
limited to, financial institutions, broker-dealers, insurance companies,
tax-exempt organizations and foreign taxpayers, or holders who hold an Old Note
as part of a position in a "straddle" or as part of a "hedging" or "conversion"
transaction or have a functional currency other than the U.S. dollar), nor does
it address state, local or non-U.S. tax consequences. This summary assumes that
holders of Old Notes have held their Old Notes as "capital assets" as that term
is defined in section 1221 of the Internal Revenue Code of 1986, as amended
("Code"). You are urged to consult your tax advisor regarding the specific U.S.
federal, state, local and non-U.S. income and other tax consequences to you of
the restructuring plan.
This section applies to U.S. holders of our outstanding indebtedness. A U.S.
holder is, generally, a citizen or resident of the United States, a
corporation, a partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
the income of which is subject to United States federal income taxation
regardless of its source. A trust is a U.S. holder if a United States court can
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. A U.S. holder is also any other person whose worldwide
income or gain is otherwise subject to United States federal income taxation on
a net income basis. Generally, implementation of the restructuring plan should
not have material U.S. federal income tax consequences for a person other than
a U.S. holder.
Tender of Old Notes and Old Loans in exchange for New Notes pursuant to the
restructuring plan
This section applies to all U.S. holders that tender Old Notes pursuant to
the restructuring plan. This section also applies to those U.S. holders of Old
Loans that tender such debt and are able to elect, and that in fact elect, to
receive the same consideration as holders of Old Notes.
The tax consequences of the exchange of Old Notes for New Notes, Company
stock and cash to such U.S. holders depends on whether the exchange will be
treated as a "recapitalization" within the meaning of section 368(a)(1)(E) of
the Code. A U.S. holder's exchange will be treated as a recapitalization only
if the debt claim that it tenders in the exchange qualifies as a "security" for
U.S. federal income tax purposes.
The term "securities" is not defined in the Code or in the regulations
promulgated thereunder. Under applicable administrative pronouncements and
judicial decisions, as a general proposition, the original term of the debt
instrument is the most important factor in determining whether the debt
instrument is a security (debt instruments with an original term of at least
ten years are usually considered securities and debt instruments with a term of
five years or less are usually not considered securities). However, (1) the
term of a debt instrument is not necessarily determinative and other factors
such as the degree of participation and continuing interest associated with the
debt instrument may be relevant, (2) even under this simplified original-term
test, the status of debt instruments with an original term of between five and
ten years is not clear, and (3) in any event, the applicable judicial decisions
are not entirely consistent. U.S. holders are encouraged to consult their own
tax advisors as to whether an exchange of Old Notes will be treated as a
recapitalization.
Recapitalization treatment
If the exchange is a recapitalization, an exchanging U.S. holder would
recognize gain realized on the exchange to the extent of the amount of "boot"
received in the exchange. The amount of boot received in the exchange depends
on whether the New Notes received in the exchange also qualify as securities.
If they do, the amount of boot would be equal to the amount of cash received in
the exchange.
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If the New Notes do not qualify as securities, the amount of boot would be
equal to the amount of cash received in the exchange plus the fair market value
of the New Notes. Although the matter is not free from doubt, the fair market
value of a New Note for this purpose should be deemed to equal its issue price,
as determined below.
If the exchanging U.S. holder realized a loss on the exchange, it may not
recognize that loss.
The exchanging U.S. holder's holding period in the common stock and, if they
are securities, the New Notes will include the U.S. holder's holding period in
its old debt claim. If the New Note are not securities, the U.S. holder's
holding period in the New Notes will begin on the day following the date of the
exchange.
If the New Notes qualify as securities, the exchanging U.S. holder's
aggregate basis in the New Notes and common stock would equal its basis in its
Old Notes or Old Loans, less the amount of cash received by the U.S. holder in
the exchange. If the New Notes do not qualify as securities, the exchanging
U.S. holder's basis in the New Note would equal their fair market value, and
its basis in the common stock received in the exchange would equal its basis in
its Old Notes or Old Loans, less the sum of the amount of cash received and the
fair market value of the New Notes.
Non-recapitalization treatment
If the Old Notes or Old Loans exchanged in the restructuring are not
securities, the transaction will not be treated as a recapitalization. In this
case, the exchange will be a fully taxable transaction for U.S. federal income
tax purposes. Accordingly, a U.S. holder will recognize gain or loss equal to
the difference between the fair market value of the aggregate consideration
received in the exchange and such U.S. holder's adjusted tax basis in such Old
Notes or Old Loans. For this purpose, the fair market value of a new note will
equal its issue price, as determined below.
The U.S. holder's adjusted tax basis in the New Notes and the new common
stock would equal their fair market value. The U.S. holder's holding period in
the New Notes and the new common stock would begin on the day following the
date of the exchange.
Receipt of Interest
Notwithstanding the foregoing, any property received by the exchanging U.S.
holder that is attributable to accrued and unpaid interest will not be treated
as received in exchange for the U.S. holder's Old Notes. Rather, such property
will be treated as interest paid to the exchanging U.S. holder. If the U.S.
holder has not taken such interest into income previously, the U.S. holder must
do so upon receipt. Any such interest income will be ordinary income. If the
U.S. holder has taken such interest into income previously, the U.S. holder
need not do so again upon receipt.
Tender of Old Loans in exchange for New Loans pursuant to the restructuring plan
The tax consequences of the exchange of Old Loans for New Loans, common
stock, and cash depends on whether the exchange will be treated as a
"recapitalization" within the meaning of section 368(a)(1)(E) of the Code. The
exchange will be treated as a recapitalization if the Old Loans qualify as
"securities" for U.S. federal income tax purposes. See "--Tender of Old Notes
Old Loans in exchange for New Notes pursuant to the restructuring plan" for a
general discussion of the meaning of "securities" under the Code. It is not
clear whether the Old Loans will qualify as securities.
Recapitalization treatment
If the exchange is a recapitalization, an exchanging U.S. holder would
recognize gain realized on the exchange to the extent of the amount of "boot"
received in the exchange. The amount of boot received in the exchange depends
on whether the New Loans also qualify as securities. If it does, the amount of
boot would be
243
equal to the amount of cash received in the exchange. If it does not, the
amount of boot would be equal to the amount of cash received in the exchange
plus the fair market value of the new bank debt. Although the matter is not
free from doubt, the fair market value of the new bank debt for this purpose
should be deemed to equal its issue price, as determined below.
If the exchanging U.S. holder realizes a loss on the exchange, it may not
recognize that loss.
If the New Loans qualify as securities, the exchanging U.S. holder's
aggregate basis in the New Loans and common stock would equal its basis in the
Old Loans, less the amount of cash received by the U.S. holder in the exchange.
Also, the U.S holder's holding period in the News Loans and common stock would
include its holding period in Old Loans.
If the New Loans do not qualify as securities, the exchanging U.S. holder's
basis in the New Loans would equal their fair market value, and its basis in
the common stock received in the exchange would equal its basis in the Old
Loans, less the sum of the amount of cash received and the fair market value of
the New Loans. Although the matter is not free from doubt, the fair market
value of the new bank debt for this purpose should be deemed to equal its issue
price, as determined below. The U.S. holder's holding period in the new bank
debt would begin on the day following the date of the exchange, but its holding
period in the common stock would include its holding period in the old bank
debt.
Non-recapitalization treatment
If the Old Loans are not securities, the transaction will not be treated as
a recapitalization. In this case, the exchange will be a fully taxable
transaction for U.S. federal income tax purposes. Accordingly, a U.S. holder
will recognize gain or loss equal to the difference between the fair market
value of the aggregate consideration received in the exchange and such U.S.
holder's adjusted tax basis in such Old Loans. For this purpose, the fair
market value of New Loans will equal its issue price, as determined below.
The U.S. holder's adjusted tax basis in the New Loans and the new common
stock will equal their fair market value. The U.S. holder's holding period in
the New Loans and the new common stock would begin on the day following the
date of the exchange.
Receipt of Interest
Notwithstanding the foregoing, any property received by the exchanging U.S.
holder that is attributable to accrued and unpaid interest will not be treated
as received in exchange for the U.S. holder's old bank debt. Rather, such
property will be treated as interest paid to the exchanging U.S. holder. If the
U.S. holder has not taken such interest into income previously, the U.S. holder
must do so upon receipt. Any such interest income will be ordinary income. If
the U.S. holder has taken such interest into income previously, the U.S. holder
need not do so again upon receipt.
Receipt of Common Stock.
U.S. holders receiving common stock must agree to place such common stock in
the AHMSA Creditor Voting Trust. For U.S. income tax purposes, U.S. holders
should be treated as owning their proportionate share of the common stock owned
by the AHMSA Creditor Voting Trust. For a description of the AHMSA Creditor
Voting Trust, see "Description of AHMSA Creditor Voting Trust."
Tax Treatment of Purchase Option.
Common stock received by U.S. holders will be subject to certain purchase
options in favor of AHMSA. It is possible that a portion of the cash, common
stock, bank debt or notes received by such U.S. holders might be treated as a
"premium" received in exchange for the grant of the purchase options. In that
event, if the purchase
244
options are not exercised, upon lapse of the purchase options, U.S. holders
would recognize capital gain to the extent of such premium. Alternatively, U.S.
holders may take the position that they received the common stock subject to
the purchase options. In any event, in view of the conditions to exercise of
the purchase options, and the fact that the exercise price for the purchase
options other than the Micare Share Repurchase Option will, after the first
year, be an amount not less than a multiple of EBITDA and which multiple is
designed to approximate fair market value, it is likely that any premium deemed
received for the grant of the purchase option would be relatively small. For a
discussion of the terms and conditions of the purchase option, see "Description
of AHMSA Creditor Voting Trust."
Tax Treatment of Receipt of Cash.
The descriptions of the restructuring plan consideration contained elsewhere
in the Prospectus and Consent Solicitation characterize cash to be paid to U.S.
holders as a "fee." The preceding tax discussion treats such cash as received
in exchange for indebtedness, as part of an exchange of old indebtedness for a
package of consideration including cash. To the extent that the cash is
received more than one year after the receipt of the other consideration in the
exchange, a portion of such additional cash may be treated as ordinary interest
income and the remainder as gain from the disposition of the New Notes.
Alternatively, the IRS may require the U.S. holders to follow the form of the
transaction and treat the entire amount of the cash fee as compensation for
services. To the extent so treated, the cash received would be treated as
ordinary income, possibly even "unrelated business taxable income" to
tax-exempt entities, and would not be governed by the discussion above.
Consequences to non-tendering holders.
A U.S. holder that does not tender its Old Notes or Old Loans in the
restructuring plan will not be treated as having sold or exchanged its Old
Notes or Old Loans upon the adoption of the restructuring plan. Accordingly,
such U.S. holder will not recognize any gain or loss, for federal income tax
purposes, and will have the same adjusted tax basis and holding period in the
Old Notes or Old Loans, as the case may be, after the adoption of the
restructuring plan as it had in the Old Notes or Old Loans immediately before
such adoption.
Tax Consequence of Holding New Note and New Loans.
Mexican Withholding Taxes
A U.S. holder will treat the gross amount of interest (i.e., without
reduction for Mexican withholding taxes) as ordinary interest in respect of the
New Notes or New Loans, as applicable. Mexican withholding taxes paid at the
appropriate rate applicable to the U.S. holder will be treated as foreign
income taxes eligible for credit against such U.S. holder's U.S. federal income
tax liability, subject to generally applicable limitations and conditions, or,
at the election of such U.S. holder, for deduction in computing such U.S.
holder's taxable income. For foreign tax credit purposes, during any period in
which the rate of withholding is less than 5%, such income generally will
constitute "passive income" or, in the case of certain holders, "financial
services income." If the Mexican withholding tax rate applicable to the U.S.
holder is 5% or more, however, such income generally will constitute "high
withholding tax interest."
The calculation of foreign tax credits and, in the case of a U.S. holder
that elects to deduct foreign taxes, the availability of deductions, involves
the application of rules that depend on a U.S. holder's particular
circumstances. A U.S. holder should consult its own tax advisor regarding the
availability of foreign tax credits and the treatment of Additional Amounts.
Foreign tax credits will not be allowed for withholding taxes imposed in
respect of certain short-term or hedged positions in securities or in respect
of arrangements in which a U.S. holder's expected economic profit, after
non-U.S. taxes, is insubstantial. A U.S. holder should consult its own tax
advisor concerning the implications of these rules in light of its particular
circumstances.
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Original Issue Discount
The treatment of original issue discount in respect of the New Notes and New
Loans is highly complex. You are encouraged to consult your tax advisor
concerning this issue.
General. A debt instrument will be issued with "original issue discount" if
its "stated redemption price at maturity" exceeds its "issue price" by more
than a de minimis amount (generally, the product of 0.25% of the stated
redemption price at maturity and the number of full years to maturity on the
instrument). The stated redemption price at maturity of a debt instrument is
equal to the sum of all payments on the instrument other than "qualified stated
interest." Qualified stated interest is stated interest that is unconditionally
payable at least annually at a single fixed rate throughout the term of the
debt instrument.
A U.S. holder of a debt instrument issued with OID will be required to
include in income an amount equal to the sum of the "daily portions" of such
OID attributable to each day during the taxable year on which the U.S. holder
holds the debt instrument as such OID accrues, in accordance with a constant
yield to maturity method based on a compounding of interest, before the receipt
of the cash payments to which such income is attributable. Under this method,
U.S. holders generally will be required to include in income increasingly
greater amounts of OID in successive accrual periods. To the extent stated
interest does not constitute qualified stated interest, payments thereof will
not be separately included in income, but rather will be treated first as
payments of previously accrued OID and then as payments of principal, and,
consequently, will reduce a U.S. holder's basis in such debt instrument. U.S.
holders of New Note or New Loans should consult their tax advisors concerning
the inclusion in their taxable income of the OID, if any, attributable to the
New Note or New Loans.
A U.S. holder's adjusted issue price in a debt instrument will be increased
by the amount of any OID or market discount, discussed in "--Market Discount,"
included in the U.S. holder's income with respect to such instrument and
reduced by the amount of any payments on such instrument other than payments of
qualified stated interest.
In general, if an issuer has the option to repay a debt instrument, it is
deemed to do so for purposes of determining OID, if exercise of the option to
repay minimizes the yield on the instrument.
Premium and Acquisition Premium. A U.S. holder that acquires a debt
instrument for an amount (or with a basis) less than or equal to the sum of all
amounts payable on such instrument after the acquisition date (other than
payments of qualified stated interest) but in excess of its adjusted issue
price (any such excess being "acquisition premium") and that does not make the
election described below is permitted to reduce the daily portions of OID
includible in its income by a fraction, the numerator of which is the excess of
the U.S. holder's adjusted tax basis in the instrument immediately after its
acquisition over the adjusted issue price of such instrument, and the
denominator of which is the excess of the sum of all amounts payable on such
instrument after the acquisition date (other than payments of qualified stated
interest) over the adjusted issue price of such instrument. If the U.S. holder
acquires the debt investment for an amount (or with a basis) greater than the
sum of all amounts payable on such instrument after the acquisition date (other
than payments of qualified stated interest, the holder does not include any OID
in gross income.
A U.S. holder may elect to include in gross income all interest that accrues
on a debt instrument using the constant-yield method, with certain
modifications. Such an election may be revoked only with the consent of the
Internal Revenue Service.
Market Discount. A debt instrument will be considered to be acquired with
market discount ("market discount note") if the adjusted issue price of the
instrument at the time of acquisition exceeds the initial tax basis of the
instrument in the hands of the U.S. holder by more than a specified de minimis
amount (as noted above, the initial the tax basis in the New Notes and the New
Loans will depend on whether New Notes and New Loans are "securities" for tax
purposes) . If such excess is not sufficient to cause such instrument to be a
market discount
246
instrument, then such excess constitutes "de minimis market discount." In
addition, if a U.S. holder acquires an i nstrument that is a security in a
recapitalization, then accrued market discount on the exchanged instrument will
carry over to the instrument received in exchange therefor.
Any gain recognized on the receipt of payments on or disposition of a market
discount note will be treated as ordinary income to the extent that such gain
does not exceed the accrued market discount on such note. Alternatively, a U.S.
holder of a market discount note may elect to include market discount in income
currently over the life of such instrument. Such an election would apply to all
debt instruments with market discount acquired by the electing holder on or
after the first day of the first taxable year to which the election applies.
This election may not be revoked without the consent of the IRS.
Market discount on a market discount note will accrue on a ratable basis
unless the U.S. holder elects to accrue such market discount using a
constant-yield method. Such an election shall apply only to the instrument with
respect to which it is made and may not be revoked without the consent of the
IRS. A U.S. holder of a market discount note that does not elect (and is not
deemed to have elected) to include market discount in income currently
generally will be required to defer deductions for net direct interest expense
with respect to such note in an amount not exceeding the accrued market
discount on such note until the maturity or disposition of such note.
New Series A Notes. A U.S. holder's issue price in respect of the New
Series A Notes received in the exchange will depend on whether either the
exchanged old indebtedness or the New Series A Notes are "publicly-traded." If
as of the date the exchange offer is consummated, the New Series A Notes are
"traded on an established market" within the meaning of the applicable
regulations on or at any time during the 60-day period ending 30 days after the
date the exchange offer is consummated, then the issue price of such notes
would equal the fair market value established by such trading. If the New
Series A Notes are not so traded, but the old indebtedness exchanged therefor
is so traded, then the issue price of the New Series A Note would equal the
fair market value, established by such trading, of the debt claim for which the
New Series A Note was exchanged. If neither the New Series A Notes nor the old
indebtedness exchanged therefor are so traded, the issue price of the New
Series A Notes would be its stated principal amount. It cannot be determined at
the present time whether the New Series A Notes or the old indebtedness
exchanged therefor will be, at the relevant times, traded on an established
market within the meaning of the applicable regulations.
The relevant Treasury Regulations are complex and highly-detailed in
defining the phrase "traded on an established market." For example, it is
possible that the New Notes will be treated as so traded not only if they are
listed on an exchange, but also if transfers of such New Note appear on a
computerized quotation medium. You should consult you own tax advisor with
respect to whether your old indebtedness or a New Series A Note qualifies for
this purpose as "traded on an established market."
As noted above, for purposes of determining OID, it will be assumed that we
will exercise our right to redeem voluntarily all of our New Series A Notes on
a particular date if this minimizes the yield on the New Series A Notes. Any
OID in respect of the New Series A Notes would have to be accrued over the
period beginning on the issue date and ending on the date the New Series A
Notes are assumed redeemed. If we do not exercise this right at this time,
then, only for purposes of determining OID, the New Series A Notes will be
treated as retired on that day and then re-issued.
Applying these various rules to the New Series A Notes, if neither the New
Series A Notes nor the Old Notes for which they are exchanged are publicly
traded, the New Series A Notes should be assumed to be redeemed on the first
anniversary of their issuance. Given this assumption, the non-contingent
portion of the New Series A Notes (that is, the amount (not including any
interest payments) for which the Notes could be redeemed on the first
anniversary) should be treated as issued for an amount equal to the present
value of such non-contingent payment on such Notes, discounted back to the
issue date at the short-term applicable federal rate (2.46% as of December
2001) The difference between this issue price and the amount for which the
Notes are considered to be redeemed on the first anniversary is includable by
the holder by applying the yield (the short-
247
term applicable rate under these circumstances) on such New Series A Notes to
the issue price. In addition, holders of such New Series A Notes should be
taxed on receipt of interest payments (of both stock and cash) during the first
year of the Note by (i) treating as a payment of principal the present value of
the payments (i.e., the fair market value of the common stock and any cash
interest, discounted back to the issue date at the short-term applicable
federal rate) and (ii) treating the amount of the payments in excess of the
amount treated as principal as a payment of interest. If the Notes are not
redeemed on the first anniversary, they should be treated as reissued at that
time for OID purposes.
If, on the other hand, either the New Series A Notes or the Old Notes for
which they are exchanged are publicly traded, then as indicated above, the
issue price of the New Series A Notes would be determined based on such public
trading. Further, bifurcation of the New Series A Notes into a contingent
interest bond and a non-contingent bond would not be required--instead, the
yield on the New Series A Notes would be determined based on the comparable
yield for fixed rate debt instrument with similar terms and conditions. A
determination would be made as to the date, if any, that such instrument would
be assumed to be redeemed, so as to minimize the yield on such instrument.
Finally, the inclusion of OID and interest on the New Series A Notes would be
determined consistent with these assumptions, adjusted from time to time as
actual payments of interest (including payments in common stock, if any) are
made.
The rules discussed above under "Premium and Acquisition Premium" may reduce
or eliminate the amount of OID includable by a holder of the New Series A
Notes. For example, if the exchange of New Series A Notes for Old Notes
qualifies as a recapitalization, a holder's basis in the New Series A Notes may
substantially exceed the issue price of such New Series A Notes (depending on
the holder's basis in the Old Notes), and such holder may be able to reduce or
eliminate the amount OID includable with respect to such New Series A Notes.
New Series B Notes. New Series B Notes automatically convert into Series A
Notes on the date following the six-month anniversary of the closing date for
the restructuring plan. We believe that for OID purposes, this conversion
should be ignored and holders of New Series B Notes should not be treated as
having a taxable exchange at the time of the conversion.
Whether the New Series B Notes are issued with OID and the rules discussed
above regarding the presumption of redemption and contingent and non-contingent
interest, must be determined and applied consistent with the rules described
above. The issue price for these notes must be determined separate from the
issue price of the New Series A Notes. The same principles described in
"--Series A Notes" in respect of the determination of the issue price of the
New Series A Notes apply to the determination of the issue price of the New
Series B Notes. As described in "--New Series A Notes" with respect to the
Series A Notes, it cannot be determined at the present time whether the New
Series B Notes or the Old Notes will be, at the relevant times, traded on an
established market within the meaning of the applicable regulations.
New Loans. As described in "--New Series A Notes" in respect of the New
Series A Notes, it must be assumed for OID purposes that we will exercise our
right to prepay voluntarily the New Loans on the first anniversary of the
closing date.
Whether the New Loans are issued with OID and the rules discussed above
regarding the presumption of redemption and contingent and non-contingent
interest, must be determined and applied consistent with the rules described in
"--New Series A Notes" in reference to the New Series A Notes. While the matter
is not free from doubt, for purposes of determining issue price each tranche of
New Loans should be treated separately.
As described in "--New Series A Notes" and "--New Series B Notes" with
respect to the New Notes, it cannot be determined at the present time whether
any of the tranches of the New Loans or the Old Loans will be, at the relevant
times, traded on an established securities market within the meaning of the
applicable regulations.
248
Taxation of disposition of the New Notes and New Loans.
A U.S. holder generally will recognize gain or loss on the sale, redemption
or other disposition of the New Notes and New Loans in an amount equal to the
difference between the amount realized on such sale, redemption, prepayment or
other disposition (less any amounts attributable to accrued but unpaid interest
not previously included in gross income, which will be taxable as ordinary
income), and the U.S. holder's tax basis in the New Note or New Loans disposed
of. Gain or loss realized by a U.S. holder on such sale, redemption,
prepayment, or other disposition generally will be long-term capital gain or
loss if, at the time of the disposition, the New Notes or New Loans, as the
case may be, have been held for more than one year. If neither the applicable
New Notes or New Loans, nor the Old Notes or Old Loans for which they were
exchanged, were "publicly-traded" at the time of the issuance of such New Notes
or New Loans, some gain or loss upon disposition of such New Notes or New Loans
may be treated as ordinary income or loss if the disposition occurs before the
first anniversary of the issuance of such New Notes or New Loans. If the
applicable New Notes or New Loans, or the Old Notes or Old Loans for which they
were exchanged, were "publicly-traded" at the time of the issuance of such New
Notes or New Loans, all gain or loss upon disposition of such New Notes or New
Loans may be treated as ordinary income or loss, depending on, among other
things, whether the New Notes or New Loans remain subject to the contingent
payment debt instrument rules.
Gain or loss recognized by a U.S. holder on the sale or exchange of a New
Note or New Loan generally will be treated as United States source gain or loss.
Backup Withholding and Information Reporting
Certain "backup" withholding and information reporting requirements may
apply to payments in respect of the New Notes and New Loans. We, or any paying
agent, may withhold tax from any such payment to a U.S. holder that fails to
furnish its taxpayer identification number to certify that such holder is not
subject to backup withholding, or to otherwise comply with the applicable
requirements of the backup withholding rules. Certain holders (including, among
others, corporations) generally are not subject to the backup withholding and
information reporting requirements.
Any amounts withheld under the backup withholding rules from a payment to a
U.S. holder would be allowed as a refund or a credit against such holder's U.S.
federal income tax, provided that the required information is timely furnished
to the Internal Revenue Service.
Reductions in backup withholding tax rates were made pursuant to the
enactment of the Economic Growth and Tax Reconciliation Act of 2001 which
provides, in general, that the withholding rate of 31% in effect for payments
made on or before August 6, 2001 will be reduced over a six-year period. The
new rate of 30.5% applies in the case of payments made on or after August 7,
2001 and the rate is further reduced to 30.0% for taxable years 2002 and 2003,
29% for taxable years 2004 and 2005, and 28% for the taxable years 2006 and
thereafter.
THE FOREGOING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES DOES NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
PARTICULAR HOLDER'S SITUATION OR STATUS. THIS SUMMARY IS BASED ON THE
PROVISIONS OF THE CODE, REGULATIONS, PROPOSED REGULATIONS, RULINGS AND JUDICIAL
DECISIONS NOW IN EFFECT, BOTH OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A
RETROACTIVE BASIS.
249
PLAN OF DISTRIBUTION
Pursuant to this Prospectus and Consent Solicitation and the terms of the
restructuring plan, AHMSA is offering
. its common stock to the holders of its outstanding bank debt, and
. its common stock and New Notes to the holders of its outstanding Old
Notes in exchange for the Old Notes.
Holders of AHMSA's Old Loans and Old Notes will be required to transfer the
shares of AHMSA's common stock received pursuant to the offering to the AHMSA
Creditor Voting Trust, which, in turn, will issue such creditors voting
interests in the AHMSA Creditor Voting Trust on a pro rata basis, based on the
number of shares transferred to the trust.
Each broker-dealer that receives restructuring plan consideration for its
own account pursuant to the restructuring plan must acknowledge that it will
deliver a Prospectus and Consent Solicitation in connection with any resale of
such securities. This Prospectus and Consent Solicitation, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of securities received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities.
AHMSA will not receive any proceeds from any sale of restructuring plan
consideration by broker-dealers. Restructuring plan consideration received by
broker-dealers for their own account pursuant to the restructuring plan may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options thereon or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any
restructuring plan consideration. Any broker-dealer that resells restructuring
plan consideration that was received by it for its own account pursuant to the
restructuring plan and any broker or dealer that participates in a distribution
of such securities may be deemed to be an "underwriter" within the meaning of
the Securities Act of 1933 and any profit on any such resale of such securities
and any commissions or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act of 1933. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a Prospectus and Consent Solicitation, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the restructuring plan consideration offered hereby will be
passed upon for AHMSA by Willkie Farr & Gallagher, New York, New York and
Guerra Gonzalez y Associados, Mexico.
EXPERTS
The consolidated balance sheets as of December 31, 2000 and 1999, and the
consolidated statements of income (loss), changes in shareholders' equity, and
changes in financial position for each of the three years in the period ended
December 31, 2000, have been audited by Arthur Andersen, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report. Reference is made to said report, which includes an
explanatory paragraph with respect to the uncertainty regarding the Company's
ability to continue as a going concern as discussed in Note 2 to the financial
statements.
250
With respect to the unaudited interim financial information for the
six-month periods ended June 30, 2001 and 2000, Arthur Andersen has applied
limited procedures in accordance with professional standards for a review of
that information. However, their separate report thereon states that they did
not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report on that
information should be restricted in light of the limited nature of the review
procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is
not a "report" or a "part" of the registration statement prepared or certified
by the accountants within the meaning of Sections 7 and 11 of the Act."
Certain information regarding AHMSA's iron ore reserves under "AHMSA's
Business--Mining Operations--Iron Ore Mining Operations--Reserves" has been
audited by ., independent mining engineers and geologists. Such information has
been included in this Prospectus and Consent Solicitation in reliance upon the
report of . given upon their as experts in mining and geology.
Certain information regarding AHMSA's iron ore reserves under "AHMSA's
Business--Mining Operations--Coal Mining Operations--Reserves" has been audited
by ., independent mining engineers and geologists. Such information has been
included in this Prospectus and Consent Solicitation in reliance upon the
report of . given upon their as experts in mining and geology.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-4 with the Securities and
Exchange Commission relating to the securities offered by this Prospectus and
Consent Solicitation. This Prospectus and Consent Solicitation does not contain
all of the information contained in the registration statement. Statements
contained in this Prospectus and Consent Solicitation as to the content of any
contract or other document are not necessarily complete and we refer you to
copies of such contracts or other documents, which have been filed as exhibits
to the registration statement. For further information with respect to AHMSA
and the securities offered by this Prospectus and Consent Solicitation, you
should refer to the registration statement and its exhibits and schedules. You
may read and copy the registration statement at the SEC's public reference room
at 450 Fifth Street, N.W., Washington D.C. 20549. The registration statement is
also available at the public reference rooms at the SEC's regional offices in
New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information regarding the public reference rooms.
251
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Arthur Andersen, Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000........................................ F-3
Consolidated Statements of Income (Loss) for the years ended December 31, 1998, 1999 and 2000....... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998,
1999 and 2000..................................................................................... F-5
Consolidated Statements of Changes in Financial Position for the years ended December 31, 1998, 1999
and 2000.......................................................................................... F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1999 and 2000..... F-8
Report of Arthur Andersen, Independent Auditors..................................................... F-54
Consolidated Balance Sheet as of December 31, 2000 and Unaudited Consolidated Balance Sheet as of
June 30, 2001..................................................................................... F-55
Unaudited Consolidated Statements of Income (Loss) for the six months ended June 30, 2000 and 2001.. F-56
Unaudited Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31,
2000 and the six months ended June 30, 2001....................................................... F-57
Unaudited Consolidated Statement of Changes in Financial Position for the six months ended June 30,
2000 and 2001..................................................................................... F-58
Notes to Unaudited Consolidated Financial Statements for the six months ended June 30, 2000 and 2001
and for the year ended December 31, 2000.......................................................... F-59
F-1
REPORT OF ARTHUR ANDERSEN, INDEPENDENT AUDITORS
Translation from a report originally issued in Spanish
To the Shareholders of
Altos Hornos de Mexico, S. A. de C. V.:
We have audited the accompanying consolidated balance sheets of ALTOS HORNOS
DE MEXICO, S.A. DE C.V. (incorporated in Mexico) AND SUBSIDIARIES (collectively
referred to as the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of income (loss), changes in shareholders' equity and
changes in financial position for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that the audit be
planned and performed 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 audits provide a reasonable basis for our opinion.
As mentioned in Note 7 a), beginning in 2000 the Company adopted the new
procedures for the recognition of deferred income taxes as prescribed by
recently revised Bulletin D-4, "Accounting for Income Taxes, Asset Taxes and
Employee Profit Sharing."
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 (U.S. GAAP). A description of these differences
and a reconciliation of consolidated net income (loss) and shareholders' equity
to U.S. GAAP are set forth in Note 21.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Altos
Hornos de Mexico, S.A. de C.V. and Subsidiaries as of December 31, 2000 and
1999, and the results of their operations, the changes in their shareholders'
equity and the changes in their financial position for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in Mexico.
As explained in Note 2 to the accompanying consolidated financial
statements, the Company has not complied with certain covenants of some of its
debt agreements. As a result, the Company began negotiations with its
creditors, with the objective of restructuring its debt. Additionally, on May
25, 1999 the Company and some of its subsidiaries obtained the status of
"suspension of payments", which allows for orderly control over the
aforementioned negotiation process. Management believes that this decision will
not affect the Company's operation of the business or the relationship with its
suppliers of goods and services. As of the date of the accompanying
consolidated financial statements, the suspension of payments is pending
resolution and has had a significant impact on its financial position.
Additionally, as explained in Note 3 the Company's cash flows have been
deteriorating, which has caused significant financial and operating problems.
The Company's management has been taking steps in an effort to improve its
overall financial condition, results of operations and cash flows in the short
to medium term. However, these steps do not ensure that the Company will be
able to resolve its current financial problems. The preceding matters raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments or reclassifications that may result from the outcome of these
matters.
Monterrey, N.L.
April 3, 2001 (except with respect to the
restatement to constant Mexican pesos
as of June 30, 2001, and the matter discussed in
Note 2 c), as to which the date is
September 30, 2001)
F-2
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
1999 2000 2000
---------- ---------- ----------
Assets
- ------
Current:
Cash and cash equivalents.......................... Ps. 94 Ps. 162 US$ 18
Trade accounts receivable, net..................... 1,845 1,461 161
Due from affiliated companies...................... 257 401 44
Other accounts receivable.......................... 301 236 26
Inventories........................................ 3,697 3,465 382
Prepaid expenses................................... 36 59 6
------ ------ -----
Total current assets............................ 6,230 5,784 637
Non-current:
Other long-term receivables........................ 17 4 --
Assets subject to sale............................. 55 55 6
Due from affiliated companies...................... 22 7 1
Investments in shares.............................. 500 445 49
Employee housing developments...................... 327 311 34
Property, plant and equipment, net................. 27,911 26,256 2,898
Deferred charges, net.............................. 2,374 2,315 256
------ ------ -----
Total non-current assets........................ 31,206 29,393 3,244
------ ------ -----
Total assets.................................... Ps. 37,436 Ps. 35,177 US$ 3,881
====== ====== =====
Liabilities and shareholders' equity
- ------------------------------------
Current:
Bank loans......................................... Ps. 17,787 Ps. 16,273 US$ 1,796
Current portion of long-term debt.................. 136 241 27
Interest payable................................... 786 809 89
Due to suppliers and contractors................... 1,960 2,050 226
Taxes payable...................................... 228 173 19
Due to affiliated companies........................ 25 30 3
Other payables..................................... 2,704 1,857 205
------ ------ -----
Total current liabilities....................... 23,626 21,433 2,365
Long-term:
Long-term debt..................................... 450 208 23
Retirement, pension plan and seniority premiums.... 1,053 1,207 133
Deferred income taxes.............................. -- 3,789 418
Other long-term payables........................... 233 491 54
------ ------ -----
Total long-term liabilities..................... 1,736 5,695 628
------ ------ -----
Total liabilities............................... 25,362 27,128 2,993
Shareholders' equity:
Capital stock...................................... 8,216 8,216 907
Reserve for repurchase of shares................... 357 357 39
Retained earnings.................................. 1,055 2,446 270
Net income for the year............................ 1,391 1,146 127
Cumulative initial effect of deferred income taxes. -- (3,860) (426)
Unamortized actuarial liability effect............. (71) (168) (19)
Cumulative restatement effect...................... 1,097 (115) (13)
Minority interest.................................. 29 27 3
------ ------ -----
Total shareholders' equity...................... 12,074 8,049 888
------ ------ -----
Total liabilities and shareholders' equity...... Ps. 37,436 Ps. 35,177 US$ 3,881
====== ====== =====
The accompanying notes are an integral part of these consolidated balance sheets.
F-3
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Statements of Income (Loss)
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. Dollars, (US$), except per share data
1998 1999 2000
----------- ----------- -----------
Net sales............................................................... Ps. 16,159 Ps. 13,360 Ps. 12,806
Cost of sales........................................................... 11,711 10,109 9,634
Depreciation............................................................ 1,293 1,287 1,189
------- ------- -------
Gross profit......................................................... 3,155 1,964 1,983
Selling and administrative expenses..................................... 1,015 927 766
------- ------- -------
Operating income..................................................... 2,140 1,037 1,217
Financing and related costs:
Interest expense..................................................... 2,825 1,947 1,101
Interest income...................................................... (241) (109) (104)
Foreign exchange loss (gain)......................................... 4,287 (1,177) 72
Gain from monetary position.......................................... (3,538) (2,685) (2,091)
------- ------- -------
3,333 (2,024) (1,022)
Other expenses, net..................................................... 260 1,117 390
Severance payments...................................................... 313 525 (96)
------- ------- -------
Income (loss) before provisions for taxes, employee profit sharing,
participation in results of associated companies and discontinued
operations.......................................................... (1,766) 1,419 1,945
Provisions for:
Deferred income taxes................................................ -- -- 723
Current income taxes................................................. 13 1,141 27
Asset taxes.......................................................... 408 332 312
Employee profit sharing.............................................. 21 21 13
Credit to asset tax from immediate deduction of fixed assets......... (407) (318) (264)
Amortization of tax loss carryforwards............................... (12) (1,138) (26)
------- ------- -------
23 38 785
Participation in results of associated companies........................ (1) 38 (8)
------- ------- -------
Income (loss) before discontinued operations......................... (1,790) 1,419 1,152
Discontinued operations................................................. (540) (26) --
------- ------- -------
Net income (loss) for the year....................................... Ps. (2,330) Ps. 1,393 Ps. 1,152
======= ======= =======
Distribution of consolidated net income (loss) for the year:
Net income (loss) of majority interest............................... Ps. (2,335) Ps. 1,391 Ps. 1,146
Net income of minority interest...................................... 5 2 6
------- ------- -------
Ps. (2,330) Ps. 1,393 Ps. 1,152
======= ======= =======
Basic earnings (loss) per share:
From continuing operations........................................... Ps. (4.76) Ps. 3.91 Ps. 3.21
From discontinued operations......................................... (1.44) (0.07) --
------- ------- -------
Ps. (6.20) Ps. 3.84 Ps. 3.21
======= ======= =======
Basic weighted average shares outstanding (000's).................... 376,428 362,298 357,873
======= ======= =======
2000
--------------
Net sales............................................................... US$ 1,413
Cost of sales........................................................... 1,063
Depreciation............................................................ 131
-------
Gross profit......................................................... 219
Selling and administrative expenses..................................... 85
-------
Operating income..................................................... 134
Financing and related costs:
Interest expense..................................................... 122
Interest income...................................................... (12)
Foreign exchange loss (gain)......................................... 8
Gain from monetary position.......................................... (231)
-------
(113)
Other expenses, net..................................................... 43
Severance payments...................................................... (11)
-------
Income (loss) before provisions for taxes, employee profit sharing,
participation in results of associated companies and discontinued
operations.......................................................... 215
Provisions for:
Deferred income taxes................................................ 80
Current income taxes................................................. 3
Asset taxes.......................................................... 34
Employee profit sharing.............................................. 1
Credit to asset tax from immediate deduction of fixed assets......... (29)
Amortization of tax loss carryforwards............................... (3)
-------
86
Participation in results of associated companies........................ (1)
-------
Income (loss) before discontinued operations......................... 128
Discontinued operations................................................. --
-------
Net income (loss) for the year....................................... US$ 128
=======
Distribution of consolidated net income (loss) for the year:
Net income (loss) of majority interest............................... US$ 127
Net income of minority interest...................................... 1
-------
US$ 128
=======
Basic earnings (loss) per share:
From continuing operations........................................... US$ 0.35
From discontinued operations......................................... --
-------
US$ 0.35
=======
Basic weighted average shares outstanding (000's).................... 357,873
=======
The accompanying notes are an integral part of these consolidated statements.
F-4
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001, except for shares outstanding
Cumulative
Premium Initial Effect Unamortized
on Sale of Reserve for of Deferred Actuarial
Shares Capital Capital Repurchase Retained Income Liability
Outstanding Stock Stock of Shares Earnings Taxes Effect
----------- --------- --------- ---------- ---------- ------------- ----------
Balances as of December 31, 1997..... 384,082,502 Ps. 8,216 Ps. 28 Ps. 707 Ps. 3,390 Ps. -- Ps. (21)
Premium on sale of capital stock..... -- -- (28) -- -- -- --
Repurchase of shares................. (4,082,000) -- -- (119) -- -- --
Comprehensive income (loss).......... -- -- -- -- (2,335) -- (34)
----------- --- ----- --- ---- --- ---- --- ------ --- ------ --- ----
Balances as of December 31, 1998..... 380,000,502 8,216 -- 588 1,055 -- (55)
Repurchase of shares................. (22,128,000) -- -- (231) -- -- --
Comprehensive income (loss).......... -- -- -- -- 1,391 -- (16)
----------- --- ----- --- ---- --- ---- --- ------ --- ------ --- ----
Balances as of December 31, 1999..... 357,872,502 8,216 -- 357 2,446 -- (71)
Cumulative initial effect of deferred
income taxes........................ -- -- -- -- -- (3,860) --
Comprehensive income (loss).......... -- -- -- -- 1,146 -- (97)
----------- --- ----- --- ---- --- ---- --- ------ --- ------ --- ----
Balances as of December 31, 2000..... 357,872,502 Ps. 8,216 Ps. -- Ps. 357 Ps. 3,592 Ps. (3,860) Ps. (168)
=========== ===== ==== ==== ====== ====== ====
Cumulative Total Total
Restatement Majority Minority Shareholders'
Effect Interest Interest Equity
---------- ---------- ------- ------------
Balances as of December 31, 1997..... Ps. 4,736 Ps. 17,056 Ps. 2 Ps. 17,058
Premium on sale of capital stock..... -- (28) -- (28)
Repurchase of shares................. -- (119) -- (119)
Comprehensive income (loss).......... (249) (2,618) 26 (2,592)
--- ------ --- ------ --- --- --- ------
Balances as of December 31, 1998..... 4,487 14,291 28 14,319
Repurchase of shares................. -- (231) -- (231)
Comprehensive income (loss).......... (3,390) (2,015) 1 (2,014)
--- ------ --- ------ --- --- --- ------
Balances as of December 31, 1999..... 1,097 12,045 29 12,074
Cumulative initial effect of deferred
income taxes........................ -- (3,860) (6) (3,866)
Comprehensive income (loss).......... (1,212) (163) 4 (159)
--- ------ --- ------ --- --- --- ------
Balances as of December 31, 2000..... Ps. (115) Ps. 8,022 Ps. 27 Ps. 8,049
====== ====== === ======
The accompanying notes are an integral part of these consolidated statements.
F-5
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Statements of Changes in Financial Position
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
1998 1999 2000 2000
---------- --------- --------- --------
Resources generated by (used in) operations:
Income (loss) before discontinued operations............. Ps. (1,790) Ps. 1,419 Ps. 1,152 US$ 128
Add (deduct) - Items that do not affect cash:
Depreciation and amortization........................ 1,411 1,422 1,423 157
Provision for pension and retirement plans and
seniority premiums................................. 156 150 158 17
Participation in results of associated companies..... 1 (38) 8 1
Reserve for severance payments....................... -- 525 (96) (11)
Deferred income taxes................................ -- -- 723 80
Other provisions and reserves........................ 127 97 90 10
------ ----- ----- ---
(95) 3,575 3,458 382
Resources generated by (used in) working capital:
Decrease in trade accounts receivable.................... 339 261 384 42
Decrease (increase) in due from affiliated companies..... 142 88 (144) (16)
Decrease in other accounts receivable.................... 12 27 33 4
(Increase) decrease in inventories....................... (737) 346 (254) (28)
(Increase) decrease in assets subject to sale............ (1,358) 1,389 -- --
Decrease (increase) in prepaid expenses.................. 29 41 (26) (3)
Increase in interest payable............................. 115 358 22 2
(Decrease) increase in due to suppliers and
contractors............................................ (255) (10) 124 14
Increase (decrease) in taxes payable..................... 198 (198) (57) (6)
Increase (decrease) in due to affiliated companies....... 8 (59) 5 1
Increase (decrease) in other payables.................... 507 232 (820) (92)
------ ----- ----- ---
(1,000) 2,475 (733) (82)
------ ----- ----- ---
Net resources generated by (used in) operations
before discontinued operations..................... (1,095) 6,050 2,725 300
Discontinued operations.............................. (540) (26) -- --
------ ----- ----- ---
Net resources generated by (used in) operations...... (1,635) 6,024 2,725 300
Investing activities:
Additions to property, plant and equipment............... (2,079) (730) (789) (87)
Net book value of retirements of property,
plant and equipment.................................... 1,194 311 79 9
Employee housing developments............................ 28 10 16 2
Deferred charges, net.................................... (947) (443) (180) (20)
Investments in shares.................................... 505 263 -- --
Decrease in other long-term investments.................. 30 1 -- --
------ ----- ----- ---
Net resources used in investing activities........... (1,269) (588) (874) (96)
F-6
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Statements of Changes in Financial Position
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
1998 1999 2000 2000
---------- ---------- ---------- ---------
Financing activities:
Premium on sale of capital stock.................. Ps. (28) Ps. -- Ps. -- US$ --
Repurchase of treasury shares..................... (119) (231) -- --
Other long-term receivables....................... 31 (37) 14 1
Borrowing under short-term bank loans............. 12,514 (448) -- --
Payments on bank loans............................ (6,525) (1,930) (220) (24)
Effect of changes in purchasing power on long-
term bank debt.................................. (3,392) (2,598) (1,430) (158)
Effect of changes in purchasing power of deferred
income taxes.................................... -- -- (318) (35)
Loans from (payments to) affiliated companies..... (9) (21) 15 2
Payments of pension and retirement plans and
seniority premiums.............................. (210) (83) (102) (11)
Increase (decrease) in other long-term payables... 536 (398) 258 29
------ ------ ------ ----
Net resources generated by (used in)
financing activities........................ 2,798 (5,746) (1,783) (196)
------ ------ ------ ----
Net increase (decrease) in cash and cash
equivalents................................. (106) (310) 68 8
Cash and cash equivalents:
Beginning of year................................. 510 404 94 10
------ ------ ------ ----
End of year....................................... Ps. 404 Ps. 94 Ps. 162 US$ 18
====== ====== ====== ====
Supplemental cash flow disclosures:
Income and asset taxes paid....................... Ps. 3 Ps. 1 Ps. 42 US$ 5
====== ====== ====== ====
Employee profit sharing paid...................... Ps. 16 Ps. 12 Ps. 13 US$ 1
====== ====== ====== ====
Interest paid..................................... Ps. 2,150 Ps. 452 Ps. 50 US$ 6
====== ====== ====== ====
The accompanying notes are an integral part of these consolidated statements.
F-7
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 1. Activities of the Company
Altos Hornos de Mexico, S.A. de C.V. ("AHMSA" or the "Company"), a
subsidiary of Grupo Acerero del Norte, S.A. de C.V. ("GAN"), is the largest
integrated steel producer in Mexico. AHMSA's principal activity is the
production and sale of flat steel products and heavy and light structural
sections.
AHMSA's significant subsidiaries are as follows:
Consolidated:
. Minera Carbonifera Rio Escondido, S.A. de C.V. ("MICARE") is dedicated
to the mining and sale of steam coal, that is used by the Comision
Federal de Electricidad ("Mexican Federal Power Commission" or "CFE") to
produce electricity for its thermoelectric plants.
. Minera del Norte, S.A. de C.V. ("MINOSA") and Cerro de Mercado, S.A. de
C.V. ("CERRO") are dedicated to the extraction, exploitation and sale of
iron ore and limestone, each of which is used principally by AHMSA in
the production of steel products.
. Minerales Monclova, S.A. de C.V. ("MIMOSA") is dedicated to the mining
of metallurgical coal that is used principally by AHMSA in the
production of steel products.
. La Perla Minas de Fierro y Carbon, S.A. de C.V. ("LA PERLA") is
dedicated to the mining of iron ore and owns a pellet plant and a slurry
pipeline which is used to transport iron ore to the pellet plant, which
is located at AHMSA's steel-producing facilities. LA PERLA also provides
administrative services to the Company and to affiliated companies.
Unconsolidated:
. Centro de Servicio Placa y Lamina, S.A. de C.V. ("CSPYL"), formerly
Ryerson de Mexico ("RYERSON"), a 50% joint venture with Ryerson Tull,
Inc., was incorporated to strengthen the Company's distribution network
and AHMSA's presence in the domestic market.
. Linea Coahuila-Durango, S.A. de C.V. ("LCD") is a railroad company and a
50% joint venture with Industrias Penoles, S.A. de C.V. ("PENOLES"). It
is used to transport the metallurgical coal to AHMSA's steel producing
facilities.
. Inmobiliaria Dos Carlos, S.A. de C.V. ("DOS CARLOS") is a real estate
firm dedicated to develop a residential project called "Valle de Reyes"
in Monterrey, N.L. Mexico. The project is subject to authorization from
the Secretary of Urban Development of the State of Nuevo Leon, which at
the date of these consolidated financial statements has not been
obtained.
Note 2. Noncompliance, suspension of payments, potential partners and debt
restructuring
a) Noncompliance
Since 1998, international steel prices have fallen sharply due mainly to the
Asian financial crisis, which worsened toward the end of that year with the
crisis in Russia, during 1999 with the crisis in Brazil and has continued in
the year 2000, affecting the American and European steel industry
significantly. This has caused a constant deterioration in the profit margins
over the last years, and combined with its high indebtedness of
F-8
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
approximately US$1,900 of bank debt, resulted in AHMSA not complying with
certain terms of some of its credit agreements in 1999 and failing to pay
principal and interest for US$39 on a syndicated loan whose agent is JP Morgan
Chase Bank (successor to Morgan Guaranty Trust Company of New York) (Morgan),
and a scheduled payment of US$25 of interest with respect to the Senior Notes.
AHMSA informed The Chase Manhattan Bank (as trustee) of some defaults with
the Senior Notes, as well as the manner in which this was remedied by
management, together with its external legal counsel. These events refer to
situations such as:
. Lamina y Placa Comercial, S.A. de C.V. (LPC) transaction:
The Company's advance of funds to GAN for US$42 for the purchase of 49% of
the shares of LPC (see Note 4 d) GAN transferred its rights to invest in LPC to
AHMSA and paid interest on the advances received, as a result of which the
transaction was completed as if it had been carried out directly by AHMSA. On
March 1, 1999, the Board of Directors, including the unrelated Directors,
ratified the mandate and the transfer of funds for the acquisition of LPC, and
an opinion was obtained from BBVA-Bancomer, S.A., formerly Bancomer, S.A.
("Bancomer") that the interest rate on the advances was no less favorable than
that which could have been obtained from an unrelated third party.
. Commission payments to GAN:
Since February 1997, AHMSA had, with the approval of its Board of Directors,
been paying GAN a 2.5% commission on bank loans and advances from customers
where GAN acts as the guarantor. Such payment constituted an event of default
under the Indenture. On March 1, 1999, the payment of the commissions was
ratified by the Board of Directors, including the unrelated Directors, and an
opinion was obtained from Banco Mercantil del Norte, S.A. ("Banorte") stating
that the 2.5% rate is no less favorable to the Company than the terms that
could be obtained from a third party.
. Affiliate transactions:
During 1998 and through March 1999, MICARE and AHMSA made loans to
affiliated companies that were restricted by the bank debt agreements and the
Indenture. However, the loans made by AHMSA and MICARE were paid by GAN in cash
or in kind, including the corresponding interest. On March 26, 1999, the Board
of Directors, including the unrelated Directors, approved and ratified the
transactions made with GAN and its subsidiaries.
During 1998, the Company and its subsidiaries purchased certain businesses
from GAN, including: Hojalata Mexicana, S.A. de C.V., Forjacero, S.A. de C.V.,
LCD, GAN International Trading, S.A. de C.V., Carboelectrica Sabinas, S. de
R.L. de C.V. and Ediciones Vulcano, S.A. de C.V. The purchases totaled Ps.157
and, certain of the transactions constituted events of default under the
Indenture. On March 1, 1999, the Board of Directors, including the unrelated
Directors, ratified the transactions.
During March 1999, AHMSA purchased 20,000,000 of its own shares from GAN for
Ps.207. On March 1, 1999, the Board of Directors, including the unrelated
Directors, ratified the transaction, and the Company obtained an opinion from
Bancomer that the transaction was carried out at market value and under
conditions no less favorable that those that could have been obtained from a
third party.
On March 31, 1999, MICARE purchased an airplane from GAN for US$6.9. On
April 23, 1999, the purchase was ratified by the Board of Directors, including
the unrelated Directors. The purchase was subject to certain conditions which
were not met; therefore Antair, S.A. de C.V. (direct subsidiary of GAN) was
authorized to sell the airplane and give the funds obtained of US$4.2 to MICARE.
F-9
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
During 1998, AHMSA guaranteed certain loans obtained by GAN for a total of
US$42 (nominal value).
The Company's management took some corrective measures to remedy most of the
aforementioned situations, except for the nonpayment of the syndicated loan
with Morgan and the Senior Notes, additionally the Company did not comply with
the current ratio and the interest coverage ratio committed to in its loan
agreements and the substitution of the guarantee granted by the Company to GAN.
The aforementioned issue obligated AHMSA to initiate on April 26, 1999 a
restructuring process to renegotiate its debt with its creditors, based on its
ability to pay (still under negotiation). Therefore, principal and interest
payments on the debt were suspended and the search for a potential partner
began. The main financial institutions formed an unofficial Creditor Steering
Committee ("Committee"), whose main objective is to oversee the negotiations of
the debt restructuring process by representatives of such institutions as
follows:
Bank of America, N.A.
JP Morgan Chase Bank (successor to Morgan Guaranty Trust Company of
New York)
Scotiabank Inverlat, S.A.
Banco Nacional de Mexico, S.A.
BBVA-Bancomer, S.A.
Banco Mercantil del Norte, S.A.
Wells Fargo Bank Minnesota, N.A., in its capacity as trustee for the
Old Notes
West Merchant Bank Limited
Export-Import Bank of the United States
AHMSA entered into a non-binding letter of intent with the Committee setting
forth a framework for a restructuring. The letter of intent provided for three
alternative plans for the restructuring of the indebtedness:
Plan A, the restructuring in connection with a US$400 equity investment in
AHMSA by Aceralia Corporacion Siderurgica, S.A.("Aceralia") in order to
implement the plan by June 15, 2000.
Plan B, provided the restructuring independent of a business combination
transaction.
Plan C, which was to be pursued if Plan B was not implemented by August 15,
2000, provided for an exchange by GAN of its entire equity interest in AHMSA
for all of the capital stock of a debt-free MICARE and up to 6% of the capital
stock in AHMSA (based on the success of certain asset sales).
b) Suspension of Payments
Due to the issues indicated above and because some of its creditors filed
certain lawsuits against the Company, on May 24, 1999, AHMSA and some of its
subsidiaries requested a judicial declaration of Suspension of Payments status
("Suspension of Payments"), which was granted on May 25 and May 28, 1999 by the
first judge of the First Instance Court in Monclova, Coahuila. The Company's
filing for Suspension of Payments constituted an event of default on
substantially all of its debt obligations.
The Company proposed a preventive payment agreement, which must be approved
by its creditors; the contingency of AHMSA being liquidated exists in the event
it is not approved.
F-10
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
As a result of the Suspension of Payments ordered:
. All debts AHMSA had incurred up to the date of Suspension of Payments
were deemed due and payable; therefore, all balances were recorded under
current liabilities representing as of December 31, 2000 Ps.18,331
(nominal value).
. AHMSA was granted an automatic stay from collection of any indebtedness
arising out of transactions completed prior to the Suspension of
Payments.
. Interest ceased to accrue on all outstanding indebtedness, other than
ordinary interest with respect to secured indebtedness (as defined under
applicable Mexican bankruptcy and Suspension of Payments laws) to the
extent of the security. The additional interest that would have been
accrued during the years ended December 31, 1999 and 2000 was Ps.1,407
and Ps.2,046, respectively.
. All lawsuits filed for the collection of any monetary obligation against
AHMSA were suspended, except for tax obligations, proceedings for the
enforcement of labor liabilities or secured credits (as defined under
applicable Mexican law) and any enforcement of such secured credits.
. A trustee (sindico) was appointed by the court to supervise AHMSA's
operations (AHMSA's management retained administrative control and
continued operations in the ordinary course of business under the
trustee's supervision).
. For purposes of recognition and classification of AHMSA's debt
obligations and in order to provide certainty and equal treatment to all
creditors, all credit obligations (other than obligations entitled to be
paid currently under Suspension of Payments law) stated in foreign
currency were converted into pesos at the rate of exchange prevailing on
the date of the judicial declaration of Suspension of Payments. For
AHMSA, MICARE, MIMOSA and MINOSA, which obtained a judicial declaration
of Suspension of Payments on May 25, 1999, this rate of exchange was
Ps.9.359 per 1 U.S. dollar and for CERRO, which obtained a judicial
declaration of Suspension of Payments on May 28, 1999, this rate of
exchange was Ps.9.672 per 1 U.S. dollar. As a result, AHMSA did not
record exchange losses of Ps.322 and Ps.140 in the consolidated
statement of income (loss) as of December 31, 1999 and 2000,
respectively.
. During fiscal years 1999 and 2000, there were disbursements mainly for
professional advisory fees, which totaled Ps.191 and Ps.276,
respectively, and were recorded under other expenses in the consolidated
statement of income (loss).
. The interest rate swaps that had been contracted with certain
institutions became due and payable, resulting in the recognition of a
US$1.9 loss in 1999.
. The suspension of the Company's stock on the Mexican Stock Market and
AHMSA ADR listings on the New York Stock Exchange.
. The convertible note holders lost the right to convert such notes into
capital stock of the Company.
During the Suspension of Payments period, the Company may continue its
operations and pay trade payables and supplies. There may be additional effects
that may arise at the conclusion of the Suspension of Payments and the final
negotiations with the creditors, which effects are unknown at this time.
F-11
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
c) Business Combination and Restructuring plan
Business combination
From September 1999 through February 2000 a potential restructuring
considered a merger with Industrias Monterrey, S.A. de C.V. ("IMSA"). After it
became apparent to AHMSA and GAN that such a business combination would not be
advantageous, on February 23, 2000, they entered into negotiations with
Aceralia regarding a potential cash investment in AHMSA and signed a
non-binding letter of intent providing for the creation of a joint venture.
On July 19, 2000, the Committee reported that it would not approve a
restructuring involving a joint venture with Aceralia. They rejected the
proposal for the following reasons:
. Aceralia did not provide a firm commitment.
. The committee considered the up-front cash payment to be paid to AHMSA
to be too low.
. Aceralia would manage and control the joint venture.
. There was no assurance that the joint venture would generate cash flow
for AHMSA.
. The projected profit margins for the joint venture would be too low.
. AHMSA would have been obligated to supply the joint venture substantial
raw or unfinished materials at cost for 20 years.
. The committee was doubtful of the ability of AHMSA to generate payments
form the joint venture sufficient to pay the restructured debt.
Agreement for a restructuring plan
On August 25, 2000 the Company entered into a non-binding term sheet for the
restructuring of its outstanding indebtedness along the lines of Plan B
mentioned in a) above). The Company's management, the Committee and all
interested parties finally signed on May 29, 2001 a non-binding letter of
intent in which they agreed to restructuring terms and conditions along the
lines set forth in some agreements attached to it (Credit Agreement, the
Indenture, the corporate by-laws, the three agreements governing the AHMSA
Creditor Voting Trust, the Stock Option Agreement and the Registration Rights
Agreements) and intent also to work towards a prompt filing of a registration
statement relating to the restructuring.
The proposed restructuring plan classifies the claims into five general
categories, and provides for the treatment of the holders of claims in each of
those categories, as follows:
1. Capital Leases
Those capital leases that have been approved by the Court to continue in
full force and effect.
2. Holders of Preferred Claims
Consists of claims granted valid preferences by the Court, including in this
case the claims that will be paid in full, pursuant to their existing
agreements. These claims are held by Bancomext, Banca Cremi, S.N.C. and Banco
Santander S.A. (which Banca Cremi and Banco Santander claims relate to loans to
finance the construction of housing for AHMSA's employees, who pay for the
homes through deductions from their salaries).
F-12
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
3. Holders of Claims for Indebtedness for Borrowed Money
Consists of (a) holders of Old Senior Notes (yankee bond) and Old Discount
Convertible Notes (convertible notes); (b) claims for indebtedness for borrowed
money of MICARE; (c) claims under the Old SEN Facility (Morgan); and (d) other
claims for indebtedness for borrowed money.
Holders of these claims receive their pro rata share (based on the amount of
their claim from a total of US$1,846.2 of the considerations set forth in the
agreement.)
4. Suppliers
Consists of suppliers to whom amounts are outstanding for goods or services
supplied on or prior to May 25, 1999. These claims total approximately US$125.4
net from advance payments.
5. Equity Holders
Equity holders will maintain their existing interests subject to dilution by
the new common stock being issued pursuant to the terms of the restructuring
plan.
Under the restructuring plan, holders of the Company's debt will receive
302,000,000 shares of the common stock representing 40% of the outstanding
common stock on a fully diluted basis, subject to a three-year purchase option
and additional two-year right of first refusal in favor of a special purpose
vehicle created by the parent company of AHMSA, and in the case of shares to be
issued to the creditors of MICARE, a nine-year purchase option in AHMSA's
favor. In order that the issuance of this common stock may be accomplished in a
tax efficient manner under Mexican law, the following steps will be taken:
1. GAN will form a new wholly owned subsidiary ("NewCo"), which will assume
US$551.2 of AHMSA's indebtedness in exchange for an equal U.S. dollar
amount of claim against AHMSA.
2. NewCo will then capitalize its claim against AHMSA in exchange for
397,127,498 new shares of AHMSA's common stock, representing 52.6% of
AHMSA's outstanding capital stock on a fully diluted basis.
3. The holders of the Old Notes and Old Loans will then contribute the
US$551.2 of indebtedness to NewCo in exchange for the issuance of
302,000,000 shares of NewCo's common stock representing 76.0% of NewCo's
outstanding capital stock on a fully diluted basis.
4. NewCo will then merge into AHMSA, so that AHMSA would be the surviving
entity. Each share of NewCo Common Stock will be converted into a share
of AHMSA common stock. As a result of the merger, GAN, the holders of
the Old Notes and Old Loans and AHMSA's other shareholders will own
50.1%, 40% and 9.9%, respectively, of the Company's outstanding capital
stock on a fully diluted basis.
To consummate the restructuring plan there are several conditions that must be
met prior to the closing date. Some of them are:
. All holders of preferred claims against AHMSA recognized in the
Suspension of Payments proceeding must have consented to the
restructuring plan and agreed to be bound by the terms of the suspension
of payments settlement agreement (the "Settlement Agreement") to be
filed with and approved by the Mexican Bankruptcy Court.
F-13
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
. All other holders of claims against AHMSA (including supplier claims),
other than holders of claims with an aggregate principal amount of less
than US$25, must have consented to the restructuring plan and agreed to
be bound by the terms of the Settlement Agreement.
. The U.S. Securities and Exchange Commission must have declared the
registration statement effective and not have instituted any stop order
with respect to the registration statement.
. The Civil Court of First Instance for the Judicial District of Monclova,
Coahuila, Mexico, must have lifted AHMSA's Suspension of Payments and
the Suspension of Payments of each of AHMSA's subsidiaries.
. AHMSA must have delivered disclosure schedules to the New Credit
Agreement entered into pursuant to the restructuring plan that have not
been objected to by the holders of 40% or more of claims who are
entitled to receive promissory notes under the New Credit Agreement.
. The aggregate amount of indebtedness that AHMSA has incurred since
December 31, 2000 (net of repayments of indebtedness made during such
period) must not exceed US$40.
. A material adverse change to AHMSA's business, operations or financial
condition must not have occurred since December 31, 2000.
. AHMSA has generated US$50 of cash to pay restructuring fees and expenses
associated with the restructuring plan.
. The creditors of GAN must have approved the restructuring plan to the
extent required under the terms of the GAN Suspension of Payments and
GAN must have emerged from Suspension of Payments on terms satisfactory
to GAN, AHMSA and a majority of the outstanding claims against AHMSA.
. All necessary Mexican governmental approvals must have been obtained for
the restructuring plan (including necessary approvals from the Mexican
National Commission of Foreign Investment).
. The creditors shall have received favorable legal opinions of United
States and internal and external Mexican counsel to AHMSA and GAN.
. Each of the parties approving the restructuring plan must have granted a
general release to each other party for any actions or failures to act
in connection with the Old Notes and Old Loans occurring on or prior to
the closing date.
. AHMSA's suppliers must have agreed to a payment schedule for outstanding
suppliers' credits reasonably acceptable to AHMSA and AHMSA's creditors.
. Bancomext must have agreed that no principal payments in respect of its
preferred claims against AHMSA are due prior to 2003.
. Holders of no more than US$35.5 of aggregate principal amount of Old
Loans elect to receive new notes under the new indenture pursuant to the
restructuring plan.
AHMSA's ability to continue as a going concern will depend on whether the
Company successfully resolves the debt restructuring process, its
noncompliance, and the effects of the Suspension of Payments mentioned in this
note, as well as on recovering the level of generating cash flow referred to in
the following note.
Note 3. Cash flow
Notwithstanding the relief from debt service and collection actions afforded
by the Suspension of Payments, the financial condition, results of operations,
and cash flows of the Company have deteriorated during the last
F-14
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
quarter of 2000, as a result of the adverse developments in the general
economic environment, international steel industry conditions and other
internal events, which have impacted the Company in the following ways:
a) International prices have decreased 30% during the last 18 months.
b) From December 1999 to December 2000 natural gas costs have increased 178%.
c) The appreciation of the Mexican peso against the U.S. dollar; which
influences the sales price in Mexican pesos mainly because those prices are
referenced to the U.S. dollar, together with the increase in domestic input
costs, which increases as a function of inflation.
d) During the second half of the year MICARE's situation was affected by
fewer deliveries to the CFE, since steam coal production decreased
significantly during the last quarter of the year due to an unusually rainy
season in the coal area, affecting production capacity in the open pit
mines. Due to this, the Company failed to deliver 363,000 tonnes to CFE,
which represented a revenue decrease of approximately US$10.9.
e) The Company is unable to obtain financing for its operations and capital
expenditures, other than advance payments from customers and accelerated
payments of accounts receivable in exchange for discounted terms.
The Company has been unable to generate sufficient cash flow to adequately
fund obligations and operations. As a result, as of December 31, 2000, the
Company:
. Has not made necessary capital expenditures to permit the continued
extraction of raw materials necessary for the production of steel,
requiring the purchase of more costly raw materials from third party
suppliers.
. The Company has been unable to obtain necessary performance bonds
required by customers or to obtain such bonds at costs far in excess of
historical levels.
. The Company's shortage of cash requires it to extend its payments to
suppliers. Additionally, the terms and discounting of its accounts
receivable, offering of collateral for its supply expenditures, and its
inability to obtain bank financing due to the Suspension of Payments
described in Note 2 b), has considerably deteriorated the Company's
working capital.
The Company's Management has been taking the steps outlined below in an effort
to improve its financial condition, results of operations, and cash flows in
the short to medium term, as follows:
a) Continued the cost and spending reduction program, trying to reduce fixed
costs and stabilize variable unit costs.
b) To control the cost of natural gas, starting in July 2000, the Company
established a program to substitute natural gas for coal injection. With
this program, gas consumption decreased 54% in the last half of 2000. In
addition, hedging contracts were entered into for controlling gas prices for
the period December 2000 to February 2001; and on February 8, 2001, the
Company negotiated a contract with PEMEX GAS and PETROQUIMICA BASICA (PEMEX)
to guarantee a price of 4 U.S. dollars per million BTUs applicable from
January 1, 2001 through December 31, 2003.
c) Continuing to market assets not directly related to the core business,
such as the oxygen plants, railroad cars, real estate, etc.
F-15
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
For the above mentioned reasons, as of December 31, 2000, the Company has
focused its cash flows on the maintenance of plant operations.
Note 4. Other events
a) Joint venture termination
On March 9, 2000, AHMSA signed an agreement with Ryerson Tull, Inc.
("RYERSON TULL") to acquire a 50% interest in CSPYL (formerly "RYERSON") for
US$16, subject to court approval. As of the date of these consolidated
financial statements, the period to complete the transaction has expired, and
CSPYL could be liquidated. However, RYERSON TULL and AHMSA wish to extend the
date without proceeding with the liquidation of CSPYL.
b) Personnel reduction
As part of the Company's cost reduction plan during 1999, AHMSA began a
personnel reduction process for which it created a reserve of Ps.524, presented
net of the cancellation of the corresponding retirements, pension plan and
seniority premium liabilities, as "Severance Payments" in that year's
consolidated statement of income. During fiscal 2000, such reserve was
reevaluated, concluding, after an analysis, that it was excessive by Ps.96.
Therefore the corresponding correction was made.
c) Sale of the lime processing plant
On November 1, 1999, MINOSA sold the assets of its lime processing plant
located in Santa Catarina, N.L. to Refractarios Basicos, S.A. de C.V.
("REBASA") for US$19. In connection with this sale, REBASA has committed to
supply 100% of the lime that AHMSA will require for its productive processes
over the next 10 years. Since MINOSA is under Suspension of Payments status,
the final sale of the assets is subject to the corresponding legal
authorization from the Suspension Court or the release from Suspension of
Payments status. In anticipation of the sale, a lease contract was signed,
establishing a monthly rent payment of 137,500 U.S. dollars, ending October
2001, with the possibility of extension upon the agreement of both parties.
d) Association with Lamina y Placa de Monterrey, S.A. de C.V. ("LPM")
On April 16, 1998, AHMSA instructed GAN to acquire up to 49% of the shares
in LPM. As such, during 1998, the Company made advances to GAN totaling US$42
to complete the LPM transaction, subject to: a) authorization from the Board of
Directors and b) authorization from the Federal Competition Commission.
On December 31, 1998, through a partnership and/or purchase-sale of shares
agreement, AHMSA and GAN jointly agreed to acquire 49% of the shares of LPM for
US$50.4, of which US$42 was paid by AHMSA and the remainder by GAN.
On March 9, 1999, the agreement was amended such that AHMSA acquired 49% of
the shares in a new company named Lamina y Placa Comercial ("LPC") in exchange
for its US$42 contribution. LPC was created through the spin-off of certain
assets related to the processing and distributing of steel products.
On September 9, 1999, the parties executed another agreement that terminated
the March 9, 1999 agreement. The September 9, 1999 agreement required AHMSA to
return the 49% equity interest in LPC to LPM
F-16
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
in exchange for 60.15% of the shares of DOS CARLOS with limited voting rights,
and pay a contractual penalty of US$3.6, which is included in other expenses in
the consolidated statement of income (loss) in 1999.
DOS CARLOS was created to develop a residential area that includes a golf
course in a suburb of the city of Monterrey. According to a study by a real
estate specialist, the project has a projected estimated value of approximately
US$73.4.
According to the study prepared by the real estate specialist, the projected
estimated value of the 60.15% equity interest in DOS CARLOS is US$44.2.
However, the book value of the shares is US$19. As a result, the Company
conservatively decided to recognize a loss of Ps.202, which was recorded and is
included in other expenses in the consolidated statement of income (loss) in
1999, since the cost of acquisition was US$38.4 which was estimated not to be
less than realizable value.
Because AHMSA does not maintain administrative control over DOS CARLOS, this
investment is recorded under the equity method.
e) Damage at MIMOSA Mine V
In October 1998, there was a fire in passage 2 East of Mine V that resulted
in the loss of 6,558 meters of development. The Company's technicians
determined that this canyon was unusable and had to be abandoned. The
management of MIMOSA took steps to recover the insured amounts. An expense of
Ps.98, which corresponds to the investment that had been made, is included in
other expenses in the consolidated statement of income (loss) in 1999.
During 2000, part of the expense was recovered due to the insurance payment,
originating income of Ps.49 recorded in the consolidated statement of income
(loss) under other expenses, net.
Note 5. Discontinued operations
The net loss from discontinued operations for the years ended December 31,
1998, 1999 and 2000 consisted of the following:
1998 1999 2000
------------- ------------- ----------
Collapse in MIMOSA Mine VI.......................... Ps. -- Ps. (79) Ps. --
Loss on the sales of ANSA shares.................... (496) -- --
Loss of reserves in MIMOSA Mine III................. -- (29) --
Abandoning exploitation of MICARE Site I and Mine II -- (57) --
Net result of disincorporated units................. 33 -- --
Gain on the sale of the galvanizing and paint plants -- 139 --
Closing of MIMOSA's Mine IV......................... (77) -- --
--------- --------- ------
Ps. (540) Ps. (26) Ps. --
========= ========= ======
. Collapse in Mine VI of MIMOSA
During February 1999, Mine VI presented abnormal behavior due to problems in
land pressure, originating collapses in the main canyon of the long front in
the Southern Zone. Based on studies by external geologists, management decided
to abandon this zone, which meant not extracting approximately 10,749,392
tonnes of coal and originating a loss of Ps.79.
F-17
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
. Loss of reserves in Mine III of MIMOSA
The northern zone of Mine III presented geological failures that, according
to reports issued by internal geologists this area was too expensive to
continue operating. This resulted in discontinuing the operation, which meant
not extracting approximately 2,000,000 tonnes of coal, for which Ps.29 were
expensed, amount equivalent to the gallery investment that had been made for
the extraction.
. Abandonment of exploitation of Site I and Mine II of MICARE
Due to the excessive cost of extracting coal at Site I and Mine II, MICARE's
management, together with internal geologists, decided to abandon the
extraction project for approximately 381,805 tonnes of coal. This originated an
adjustment in the balance for each mine to be amortized amounting to Ps.57.
. Sale of galvanizing and paint plants
On January 28, 1999, AHMSA sold, subject to certain conditions, the assets
of the galvanizing and paint plants to IMSA for US$105.
In connection with the IMSA transaction, the following actions were taken:
A supply contract was signed, through which IMSA is obligated to purchase
from AHMSA, over the next 10 years, up to 80% of the steel required by the
production of the galvanizing plant, without exceeding 260,000 tonnes per year.
In exchange, AHMSA received a prepayment of US$72.6, whose amortization began
with the shipments that began on April 26, 2000. The amount of the shipments
pending supply for this prepayment as of December 31, 2000 was Ps.302 and it is
included in other accounts payable in the consolidated balance sheet. The gain
on this transaction was Ps.139.
During May 2000, IMSA temporarily suspended operations of the galvanization
and painting plants in Monclova; however, in order to comply with the contract
mentioned in the previous paragraph, AHMSA's steel supply was channeled toward
the other plants that IMSA has in Mexico.
. Sale of Aceros Nacionales, S.A. ("ANSA")
On January 29, 1999, 100% of the shares of ANSA were sold to DEACERO, S.A.
de C.V. for US$36.5. The net loss on this transaction was Ps.496.
. Close of Mine IV of MIMOSA
Due to depletion and the high cost of operation of MIMOSA's Mine IV, the
Company decided to close the mine's operations in August 1998. Through December
31, 1998, the expenses for restoration and conservation amounted to Ps.77.
Note 6. Basis of consolidation and presentation
U.S. dollar amounts shown in the consolidated financial statements have been
included solely for the convenience of the reader and are translated from
Mexican pesos, as a matter of arithmetic computation only, at the noon buying
rate for Mexican pesos on June 30, 2001 of 9.06 pesos per U.S. dollar published
by the Federal
F-18
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Reserve Bank of New York. Such translation should not be construed as a
representation that the Mexican peso amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or any other rate
of exchange.
The consolidated financial statements include those of AHMSA and all of its
subsidiaries.
Among the significant subsidiaries consolidated are:
%
Participation
-------------
MICARE................ 100
MINOSA................ 100
CERRO................. 100
MIMOSA................ 100
LA PERLA.............. 100
CSPYL, LCD and DOS CARLOS are accounted under the equity method.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Equity in earnings and changes in equity of subsidiaries that were bought or
sold during the year were included in the consolidated financial statements
from or up to the date of the transactions and were restated in terms of the
purchasing power of the Mexican peso at June 30, 2001.
Note 7. Significant accounting policies
The significant accounting policies followed by the Company are in
conformity with accounting principles generally accepted in Mexico ("Mexican
GAAP"), 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 to be included
therein. Actual results could differ from those estimates.
a) Changes in accounting policies
On January 1, 2000, a revised Bulletin D-4 issued by the Mexican Institute
of Public Accountants ("MIPA") went into effect. This bulletin establishes the
accounting treatment for the deferred effects of income and asset taxes and
employee profit sharing. It consists of recognizing liabilities and assets from
deferred income and asset taxes that may result from the future tax effects of
all the temporary differences between the book and tax basis of assets and
liabilities. For the computation of deferred employee profit sharing effects,
only the temporary differences that result from the reconciliation between net
income for the period and the taxable basis for employee profit sharing, which
are expected to reverse within a specific timeframe, are considered.
This principle resulted in recognizing a deferred liability of Ps.3,789 as
of December 31, 2000, a decrease in shareholders' equity of Ps.3,860 for the
initial cumulative effect as of January 1, 2000, a credit to the result from
holding nonmonetary assets of 2000 of Ps.476, and the 2000 provision for income
taxes in the consolidated statement of income increased by Ps.723.
b) New accounting principle
Mexican Bulletin C-2, "Financial Instruments", was issued in December 1999
by the MIPA and became effective in 2001. Bulletin C-2 requires the recognition
of all derivatives on the balance sheet as either assets or
F-19
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
liabilities and the measurement of certain of these instruments and the related
hedged items at their fair value. In addition, the Mexican standard will
require that all gains and losses on derivative hedging instruments be recorded
in current earnings, regardless of the nature of the instrument. As of December
31, 2000, the Company does not have any significant derivative financial
instruments (see Note 16).
c) Recognition of the effects of inflation in the financial statements
The Company restates its financial statements to reflect the purchasing
power of the Mexican peso as of the most recent reporting date, thereby
comprehensively recognizing the effects of inflation. The financial statements
of prior periods have also been restated in terms of the purchasing power of
the Mexican peso as of the most recent reporting date. Accordingly, prior
period amounts differ from those previously reported. As a result, the amounts
reported for the most current period are comparable with those of prior periods
since all periods are expressed in terms of the same purchasing power.
To recognize the effects of inflation in terms of Mexican pesos with
purchasing power as of the most recent reporting date, the following procedures
are used:
. Balance sheet:
Inventories are restated to their most recent production or purchase cost,
not exceeding realizable value. Therefore, coal inventories recovered in the
washing plant, referred to in Note 12, are valued at their latest recovery cost.
Laminating rollers are amortized based on units of production determined by
the Company's technicians.
Inventory of scrap is valued at its recovery cost, in accordance with its
market value, less the contribution margin and the cost incurred to process it.
Scrap is a by-product of AHMSA's production of molten pig iron that can be
reused as a secondary raw material.
Property, plant and equipment of domestic origin are restated using the
National Consumer Price Index ("NCPI") factors. Machinery and equipment of
foreign origin are restated based on the inflation rate of the country of
origin and the period-end exchange rate.
Depreciation of fixed assets is computed using the straight-line method
based on restated values, applying rates that correspond to the estimated
useful lives of the assets. Depreciation of additions begins in the year after
the asset is placed in service.
Deferred charges are restated using factors derived from the NCPI,
cumulative from the date of generation.
Investments subject to depletion, which include initial expenses of
exploration and development of long fronts, are valued based on the latest
costs incurred. The depletion of these investments is determined upon beginning
the mineral exploitation based on the number of tonnes extracted for annual
sales, in relation to the estimated number of tonnes in reserve in the deposits.
Investments in shares of unconsolidated subsidiaries are restated using the
equity method, based on the subsidiaries' financial statements restated on the
same basis as those of the Company.
F-20
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Shareholders' equity and nonmonetary items other than inventory and
property, plant and equipment of foreign origin are restated using factors
derived from the NCPI, cumulative from the date of contribution or generation.
. Statement of income:
Revenues and expenses that are associated with a monetary item (trade
receivables, cash, liabilities, etc.) are restated using the NCPI, taking into
account inflation from the month in which they arise through the most recent
reporting date.
Cost of sales is restated to the estimated replacement cost at the time of
the sale, through the use of standard costs that are periodically updated.
Other costs and expenses associated with nonmonetary items are restated from
the time incurred through period end, as a function of the restatement of the
nonmonetary assets that are being consumed or sold.
The gain from monetary position in the consolidated statement of income
(loss) represents the effect of inflation on monetary items. This amount is
determined by applying to net monetary assets or liabilities at the beginning
of each month the factor of inflation derived from the NCPI and is restated
through year end with the corresponding factor.
. Other statements:
The consolidated statement of changes in financial position presents the
changes in financial resources measured in constant Mexican pesos, based on the
financial position at the prior yearend, restated to Mexican pesos as of the
end of the most recent reporting period.
The cumulative restatement effect shown in the consolidated statement of
changes in shareholders' equity consists principally of the gain or loss from
holding nonmonetary assets, which represents the change in the specific price
level of those assets in relation to general inflation, as measured by the NCPI.
d) Cash and cash equivalents
Cash equivalents include short-term highly liquid investments with an
original maturity of three months or less (including Mexican treasury bills)
and bank deposits valued at market (cost plus accrued interest). As of December
31, 2000, there are bank deposits amounting to Ps.93, which the Company may not
withdraw, and they are presented net of the corresponding liability in the
consolidated balance sheet.
e) Stripping costs
In open pit mining, the overburden above the mineral must be removed before
the mineral can be removed from the pit. The costs incurred in removing the
overburden (prepaid stripping costs) are deferred for proper matching with the
revenue that they generate. Prepaid stripping costs are classified as inventory
and treated as current assets in the balance sheet. If a portion of the prepaid
stripping costs is expected to benefit a period longer than one year, that
portion is classified as a noncurrent asset.
F-21
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
f) Employee housing developments
Employee housing developments are recorded at cost of construction and/or
acquisition.
Certain houses are leased under contracts that include clauses under which
the Company has the option to sell the unit to employees. The Company may
terminate the contracts under certain circumstances. If the purchase sale
option is exercised, the purchase price is paid over a maximum of 10 years,
with an annual interest rate of 6.0% under a collective bargaining agreement.
These receivables are included in the consolidated balance sheet under the
employee housing developments item and totaled Ps.59 as of December 31, 1999
and 2000.
Additionally, certain housing developments for employees and workers are
leased under rental contracts that establish minimum monthly rent payments.
Since these developments are in remote locations and will not be sold to
employees, they are depreciated over 15 years using the straight-line method.
Also, the Company maintains housing for its employees at the remote mine
locations, which is depreciated using the straight-line method.
g) Deferred charges
At December 31, 1999 and 2000, deferred charges pending amortization
consisted of the following:
1999 2000
------------ ------------
Mining exploration and development costs Ps. 1,203 Ps. 1,184
Costs and expenses of SAP............... 386 337
Intangible employee benefit assets...... 322 300
Stripping costs......................... 217 290
Deferred start-up costs................. 113 111
Debt issue expenses..................... 85 --
Other................................... 48 93
-------- --------
Ps. 2,374 Ps. 2,315
======== ========
The amortization of deferred charges for the years ended December 31, 1998,
1999, and 2000 was as follows:
1998 1999 2000
---------- ---------- ----------
Mining exploration and development costs Ps. 8 Ps. 40 Ps. 134
Costs and expenses of SAP............... 43 35 43
Stripping costs......................... 34 46 38
Deferred start-up costs................. 17 6 6
Other................................... 16 8 13
------ ------ ------
Ps. 118 Ps. 135 Ps. 234
====== ====== ======
The Company capitalizes the exploration costs incurred in the commercial
development of the explored reserves related to individual mines by an
allocation of the common costs incurred to the reserves proven during
F-22
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
exploration. The Company is currently exploring new deposits of iron ore and
has discovered a deposit with proven reserves of approximately 171 million
tonnes in the state of Oaxaca, which was certified by Midland Standard Inc., an
expert in mining, geology and measurement of reserves. The Company has a
concession to explore mineral reserves in this area, which expires in 2002.
This project is pending derived from the legal situation of the Company.
In mine development, the Company is carrying out significant preparations at
a new Site II and MINE V of MICARE. Internal geologists have estimated the
reserves at 48 and 22 million tonnes of coal, respectively. These projects
began exploitation in the year 2000. Additionally, in MIMOSA'S MINE VI the
Company's geologists have estimated reserves at 27 million tonnes. The Company
expects to begin exploitation in 2004.
Costs and expenses incurred in connection with the administrative and
accounting system ("SAP") were capitalized and are being amortized over a
10-year period. This project was concluded in January 2000.
Start-up costs for each new steel production line are amortized over a
period of five years commencing the earlier of when the production line reaches
70.0% of its installed capacity or two years after the date the first costs
were deferred. As of December 31, 1999 and 2000 the Company had invested Ps.71
and Ps.75, respectively in an electrical power plant project, and currently the
Company is in the process of finding a strategic partner for developing this
project.
h) Employee benefit obligations
According to Mexican labor law, the Company must pay seniority premiums to
all employees that leave with 15 or more years of service. Additionally,
certain payments are made based on certain conditions, in addition to the
seniority premium benefits, to administrative personnel and unionized employees.
When there is a significant reduction in personnel due to the restructuring
of the labor force or the closing of a plant, the corresponding indemnity
costs, net of the corresponding reduction in the projected benefit obligation
and the related items to be amortized, are charged to results.
i) Revenue recognition
Revenues are recognized when the products are shipped or delivered to the
customer and the customer assumes responsibility for the products.
j) Financing and related costs
Financing and related costs include interest income and expense, foreign
exchange gains or losses and gains or losses from monetary position, except as
stated in Note 2 b).
The Company pays interest on the advances from customers, which is
calculated in accordance with the period of time elapsed between the receipt of
the advance and the time the client has to pay according to its credit terms.
However, interest is also paid to those customers who prepay before the period
established in their credit terms. The interest incurred for those concepts was
Ps.608 and Ps.609 as of December 31, 1999 and 2000, respectively.
F-23
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Transactions denominated in foreign currencies are recorded at the exchange
rate at the date on which they occur. The assets and liabilities denominated in
foreign currencies are valued at the exchange rate in effect at the balance
sheet date. The resulting exchange fluctuations are credited or charged to
income as foreign exchange gains or losses, except as stated in Note 2 b).
The Company capitalizes the integral cost of financing incurred during the
period of construction or installation of fixed assets, amortizing these costs
over the average term of depreciation of the corresponding assets. During the
periods from January 1 to December 31, 2000 and 1999, no integral cost of
financing was capitalized since the Company did not make any significant
investments in fixed assets and, in any case, costs of acquisition were
financed with the Company's own resources.
Financing costs were as follows:
1998 1999 2000
------------ ------------ ------------
Interest expense............................ Ps. 3,051 Ps. 1,947 Ps. 1,101
Interest income............................. (241) (109) (104)
Foreign exchange loss (gain)................ 4,813 (1,177) 72
Gain from monetary position................. (3,940) (2,685) (2,091)
-------- -------- --------
3,683 (2,024) (1,022)
Less capitalized financing costs............ 350 -- --
-------- -------- --------
Financing costs, net........................ Ps. 3,333 Ps. (2,024) Ps. (1,022)
======== ======== ========
Capitalized financing costs were as follows:
1998 1999 2000
------------ ------------ ------------
Interest expense............................ Ps. 226 Ps. -- Ps. --
Foreign exchange loss....................... 526 -- --
Gain from monetary position................. (402) -- --
-------- -------- --------
Ps. 350 Ps. -- Ps. --
======== ======== ========
k) Negative goodwill
Negative goodwill represents the excess of the book value of shares
(substantially equivalent to fair value as a result of the restatement for the
effects of inflation) acquired over the purchase price. Amortization is
calculated on a straight-line basis over the period during which the new
business is expected to be integrated, which for ANSA was the three-year period
ended December 31, 1998. As mentioned in Note 5, ANSA was sold on January 29,
1999, and therefore as of December 31, 1999, and 2000, the Company does not
have any negative goodwill to be amortized.
l) Restatement of shareholders' equity
Capital stock and retained earnings are restated by applying a factor
derived from the NCPI from the date contributed or earned. The restatement
represents the amount necessary to maintain shareholders' equity in terms of
the purchasing power at period end.
F-24
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
m) Minority interest
As of December 31, 2000, the minority interest principally represents the
minority shareholders' proportionate share of the earnings and equity of 5% of
Hullera Mexicana, S.A. de C.V. and 49% of Hojalata Mexicana, S.A. de C.V.
n) Other income and expenses
1998 1999 2000
---------- ------------ ----------
Expenses of debt restructuring and Suspension of Payments Ps. -- Ps. 191 Ps. 276
Nondeductible expenses................................... -- 61 61
Loss on exchange of shares of DOS CARLOS (Note 4 d))..... -- 202 --
Damage at MIMOSA Mine V (Note 4 e))...................... -- 98 --
Recovery of damages MIMOSA Mine V........................ -- -- (49)
Penalties and surcharges................................. 29 139 42
Cost of idle plant....................................... 71 68 --
Recognition of the realizable value of fixed assets...... 27 101 --
Contractual penalty - LPM (Note 4 d)).................... -- 47 --
Other.................................................... 133 210 60
------ -------- ------
Ps. 260 Ps. 1,117 Ps. 390
====== ======== ======
o) Basic earnings (loss) per share
Basic earnings (loss) per share are computed by dividing the net majority
income (loss) from continuing operations and loss from discontinued operations
by the weighted-average shares outstanding during each period.
p) Realizability of long-lived assets
The Company continually evaluates the carrying value and the economic useful
lives of its long-lived assets, including property, plant and equipment, based
on the Company's operating results and anticipated future cash flows from such
assets. The estimated future cash flows of the Company are dependent upon a
variety of factors including the future condition of the Company's production
facilities, economic regulatory and other developments in Mexico, the worldwide
demand for steel products and the demand from CFE for steam coal.
q) Comprehensive income (loss)
Comprehensive income (loss) is comprised of the net income (loss) of the
year, the unamortized actuarial liability effect and the result of holding
non-monetary assets, which are presented in the consolidated statement of
changes in stockholder's equity.
Note 8. Reclassification of financial statements
Certain items of the consolidated financial statements as of December 31,
1998 and 1999 have been reclassified to conform with the presentation of the
consolidated financial statements as of December 31, 2000.
F-25
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 9. Foreign currency position
As of December 31, 1999 and 2000, foreign currency balances were:
1999 2000
---- -----
Monetary assets:
U.S. dollar..................................................... Ps. 612 Ps. 456
Other currencies................................................ 20 11
--- -----
632 467
--- -----
Monetary liabilities:
U.S. dollar..................................................... 901 1,634
Other currencies................................................ 12 6
--- -----
913 1,640
--- -----
Net monetary liability position in foreign currencies Ps........ 281 Ps. 1,173
=== =====
The Company's principal transactions denominated in foreign currencies for
the years ended December 31, 1998, 1999 and 2000 were as follows:
1998 1999 2000
----- ----- ----
Sales............................. Ps. 1,988 Ps. 1,131 Ps. 859
===== ===== ===
Purchases of parts, minerals, etc. Ps. 1,664 Ps. 426 Ps. 531
===== ===== ===
Interest expense, net............. Ps. 2,606 Ps. 1,197 Ps. 229
===== ===== ===
Technical assistance.............. Ps. 127 Ps. 7 Ps. 1
===== ===== ===
Fees.............................. Ps. -- Ps. 167 Ps. 201
===== ===== ===
The following table summarizes export sales by geographic area:
1998 1999 2000
----- ----- ----
North America Ps. 1,213 Ps. 749 Ps. 732
Europe....... 148 203 93
South America 538 110 34
Far East..... 54 -- --
Other........ 35 69 --
----- ----- ---
Ps. 1,988 Ps. 1,131 Ps. 859
===== ===== ===
At present, the Company does not hedge any of its foreign currency
denominated assets or liabilities and does not hold any derivatives or off
balance sheet financial instruments. Management believes that the risk
associated with the Company's foreign currency denominated assets and
liabilities is mitigated, in part, by (i) the Company's export sales of steel
products, which are denominated in foreign currencies, (ii) the Company's
domestic sales of steel products and steam coal, which are generally set by
reference to international, dollar-
F-26
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
denominated steel prices and steam coal prices, respectively and (iii) as a
result of the Suspension of Payments, all the debt denominated in a foreign
currency as of May 25 and May 28, 1999, was converted in to Mexican peso at the
exchange rate on that date.
Since the final effects of the Suspension of Payments are not known, there
is a possibility of increasing liabilities in foreign currency.
As of May 25 and May 28, 1999, December 31, 1999, December 31, 2000 and
April 3, 2001, the exchange rates for the Mexican peso published by Banco de
Mexico with respect to the foreign currencies indicated above are as follows:
May 25, May 28, December 31, December 31, April 3,
1999 1999 1999 2000 2001
------- ------- ------------ ------------ --------
U.S. dollar........... 9.3589 9.6715 9.5222 9.5997 9.4933
British pound sterling 15.0912 15.5952 15.1831 13.6402 13.5327
Japanese yen.......... 0.0781 0.0807 0.0931 0.0866 0.0759
German mark........... 5.0688 5.2381 4.8978 4.2603 4.2782
As of April 3, 2001, there has been no significant change in the Company's
foreign currency position as compared to December 31, 2000.
Note 10. Trade accounts receivable
Trade accounts receivable arise from the sale of products and services to
unrelated third parties. Trade receivables, including balances with the
Company's largest customers, as of December 31, 1999 and 2000, are as follows:
1999 2000
----- -----
CFE.................................. Ps. 322 Ps. 268
LPM and Subsidiaries................. 436 188
Arco Metal, S.A. de C. V............. 14 90
Abinsa, S.A. de C. V................. 120 21
Other................................ 1,024 940
----- -----
1,916 1,507
Less--Allowance for doubtful accounts (71) (46)
----- -----
Ps. 1,845 Ps. 1,461
===== =====
F-27
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 11. Other accounts receivable
The balance in other accounts receivable consisted of the following:
1999 2000
---- ----
Advances to employees................ Ps. 120 Ps. 111
Recoverable taxes.................... 75 37
Other................................ 120 96
Less--Allowance for doubtful accounts (14) (8)
--- ---
Ps. 301 Ps. 236
=== ===
Note 12. Inventories
Inventories as of December 31, 1999 and 2000 consisted of the following:
1999 2000
----- -----
Operating materials....................... Ps. 1,606 Ps. 1,432
Raw materials............................. 371 398
Advances to suppliers and goods-in-transit 285 216
Finished goods............................ 382 303
Stripping costs and long walls............ 350 350
Production-in-progress.................... 214 244
Iron ore.................................. 309 233
Steam coal................................ 146 271
Metallurgical coal........................ 34 18
Obsolete material......................... 55 47
Allowance for obsolete inventories........ (55) (47)
----- -----
Ps. 3,697 Ps. 3,465
===== =====
During 1999 and 2000, using an analysis of the production processes prepared
by the technical department of the raw material division of the coal mines, a
new process for recovering additional coal in the washing plant was identified,
which complies with the necessary quality requirements to consider it a mineral
available for sale; 1,150,000 tonnes were recovered through this process during
2000, which were recorded as inventory and can be placed on the market in 2001.
This represented a benefit of Ps.71 and is included as steam coal inventory.
As of December 31, 1999 and 2000, the balance of obsolete material, which is
similar to the corresponding reserve, has not been restated.
F-28
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 13. Property, plant and equipment
As of December 31, 1999 and 2000 property, plant and equipment consisted of
the following:
1999 2000
------- -------
Land.............................. Ps. 1,126 Ps. 1,134
Buildings......................... 11,320 11,341
Machinery and equipment........... 48,783 46,581
Transportation equipment.......... 1,951 1,770
Computer equipment................ 483 474
Furniture and fixtures............ 451 360
Construction-in-progress.......... 782 856
Capitalized financing costs....... 2,227 2,227
Other............................. 474 487
------- -------
67,597 65,230
Less--Accumulated depreciation.... (39,686) (38,974)
------- -------
Property, plant and equipment, net Ps. 27,911 Ps. 26,256
======= =======
The average annual rates of depreciation used in 1998, 1999 and 2000 were as
follows:
1998 1999 2000
---- ---- ----
Buildings.......................... 3% 3% 3%
Machinery and equipment............ 5% 5% 5%
Transportation equipment........... 14% 13% 13%
Furniture and fixtures............. 15% 11% 11%
Computer equipment................. 22% 25% 23%
Portion of the Company's productive facilities were underutilized during
1998 and 1999 and related depreciation is included as cost of idle plant in
other expenses in the consolidated statements of income (loss) for Ps.71 and
Ps.68, respectively. During 2000 the underutilized productive facilities were
immaterial.
F-29
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 14. Transactions and balances with affiliated companies
a) Transactions with affiliated companies for the years ended December 31,
1998, 1999 and 2000 were as follows:
1998 1999 2000
----- ---- ----
Revenues from:
Sales..................... Ps. 2,045 Ps. 768 Ps. 379
===== === ===
Administrative services... Ps. 46 Ps. 20 Ps. 6
===== === ===
Interest.................. Ps. 57 Ps. 27 Ps. 21
===== === ===
Commissions for guarantees Ps. -- Ps. 11 Ps. 12
===== === ===
Other..................... Ps. 26 Ps. 7 Ps. 1
===== === ===
1998 1999 2000
---- ---- ----
Expenses for:
Purchases of materials...... Ps. 293 Ps. 168 Ps. 26
=== === ===
Commission for guarantees... Ps. 115 Ps. 82 Ps. 65
=== === ===
Train and air transportation Ps. 249 Ps. 260 Ps. 281
=== === ===
Administrative services..... Ps. 15 Ps. 3 Ps. 16
=== === ===
Interest.................... Ps. 8 Ps. 4 Ps. --
=== === ===
Technical assistance........ Ps. 12 Ps. -- Ps. --
=== === ===
Other expenses.............. Ps. 41 Ps. 41 Ps. --
=== === ===
The sales above include Ps.794, Ps.239 and Ps.379 in sales to CSPYL for the
years ended December 31, 1998, 1999 and 2000, respectively, and Ps.1,251 and
Ps.529 from sales to GANAHMSA, Inc. ("GANAHMSA") for the years ended December
31, 1998 and 1999, respectively.
F-30
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
b) As of December 31, 1999 and 2000, net amounts due to and from affiliated
companies were as follows:
1999 2000
---- ----
Due from affiliates, short-term:
CSPYL and Subsidiaries...................... Ps. 40 Ps. 223
GAN......................................... 138 69
Antair, S.A. de C.V. ....................... 28 39
AC Gres S.A. de C.V. ....................... 12 30
Grupo Agromex, S.A. de C.V. and Subsidiaries 25 23
Other....................................... 14 17
--- ---
Ps. 257 Ps. 401
=== ===
Due from affiliates, long-term:
AC Gres, S.A. de C.V. ...................... Ps. 22 Ps. 7
=== ===
Due to affiliates, short-term:
LCD......................................... Ps. 9 Ps. 18
Filahsa, S.A. de C.V. ...................... 7 4
Other....................................... 9 8
--- ---
Ps. 25 Ps. 30
=== ===
Since February 1997, AHMSA has been paying GAN a 2.5% commission on bank
loans and advances from customers where GAN is the guarantor.
In December 1999, GANAHMSA liquidated its operations and assigned AHMSA, in
lieu of payment, an account receivable that it had with GAN and some of its
subsidiaries for US$12.2.
As of December 31, 2000, GAN and its subsidiaries owed the Company a total
of US$14.9, including the account receivable assumed by AHMSA after liquidation
of GANAHMSA. On December 31, 1999, Inmobiliaria Maestranza, S.A. de C.V.,
Inmobiliaria Sabinas, S.A. de C.V. and Antair, S.A. de C.V. (direct
subsidiaries of GAN) signed an agreement with AHMSA, secured by assets owned by
them with a value of US$34.2 (subject to senior security interests), which
provided that such GAN subsidiaries would guarantee the aforementioned GAN debt
over a period of 18 months, unless both parties agreed to an extension. If
these subsidiaries fail to make payments pursuant to this guarantee agreement,
AHMSA may seize the assets pledged to secure the guarantee (subject to senior
security interests).
Note 15. Bank debt
Short-term bank debt at December 31, 1999 and 2000 was as follows:
Lender 1999 2000
------ ------ ------
Senior Notes (Yankee Bond) Ps. 4,319 Ps. 3,952
Morgan.................... 2,301 2,110
Bank of America........... 1,265 1,161
Convertible Notes......... 759 697
Other..................... 9,143 8,353
------ ------
Ps. 17,787 Ps. 16,273
====== ======
F-31
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The financial liabilities that are not under Suspension of Payments at
December 31, 1999 and 2000 are comprised as follows:
Long-term debt:
Lender 1999 2000
------ ---- ----
Bancomext........................ Ps. 407 Ps. 297
Arrendadora Bankamerica.......... 148 122
The Capita Corporation........... 31 30
---- ----
586 449
Current portion of long-term debt (136) (241)
---- ----
Ps. 450 Ps. 208
==== ====
On December 20, 1995, AHMSA and Bancomext entered into a loan agreement in
which Bancomext financed AHMSA's export sales for US$ 40. This agreement
included a collection order that allowed AHMSA to collect the notes receivable
on behalf of Bancomext, subsequently transferring the funds collected. On May
17, 1999, Bancomext revoked such collection order.
On May 2, 2000, both parties negotiated a payment schedule that allows AHMSA
to reimburse in 24 monthly payments, beginning on June 15, 2000, the funds
collected on behalf of Bancomext, which amounted to US$38.5 plus accrued
interest of US$4.3. The balance bears interest at LIBOR plus 5.4% per annum.
In May and December 2000 the judge that had granted the Suspension of
Payments authorized AHMSA and some of its subsidiaries to comply with the
payments established in the financial lease agreements with Arrendadora
Bankamerica and The Capita Corporation because the equipment leased was
considered absolutely necessary for the Company and its subsidiaries in order
to continue ordinary operations. This was based on Article 139 of the
Bankruptcy and Suspension of Payments Law.
Note 16. Financial instruments
The carrying amounts and fair values, converted into millions of U.S.
dollars, of the Company's debt instruments for which such amounts are
substantially the same, are summarized as follows:
December 31, 1999 December 31, 2000
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Long-term debt..... US$ -- US$ -- US$ 45.8 US$ 45.5
The market value of the long-term bank loan is based on the value of the
discounted flows. The discount rate is estimated using the current rates
offered for debts with similar maturity dates.
F-32
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
AHMSA entered into two forward contracts with PEMEX to hedge against gas
price increases during 2000. The first forward contract was entered into during
August 2000, in order to obtain a 25% discount on the purchases of that
particular month and it covered 1% of the monthly consumption from September
2000 through February 2001, or approximately 14,000 million BTUs, at a cost of
4.57 U.S. dollars per million BTUs. The second forward contract was entered
into during September 2000 to cover 60% of the monthly consumption from
December 2000 through February 2001, or approximately 840,000 million BTUs, at
a cost of 5.16 U.S. dollars per million BTUs. Additionally, the Company
contracted hedging with PEMEX to guarantee the price of 4 U.S. dollars per
million BTUs from January 1, 2001 through December 31, 2003, for a consumption
of 1,000,000 million BTUs.
Note 17. Other payables
Other current payables consist of the following:
1999 2000
----- -----
Advances from customers....... Ps. 1,299 Ps. 737
Severance payments............ 424 269
Reserve for water usage rights 137 191
REBASA........................ 84 77
Other......................... 760 583
----- -----
Ps. 2,704 Ps. 1,857
===== =====
As of December 31, 2000, advances from customers included advances from IMSA
and Trinity Industries de Mexico, S.A. de C.V. of Ps.302 and Ps.97,
respectively.
There are long-term supply contracts for steel products included in the
consolidated balance sheet under other long-term payables. As of December 31,
1999 and 2000, the balances were Ps.233 and Ps.368, respectively.
Note 18. Shareholders' equity
As of December 31, 2000, the Company's capital stock is represented by
388,375,502 common shares, without par value, fully subscribed and paid, of
which the Company has repurchased 30,503,000.
Beginning in 1999, dividends paid to individuals or foreign residents are
subject to income tax withholding at an effective rate ranging from 7.5% to
7.7%, depending on the year in which the earnings were generated. In addition,
if earnings for which no corporate tax has been paid are distributed, the tax
must be paid upon distribution of the dividends. Consequently, the Company must
keep a record of earnings subject to each tax rate. Earnings for which
corporate taxes have been paid amount to approximately Ps.221.
Capital reductions are subject to taxes on the excess of the reduction over
the price-level adjusted paid-in capital, in accordance with the formula
prescribed by the income tax law.
The net income of each company is subject to the legal requirement that 5%
thereof be transferred to a legal reserve each year until such reserve equals
20% of capital stock. This reserve cannot be distributed to shareholders except
as stock dividends. As of December 31, 2000, the legal reserve was Ps.55.
F-33
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
As of December 31, 2000, the reserve for the repurchase of shares of the
Company's common stock was Ps.357. As of the date of these consolidated
financial statements, the Company owns shares equivalent to 7.9% of the
388,375,502 shares outstanding. The last market value of AHMSA's shares,
recorded by the Mexican Stock Exchange before the suspension of the Company's
common stock on that market (see Note 2 b)) was 2.52 Mexican pesos per share.
Note 19. Tax environment in Mexico
a) Income and asset tax regulations
The Company is subject to income taxes and asset taxes. Income taxes are
computed on an unconsolidated basis taking into consideration the taxable and
deductible effects of inflation, such as depreciation calculated on restated
asset values and the deduction of purchases in place of cost of sales, which
permit the deduction of current costs; taxable income is increased or reduced
by the effects of inflation on certain monetary assets and liabilities through
the inflationary component, which is similar to the gain or loss from monetary
position. Beginning in 1999, the income tax rate increased from 34% to 35%,
with the obligation to pay this tax each year at a rate of 30% (transitorily
32% in 1999) with the remainder payable upon distribution of earnings. This
remainder is recorded as a long-term liability.
The asset tax is computed at an annual rate of 1.8% on the average of the
majority of restated assets less certain liabilities. The tax is paid only to
the extent that it exceeds the income taxes of the year. Any required payment
of asset tax is creditable against the excess of income taxes over asset taxes
for the preceding three and following 10 years. For the years ended December
31, 1999 and 2000 the Company obtained tax benefits by using an asset tax
credit for the immediate deduction of fixed assets in the amount of Ps.318 and
Ps.264, respectively.
b) Employee profit sharing
Employee profit sharing is calculated for the Company and each subsidiary at
a rate of 10% of taxable income on an unconsolidated basis, after certain
adjustments, such as the elimination of price-level adjusted depreciation, the
inflationary component and unrealized exchange gains and losses.
F-34
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
c) Tax loss carryforwards, recoverable asset taxes and unused asset tax credits
At December 31, 2000, the Company has tax loss carryforwards for income tax
purposes, recoverable asset taxes and asset tax credits, all of which are
indexed for inflation as of June 30, 2001, and such carryforwards are
calculated based on the results of each individual company, rather than on a
consolidated basis, in the following restated amounts:
Recoverable
Tax Loss Asset Tax Unused Asset
Expiration Carryforwards Carryforwards Tax Credits
- ---------- ------------- ------------- ------------
2001.. Ps. 359 Ps. 194 Ps. 2
2002.. 76 66 31
2003.. 93 6 394
2004.. 3,092 7 --
2005.. 70 1 --
2006.. 35 1 --
2007.. 1,702 -- --
2008.. 2,601 -- --
2009.. 438 11 --
2010.. 726 53 --
----- --- ---
Ps. 9,192 Ps. 339 Ps. 427
===== === ===
The unused asset tax credits arose from the Company's investments in
property, plant and equipment in the state of Coahuila, where AHMSA's principal
steel facilities are located.
The Company's tax loss carryforwards and recoverable asset taxes may only be
applied to offset the Company's stand-alone tax liabilities and not those of
the Company's subsidiaries. Certain subsidiaries of the Company also have tax
loss carryforwards and recoverable asset taxes. Each entity is required to file
a separate tax return.
F-35
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
d) Reconciliation of statutory tax rate and effective tax rate
In accordance with Mexican GAAP, the following items represent the principal
differences between the income or loss rate computed for financial reporting
purposes and that for tax purposes:
1998 1999 2000
---- ---- ----
Pretax income (loss) for financial reporting purposes 35 35 35
Permanent differences:
Result from monetary position..................... 70 (66) (38)
Inflationary component............................ (55) 29 32
Non-deductible items.............................. (5) 11 6
Other............................................. 2 6 2
Temporary differences:
Depreciation...................................... 30 (4) --
Purchase and production costs..................... 2 16 --
Deferred charges.................................. 8 (13) --
Advances from customers........................... (34) 41 --
Pension plan...................................... (3) 4 --
Tax loss carryforwards amortized.................. 1 (80) --
Tax loss carryforwards generated.................. (52) 11 --
Other............................................. 1 10 --
--- --- ---
0 0 37
=== === ===
The temporary differences that generated deferred income tax assets
(liabilities) are as follows:
2000
------------------------
January 1 December 31
--------- -----------
Property, plant and equipment Ps. (7,226) Ps. (6,696)
Inventories.................. (936) (963)
Reserves..................... 220 238
Tax loss carryforwards....... 3,288 3,217
Pension plan................. 230 258
Advances from customers...... 536 410
Deferred charges............. (664) (672)
Investment in shares......... 109 80
Recoverable asset taxes...... 583 339
------ ------
Ps. (3,860) Ps. (3,789)
====== ======
The changes in the balance of the deferred income tax activity for the year
are as follows:
2000
------
Initial cumulative effect........... Ps. (3,860)
Loss on monetary position........... 318
Provision for the year.............. (723)
Result of holding nonmonetary assets 476
------
Ending balance...................... Ps. (3,789)
======
F-36
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 20. Pension plan cost
The plan assets are held in trust at a bank and consist mainly of short-term
Mexican government securities. The plan assets also include approximately
1,666,000 shares of the Company's stock, which were purchased on the Mexican
Stock Exchange between 1993 and 1999. There are no funding requirements for
employee benefit liabilities under Mexican law. The Company does not have a
formal funding policy and makes its contributions based on annual evaluations
of its taxes, cash flow and other factors.
The Company records the liability for retirement and pension plans and
seniority premiums based on actuarial calculations using the projected unit
credit method. Thus, the Company is providing for the liability, which at
present value, will cover the projected benefit obligation at the estimated
date of retirement of the employees.
The liability as of December 31, 1999 and 2000 is comprised as follows:
1999 2000
----- -----
Projected benefit obligations (PBO).. Ps. 1,304 Ps. 1,463
Plan assets at fair value............ (110) (118)
----- -----
Funded status........................ 1,194 1,345
Unrecognized transition obligation... (298) (274)
Unrecognized prior service cost...... (9) (6)
Unrecognized variances in assumptions (230) (327)
----- -----
Net projected benefit obligation..... 657 738
Additional liability, net............ 396 469
----- -----
Total liability..................... Ps. 1,053 Ps. 1,207
===== =====
Since in 1999 and 2000 the additional liability was Ps.71 and Ps.168,
respectively, more than the unamortized actuarial net gains or losses, it was
necessary to recognize such amounts in the effect of unamortized actuarial
liability account within shareholders' equity. This item originates from the
retirement of personnel and the use of funds, which is compensated by a
reduction in the costs in subsequent years.
Severance payments to involuntarily terminated employees and workers are
charged to expense when the liability is incurred. When an agreement exists
with the union for a future reduction in personnel as a consequence of economic
slowdowns or production cutbacks, a charge to expense is made at the time such
an agreement is reached.
F-37
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The cost of employee benefits is as follows:
1998 1999 2000
---- ---- ----
Service costs........................... Ps. 85 Ps. 78 Ps. 80
Amortization of past service costs...... -- 1 1
Amortization of transition liability.... 26 25 25
Amortization of variances in assumptions 6 7 9
Financial cost for the year............. 49 47 49
Less -- Actual return on plan assets.... (10) (8) (6)
--- --- ---
Net cost for the year................... 156 150 158
Curtailment............................. 28 (1) --
Settlement.............................. 30 13 5
--- --- ---
Net cost................................ Ps. 214 Ps. 162 Ps. 163
=== === ===
The real interest rates utilized in the actuarial calculations were as
follows:
1999 1999 2000
---- ---- ----
Investment return rate......... 5.0% 6.0% 6.0%
Interest rate.................. 3.0% 4.0% 4.0%
Salary increase rate........... 1.0% 1.0% 1.0%
The changes in the net projected liability were as follows:
1999 2000
----- -----
Beginning balance........ Ps. 577 Ps. 657
Provision for the year... 162 163
Contributions to the fund (5) (6)
Payments................. (89) (76)
Fund recoveries.......... 12 --
----- -----
Ending balance........... 657 738
Additional liability..... 396 469
----- -----
Ending balance........... Ps. 1,053 Ps. 1,207
===== =====
The changes in the fund balance were as follows:
1999 2000
---- ----
Beginning balance...... Ps. 137 Ps. 110
Contributions.......... 5 6
Returns................ 8 6
Recoveries and payments (40) (4)
--- ---
Ending balance......... Ps. 110 Ps. 118
=== ===
F-38
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The amortization period for unamortized items is as follows:
Transition liability.... 12
Past service costs...... 13
Variances in assumptions 12
The components of net periodic pension cost under SFAS No. 87 for the years
ended December 31, 1998, 1999 and 2000 consist of the following:
1998 1999 2000
---- ---- ----
Service cost earned during the period.................... Ps. 80 Ps. 74 Ps. 74
Interest on projected benefit obligations................ 48 44 46
Actual return on plan assets............................. (7) (8) (6)
Net amortization and deferral............................ 33 40 33
--- --- ---
Net cost under U.S. GAAP................................. 154 150 147
Net cost under Mexican GAAP.............................. 156 150 158
--- --- ---
Additional income that must be recognized Under U.S. GAAP Ps. 2 Ps. -- Ps. 11
=== === ===
The pension net liability under SFAS No. 87 as of December 31, 1999 and 2000
is as follows:
1999 2000
----- -----
Actuarial value of benefit obligations:
Vested benefit obligation................................ Ps. 458 Ps. 575
Non-vested benefit obligation............................ 681 730
----- -----
Accumulated benefit obligation....................... 1,139 1,305
Additional benefits related to future compensation increases 164 158
----- -----
Projected benefit obligation............................. 1,303 1,463
Plan assets at fair value................................... (110) (118)
----- -----
Unfunded projected benefit obligation.................... 1,193 1,345
Unrecognized prior service costs, net....................... (10) (153)
Unrecognized net loss....................................... (564) (497)
----- -----
Total unfunded accrued pension cost under U.S. GAAP...... 619 695
Unfunded accrued pension cost under Mexican GAAP......... 660 738
----- -----
Net liability that must be recognized under U.S. GAAP.... Ps. (41) Ps. (43)
===== =====
The change in the projected benefit obligation were as follows:
1999 2000
----- -----
Beginning balance................ Ps. 1,200 Ps. 1,304
Service costs.................... 74 74
Interest costs................... 44 46
Actuarial loss................... 75 115
Benefits paid.................... (89) (76)
----- -----
Obligation at the end of the year Ps. 1,304 Ps. 1,463
===== =====
F-39
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 21. Description of differences and reconciliation of Mexican GAAP
information to approximate U.S. GAAP information
The consolidated financial statements of the Company are presented in
accordance with Mexican GAAP. Certain accounting practices applied by the
Company that conform with Mexican GAAP do not conform with accounting
principles generally accepted in the United States ("U.S. GAAP").
The reconciliation to U.S. GAAP does not include the reversal of the
restatement of the financial statements to recognize the effects of inflation
required under Mexican GAAP Bulletin B-10, "Recognition of the Effects of
Inflation in Financial Information", as amended. The application of Bulletin
B-10 represents a comprehensive measure of the effects of price level changes
in the inflationary Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes.
The principal differences between Mexican GAAP and U.S. GAAP are described
below together with an explanation, where appropriate, of the method used in
the determination of the adjustments that affect net income (loss) and
shareholders' equity.
a) Cash flow information
The changes in the financial statement balances included in the consolidated
statements of changes in financial position constitute cash flow activity
stated in constant Mexican pesos (including monetary and foreign exchange gains
and losses, which are considered cash gains and losses in the constant currency
financial statements).
In accordance with Mexican GAAP, the reduction in current and long-term debt
due to restatement in constant Mexican pesos and unrealized exchange losses on
net short-term liabilities are presented in the consolidated statement of
changes in financial position as a resource used by financing activities, and
the gain from monetary position is presented as a component of operating
activities. SFAS No. 95, "Statement of Cash Flows", does not provide guidance
with respect to inflation-adjusted financial statements.
b) Deferred income taxes and employee profit sharing
The Company follows SFAS No. 109, "Accounting for Income Taxes", for U.S.
GAAP reconciliation purposes, the objective of which is to recognize deferred
tax liabilities and assets for the future tax consequences of all temporary
differences between the book and tax bases of assets and liabilities.
As explained in Note 7 a), beginning in 2000 a change in the accounting
principle became effective for the accounting for income and assets taxes and
employee profit sharing in Mexico. With respect to the Company, the new Mexican
accounting standard differs from U.S. GAAP as follows:
Under Mexican GAAP all deferred taxes are classified as noncurrent, while
under U.S. GAAP the classification is based on the classification of the
related asset or liability.
Under Mexican GAAP deferred employee profit sharing is calculated
considering only those temporary differences that arise during the period and
which are expected to turn around within a defined period, while under U.S.
GAAP essentially the same method as used for deferred income taxes is applied.
F-40
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Additionally, the restatement of imported machinery and equipment and the
capitalization of financing cost under Mexican GAAP have a different treatment
than under U.S. GAAP. As a consequence, the related deferred income tax
presented under Mexican GAAP is different than the effect calculated under U.S.
GAAP.
c) Restatement of machinery and equipment
As explained in Note 7 c), in accordance with Mexican GAAP, imported
machinery and equipment has been restated by applying the inflation rate of the
country of origin, and translating the resulting amount into Mexican pesos at
the year-end exchange rate.
Under U.S. GAAP, any restatement of machinery and equipment, both of
domestic and foreign origin, must be made in constant units of the reporting
currency, the Mexican peso, using the inflation rate of Mexico. Accordingly, a
reconciling item for the difference in methodologies of restating imported
machinery and equipment is included in the GAAP reconciliation of net majority
income (loss) and majority shareholders' equity.
d) Cost of pension plans and other employee benefits
The Company has prepared a study of pension costs under SFAS No. 87,
"Employers' Accounting for Pensions" (see Note 20). Under Mexican GAAP, the
requirement to record liabilities for employee benefits using actuarial
computations similar to those required by SFAS No. 87 was adopted at the
beginning of 1993.
The Company has no postretirement health care insurance or other benefit
plans, other than the pension plan referred to in Note 20. Therefore, SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
has no effect on the Company's financial statements. Similarly, the Company
does not provide any of the benefits required to be accrued under SFAS No. 112,
"Employers' Accounting for Postemployment Benefits."
e) Capitalized interest
Under Mexican GAAP, the Company capitalizes all components of financing and
related costs (see Note 7 j)) on all or a portion of its debt by applying the
weighted average rate of interest on its debt to construction in progress. For
U.S. GAAP purposes the gain from monetary position derived from foreign debt,
and foreign exchange losses, are not capitalizable.
f) Deferred technical assistance fees
Under Mexican GAAP, the Company records as an expense all technical
assistance fees incurred during the year. Under U.S. GAAP, the portion of those
fees directly relating to the improvement and installation of the physical
assets in the plant were capitalized and depreciated as a part of the cost of
the related equipment.
g) Deferred start-up costs
Under Mexican GAAP, start-up costs for new production lines are deferred and
amortized over five years, as described in Note 7 g). Under U.S. GAAP, such
costs must be expensed as incurred.
F-41
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
h) Costs and expenses of SAP
The costs of re-engineering business processes may not be capitalized under
U.S. GAAP because such costs do not qualify as purchased or internally
developed intangible assets. In addition, the costs of the implementation of
any software related to re-engineering processes are not considered part of the
cost of the software and therefore may not be capitalized as "software" costs.
Under Mexican GAAP, however, the costs of both the implementation and the
development of software may be capitalized.
i) Goodwill
Under Mexican GAAP, the purchase of ANSA in 1995, resulted in recording
negative goodwill of Ps.327. After recording deferred tax liabilities for ANSA
under U.S. GAAP, the net book value (substantially equivalent to fair value as
a result of the restatement for the effects of inflation) is less than the
purchase price. Therefore, under U.S. GAAP, there was positive goodwill of
Ps.104, which is being amortized over 20 years. As mentioned in Note 5, ANSA
was sold on January 29, 1999, and the shares in ANSA are included in the
consolidated balance sheet at their realization value. For this reason, the
goodwill balance under U.S. GAAP as of December 31, 1998 was included in the
loss from discontinued operations.
j) Cost of idle plant
The Company has divided its depreciation expense related to the idle plant
into two components. The depreciation of plants used at less than full capacity
is not included in operating income in the Mexican GAAP financial statements.
Under U.S. GAAP, the depreciation related to the utilized portion of plants
operating at less than full capacity is charged against the Company's operating
income. All plant and equipment that is completely idle has been reduced to
their net realizable value and is not being depreciated.
k) Environmental liability
Under U.S. GAAP, the estimated cost of remedial action to correct
environmental deficiencies or violations must be accrued and expensed as they
become known. Under Mexican GAAP, no such liability is recorded for the
estimated cost of remedial action. Under Mexican GAAP, the common practice is
to include the cost of new plant, equipment or modifications related to
correction of environmental deficiencies under fixed assets if these
expenditures result in improved efficiencies. Otherwise, these expenditures are
expensed at the time they are made. See Note 23 j) for a discussion of the
Company's estimated expenditures to comply with the Environmental Agreement and
existing Mexican environmental laws.
l) Minority interest
Under Mexican GAAP, minority interest is a component of net income (loss)
and shareholders' equity. Under U.S. GAAP, minority interest reduces net income
and is not a component of shareholders' equity. Minority interest represents
the portion of ownership of the Company's subsidiaries held by third parties.
m) Comprehensive Income (loss)
The Mexican GAAP presentation of comprehensive income (loss) by the Company
is in compliance with the presentation required by SFAS No. 130 of U.S. GAAP.
The difference is generated by the adjustment to net majority income and result
of non-monetary assets to reconcile to U.S. GAAP.
F-42
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
n) Concentrations of credit risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," requires certain disclosures not required under Mexican GAAP. The
Company's accounts receivable, which represent receivables from numerous retail
customers, and the Company's cash balances do not represent any significant
concentration of risk to the Company.
o) Future impact of recently issued accounting standards
Certain Mexican and U.S. accounting standards have recently been issued but
are not yet effective. The purpose of this note is to disclose the impact that
the recently issued accounting standards will have on the financial position
and results of operations of the Company when such standards are adopted in the
future.
In December 1999, the MIPA issued Bulletin C-2, "Financial Instruments,"
which will be mandatory for all Mexican companies in 2001. Bulletin C-2
requires an enterprise to recognize all of its contractual rights or
obligations under derivatives in its balance sheet as assets or liabilities and
to measure those instruments at their fair value. Changes in the fair value of
a derivative will be included in current earnings, regardless of their nature.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and also will go into effect in 2001 for
U.S. GAAP purposes. This new standard, as amended, will also require
recognition of all derivatives (including certain derivative instruments
embedded in other contracts) on the balance sheet as either assets or
liabilities and the measurement of such instruments at their fair value.
Changes in the fair value of the derivatives will be recognized currently in
earnings, unless specific hedge accounting criteria is met. Gains and losses on
derivative hedging instruments must be recorded in either other comprehensive
income or current earnings, depending on the nature of the instrument. Special
accounting for qualifying hedges allows a derivative instrument's gains and
losses to offset related results on the hedged item in the income statement, to
the extent effective, and requires the Company to formally document, designate,
and assess the effectiveness of transactions that receive hedge accounting.
The Company plans to adopt both Bulletin C-2 and Statement 133 on January 1,
2001. The Company plans to apply the new standards only to those instruments
that are issued, acquired or substantively modified after December 31, 2000.
As of December 31, 2000, the Company does not have any significant
derivative financial instruments.
F-43
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Reconciliation of majority net income:
Majority net income (loss), adjusted to take into account the significant
differences between Mexican GAAP and U.S. GAAP, except for the comprehensive
effects of price-level changes, is as follows:
1998 1999 2000
------ ----- -----
Net income (loss) of majority interest under Mexican GAAP.......... Ps. (2,335) Ps. 1,391 Ps. 1,146
------ ----- -----
Approximate U.S. GAAP adjustments-
Deferred income taxes........................................... (448) (528) 85
Deferred employee profit sharing................................ (756) (23) (211)
Depreciation effect from restatement of machinery and equipment. (206) (226) (219)
Pension plan cost............................................... 2 -- 11
Curtailment and settlement effect............................... (53) (14) --
Capitalized interest............................................ 61 32 (46)
Gain from monetary position of U.S. GAAP adjustments............ 1,375 855 325
Deferred start-up costs......................................... (63) (10) (4)
Amortization of deferred start-up costs......................... 17 6 6
Deferred start-up costs of galvanizing and paint plants......... -- 12 --
Environmental liability......................................... (32) 4 (1)
Depreciation of environmental investments....................... -- 14 13
Deferred technical assistance fees.............................. (27) (27) (27)
Costs and expenses of SAP....................................... (203) (65) 43
ANSA goodwill................................................... (125) -- --
Reversal of loss due to adjustment of ANSA shares to realizable
value......................................................... 496 -- --
ANSA U.S. GAAP adjustments...................................... 163 -- --
Minority interest portion of U.S. GAAP adjustments.............. 11 7 (10)
------ ----- -----
Total adjustments.................................................. 212 37 (35)
------ ----- -----
Approximate net income (loss) under U.S. GAAP...................... Ps. (2,123) Ps. 1,428 Ps. 1,111
------ ----- -----
Basic earnings (loss) per share under U.S. GAAP.................... Ps. (5.64) Ps. 3.94 Ps. 3.10
====== ===== =====
Because Mexican GAAP requires utilization of a comprehensive method for
recognizing the effects of inflation and the financial statements are prepared
on this basis, the applicable effects of inflation on the U.S. GAAP adjustments
are calculated and included in the caption, ''Gain from monetary position
resulting from U.S. GAAP adjustments.'' The adjustments considered to be
monetary items under U.S. GAAP are deferred income taxes, deferred employee
profit sharing and environmental liability.
F-44
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Statement of comprehensive income:
1998 1999 2000
------ ------ -----
Net income (loss) under U.S. GAAP.................... Ps. (2,123) Ps. 1,428 Ps. 1,111
Result of holding non-monetary assets under U.S. GAAP (279) (1,069) (739)
Unamortized actuarial liability effect............... (34) (16) (97)
------ ------ -----
Comprehensive income (loss) under U.S. GAAP.......... Ps. (2,436) Ps. 343 Ps. 275
====== ====== =====
Reconciliation of majority shareholders' equity:
The following table shows an adjusted majority shareholder's equity.
Excluding the comprehensive effects of price-level changes, the table
represents the significant differences between Mexican GAAP and U.S. GAAP:
1999 2000
------ ------
Majority shareholders' equity under Mexican GAAP................ Ps. 12,045 Ps. 8,022
------ ------
Approximate U.S. GAAP adjustments-
Deferred income taxes.................................... (5,190) (1,790)
Deferred employee profit sharing......................... (2,465) (2,526)
Restatement of machinery and equipment................... 4,051 5,009
Additional pension liabilities........................... 41 43
Capitalized interest..................................... 390 344
Deferred start-up costs.................................. (113) (111)
Deferred technical assistance fees....................... 185 158
Environmental liability.................................. (123) (109)
Environmental investment recorded under fixed assets..... (129) (106)
Costs and expenses of SAP................................ (337) (294)
Minority interest portion of U.S. GAAP adjustments....... 16 5
------ ------
Total adjustments........................................ Ps. (3,674) Ps. 623
------ ------
Approximate shareholders' equity under U.S. GAAP......... Ps. 8,371 Ps. 8,645
====== ======
The gain from monetary position resulting from U.S. GAAP adjustments affects
income (accumulated losses) and the cumulative effect of holding nonmonetary
assets; therefore, the net effect on shareholders' equity is zero.
For purposes of the above reconciliation, capitalized interest is recorded
as an asset separate from fixed assets. Consequently, the annual restatement of
fixed assets has no effect on the reconciliation of capitalized interest
between Mexican GAAP and U.S. GAAP. The reconciliation calculation made above
for capitalized interest represents the cumulative difference between interest
capitalized under Mexican GAAP and interest capitalized under U.S. GAAP, net of
cumulative amortization. Capitalized interest under Mexican GAAP and U.S. GAAP
is amortized over the useful life of the underlying fixed asset.
F-45
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Deferred income taxes and employee profit sharing:
The amounts reflected as adjustments to the statement of income under U.S.
GAAP for deferred income taxes and employee profit sharing do not include the
effect of changes in the book value of fixed assets nor inventory for
restatement to replacement value. Since these changes in basis are recorded
directly in equity in the ''cumulative restatement effect'' account, the
related deferred tax and employee profit sharing effects are also recorded
directly in that account.
Under Mexican tax and labor laws, companies are obligated to pay profit
sharing to their employees; this is calculated on a basis similar to income
taxes (see Note 19). To the extent that items of income and expense are
recognized in different periods for financial reporting purposes rather than
for purposes of computing profit sharing, a deferred profit sharing provision
and the related liability have been established for U.S. GAAP purposes. For
purposes of computing the provision for employee profit sharing, the
depreciation expense is based on historical cost; therefore, the basis of fixed
assets for employee profit sharing is significantly lower than the net book
value.
The tax effect of temporary differences that generated deferred tax assets
(liabilities) under SFAS No. 109 as of December 31, 1999 and 2000 are as
follows:
Deferred Income Taxes
--------------------
1999 2000
------ ------
Current:
Inventories.................................. Ps. (936) Ps. (963)
Reserves..................................... 320 213
Advances from customers...................... 536 410
------ ------
(80) (340)
------ ------
Non-current:
Property, plant and equipment................ (8,733) (8,531)
Pension plan................................. 215 243
Deferred charges............................. (572) (587)
Investments in shares........................ 109 80
Tax loss carryforwards....................... 3,288 3,217
Recoverable asset taxes...................... 583 339
------ ------
(5,110) (5,239)
------ ------
Total deferred income taxes under U.S. GAAP..... Ps. (5,190) Ps. (5,579)
------ ------
Deferred income taxes under Mexican GAAP........ Ps. -- Ps. (3,789)
------ ------
Additional deferred income taxes under U.S. GAAP Ps. (5,190) Ps. (1,790)
====== ======
F-46
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Deferred Profit Sharing
----------------------
1999 2000
------ ------
Current:
Inventories................... Ps. (268) Ps. (276)
Reserves...................... 91 61
Advances from customers....... 153 117
Foreign exchange losses....... 224 147
------ ------
200 49
Non-current:
Property, plant and equipment. (2,596) (2,499)
Pension plan.................. 62 69
Deferred charges.............. (163) (167)
Investments in shares......... 32 22
------ ------
(2,665) (2,575)
------ ------
Deferred profit sharing liability Ps. (2,465) Ps. (2,526)
====== ======
Cash flow information:
Under Mexican GAAP, the Company presents a consolidated statement of changes
in financial position. The changes in the financial statement balances
constitute cash flow activity stated in constant currency. (The constant
currency includes monetary and foreign exchanges gains and losses, which are
considered cash gains and losses in the constant Mexican peso financial
statements).
In accordance with Mexican GAAP, the reduction in current and long-term debt
due to restatement in constant Mexican pesos is presented in the statement of
changes in financial position as a resource used in financing activities and
the gain from monetary position is presented as a component of resources
applied to operating activities. SFAS No. 95, however, does not provide
guidance with respect to inflation adjusted financial statements. If the gain
from monetary position and unrealized exchange gains and losses were treated as
non-cash operating expenses, resources generated from or applied to operations
and net cash generated by or applied to financing activities would be as set
forth below. Also, under U.S. GAAP, the gain or loss on sale of property, plant
and equipment is treated as a non-cash operating activity, and the proceeds
from such sales are treated as an investing activity, as set forth below:
1998 1999 2000
------ ------ ------
Resources generated by (used in) operations under
Mexican GAAP.................................... Ps. (1,635) Ps. 6,024 Ps. 2,725
Gain from monetary position...................... (3,538) (2,685) (2,091)
Unrealized foreign exchange loss (gain).......... 5,827 (1,192) 47
Loss (gain) on retirements of property, plant and
equipment....................................... (60) 251 5
------ ------ ------
Resources generated by operations under
U.S. GAAP....................................... Ps. 594 Ps. 2,398 Ps. 686
====== ====== ======
F-47
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
1998 1999 2000
------ ------ ------
Resources used in investing activities under Mexican GAAP Ps. (1,269) Ps. (588) Ps. (874)
Proceeds from sales of property, plant and equipment..... 280 1,221 2
------ ------ ------
Resources generated by (used in) investing activities
under U.S. GAAP......................................... Ps. (989) Ps. 633 Ps. (872)
====== ====== ======
Resources generated by (used in) financing
activities under Mexican GAAP........................... Ps. 2,798 Ps. (5,746) Ps. (1,783)
Gain from monetary position.............................. 3,538 2,685 2,091
Unrealized foreign exchange (loss) gain.................. (5,827) 1,192 (47)
------ ------ ------
Resources generated by (used in) financing
activities under U.S. GAAP............................. Ps. 509 Ps. (1,869) Ps. 261
====== ====== ======
Fair value of financial instruments:
The fair value of the Company's cash equivalents, short term bank loans (out
of Suspension of Payments) and long term debt (out of Suspension of Payments)
approximate their carrying amounts. Cash equivalents are stated at market value
and the carrying amount of short-term bank loans (out of Suspension of
Payments) approximates fair value because of the relatively short maturities of
the loans. Virtually all of the Company's long-term debt (out of Suspension of
Payments) bears interest at variable rates tied to market indicators.
Statements of changes in shareholders' equity under U.S. GAAP:
1999 2000
------ -----
Shareholders' equity under U.S. GAAP as of the beginning of the year Ps. 8,258 Ps. 8,370
Cumulative restatement effect....................................... (1,069) (739)
Income for the year................................................. 1,428 1,111
Repurchase of shares................................................ (231) --
Unamortized actuarial liability effect.............................. (16) (97)
------ -----
Shareholders' equity under U.S. GAAP as of the end of the year...... Ps. 8,370 Ps. 8,645
====== =====
The cumulative restatement effect as of December 31, 1999 and 2000 includes
Ps.(293) and Ps.(707), respectively, of deferred income taxes and employee
profit sharing recorded directly in shareholders' equity under U.S. GAAP, and
Ps.2,614 and Ps.1,178 of result from holding non-monetary assets, related to
other U.S. GAAP adjustments in December 31, 1999 and 2000, respectively.
Note 22. Mineral reserves (unaudited)
The mining subsidiaries, dedicated to the extraction and sale of iron ore
and non-metallic minerals (coal and limestone), are operated under a concession
agreement for exploration and exploitation with the Mexican Mining Board. These
licenses operate under terms of 25 to 50 years. In 1999 and 2000, the expenses
paid for these rights were Ps.20 and Ps.25, respectively.
F-48
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The "reserves" refer to that part of a mineral deposit that could be
economically and legally extracted at the time the estimate is prepared.
a) Iron Ore mines
The following table presents estimated proven and probable geological
reserve and mineable reserve data for MINOSA's Hercules Unit, Cerro de Mercado
and La Perla as of December 31, 2000.
Reserves of Iron Ore at December 31, 2000(1)
(millions of tonnes, except percentages)
Average Crude Ore Concentrate Average
Iron Grade Tonnes(2) Mineable(3) Weight Recovered Iron Grade
---------- --------- ----------- ------ ----------- ----------
Hercules Unit... 44.4% 207.5 89.9 55.1% 49.5 64.17%
Cerro de Mercado 46.2% 12.1 10.7 49.1% 5.2 64.66%
La Perla........ 38.3% 36.6 17.6 36.7% 6.5 62.79%
----- ----- ----
Total........... 256.2 118.2 61.2
===== ===== ====
(1) AHMSA's iron ore reserves at April 30, 1998 have been affirmed and verified
by Midland Standard, Inc., independent consultants, who are experts in
mining, geology and reserve determination. The table shows this information
updated at December 31, 2000.
(2) Proven and probable reserves are reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings or drill
holes; (b) grade and/or quality are computed from the results of detailed
sampling; and (c) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is sufficiently defined that
size, shape, depth and mineral content of reserves are well established.
(3) Mineable reserves are that part of a proven and probable reserve which can
be removed from its location, less an allowance for that which must be left
in place because of quality, safety, economic, or environmental
constraints. The calculation of what portion of proven and probable
reserves constitute mineable reserves is a function of the mining method,
the equipment utilized and the characteristics of the formation and the ore.
b) Coal mines
The following table presents estimated proven and probable reserves,
together with the estimated amount of such reserves that is expected to be
saleable, for MICARE and MIMOSA as of December 31, 2000.
F-49
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
MIMOSA and MICARE
Reserves of Coal at December 31, 2000(1)
(millions of tonnes)
Mine Proven(2) Probable(3) Saleable(4)
---- --------- ----------- -----------
MIMOSA
Metallurgical Coal 96.9 1.8 33.1
Unassigned(5).. 187.2 0.0 137.8
----- ---- -----
Steam Coal(6).. 284.1 1.8 170.9
===== ==== =====
MICARE
Steam Coal........ 102.1 1.8 48.4
Unassigned(5)..... 142.9 10.0 104.9
----- ---- -----
245.0 11.8 153.3
===== ==== =====
Total............. 529.1 13.6 324.2
===== ==== =====
(1) AHMSA's coal reserves at December 31, 2000 have been estimated by AHMSA's
personnel. The terms "Proven" and "Probable" used here are synonymous with
"Measured" and "Indicated" under the U.S. Geological Survey ("USGS") coal
classification system. Unless otherwise indicated, all reserves are
assigned. Assigned reserves are reserves that can be extracted and
processed with the existing equipment at the mine.
(2) Proven reserves are reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; (b)
quality is computed from the results of detailed sampling; and (c) the
sites for inspection, sampling and measurement are spaced to conform with
the requirements of the USGS coal resource classification system as defined
in USGS Circular 891 for Measured Reserves.
(3) Probable reserves are reserves for which quantity and quality are computed
from information similar to that used for proven reserves but the sites for
sampling conform with the requirements of the USGS coal resource
classification system as defined in USGS Circular 891 for Indicated
Reserves.
(4) Saleable reserves are reserves estimated by taking into account all
anticipated losses, such as extraction dilution, coal left in place for
roof support and the coal washing process.
(5) Unassigned reserves are reserves that will require substantial expenditures
for extraction and processing equipment at the mine.
(6) In addition to the metallurgical coal recoverable from MIMOSA's coal
reserves, MIMOSA also produces steam coal as a byproduct of the
metallurgical coal production process.
Note 23. Commitments and contingencies
a) On November 12, 1997, the Secretary of Finance and Public Credit (SHCP)
notified the Company of a tax assessment of Ps.281 (nominal value),
corresponding to the income tax and value-added tax of fiscal year 1994. In
this respect, the Company filed a nullification suit before the Federal Tax
Court, in which the latter resolved in favor of the Company with respect to
penalties on November 18, 1999. Therefore, the actual contingency is Ps.62
(nominal value).
On May 12, 1999 and November 14, 2000, SHCP notified the Company of tax
assessments of Ps.118 and Ps.151 (nominal value), corresponding to the income
and value-added taxes of fiscal years 1995 and 1996, respectively. In this
respect, the Company filed a nullification suit before the Federal Tax Court,
which is still in process.
F-50
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
b) As of December 31, 2000, the Company had Ps.143 in assessments from various
governmental agencies.
In management's opinion, the ultimate liability that could result from the
matters mentioned in a) and b), will not have a significant effect on the
Company's financial position or results of operations.
c) During 1999, a request for confirmation of criteria was filed with the SHCP
so as not to accumulate the inflationary gain derived from the debts subject to
insolvency proceedings (debt in Suspension of Payments) within the taxable
income. On May 17, 2000, the Company filed an administrative proceeding before
the Federal Tax Court because the SHCP decided not to proceed with the
confirmation request.
d) Due to the current situation of the steel industry, the Company has not
complied with the minimum export requirements required by the Temporary Import
Program (PITEX). This could cause the authorities to cancel the Company's
program and could require the Company to pay fines of up to US$11,
corresponding to the ad-valorem tax on the imported machinery and equipment
imported under this program.
e) As of December 31, 2000, AHMSA has granted guarantees to affiliated
companies that amount to Ps.501 (nominal value).
f) As of December 31, 2000, the Company had contract commitments of
approximately US$42 from construction projects necessary to finalize the
optimization and improvement program of the installations.
g) GAN is the owner of 269,228,347 common shares of AHMSA, which guarantee
certain liabilities of GAN for US$256.
h) Shares representing 50% of the capital stock of LCD purchased from GAN in
1998 are deposited in a trust guaranteeing a loan that LCD currently has with
PENOLES. The release of the shares is subject to the payment of that loan.
Therefore, there is a contingency that AHMSA may be affected by an amount of
Ps. 78, which is the value of the shares, and consequently, the possibility of
the reversal of the original transaction exists.
i) The Company filed a writ of injunction with SHCP against the Federal Water
Rights Law, which became effective in 1997, due to the determination of the
SHCP to exclude the mining processes in its Monclova facilities from the
benefit of the mining tariff of 25% on the cost per cubic meter. As of December
31, 2000, payment had been made considering the benefit of the mining tariff,
estimating a difference to be covered of approximately Ps.146 (nominal value).
This suit is currently being reviewed by the Supreme Court of Justice of
Mexico. It is estimated that if the review petition is not settled in favor of
the Company, the amount due will not significantly differ from the contingency
amount.
j) Contingency for environmental conditions
In November 1994, an agreement for the protection of the environment was
established with the Procuraduria Federal de Proteccion al Ambiente (Federal
Bureau of Environmental Protection or PROFEPA) that established parameters with
which AHMSA must comply with regard to air contamination and residual waste
discharges. In 1998, an extension was granted by PROFEPA that included all the
other activities that were left inconclusive under the previous agreement. The
termination of the activities established in this agreement is in December
2003. As part of the agreement and the modernization program, AHMSA has
budgeted to invest US$11 between 1999 and 2004 for environmental projects.
Under the revised environmental program, the mining subsidiaries were asked
to review the waste discharges generated and their impact on the environment.
As a result of the study, an action plan was proposed to the PROFEPA that
expires in 2000, which has been concluded satisfactorily.
F-51
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 24. Summary financial data by operating segment
The presentation below sets forth certain financial information for the
years ended December 31, 1998, 1999 and 2000 with respect to the Company's two
operating segments: steel and steam coal. Intersegment transactions were not
significant.
1998 1999 2000
---------- ---------- ----------
Net sales
Steel(1).................................... Ps. 13,788 Ps. 11,076 Ps. 10,664
Steam coal.................................. 2,371 2,284 2,142
------ ------ ------
Total net sales............................. Ps. 16,159 Ps. 13,360 Ps. 12,806
====== ====== ======
Operating income
Steel....................................... Ps. 1,390 Ps. 431 Ps. 795
Steam coal.................................. 750 606 422
------ ------ ------
Total operating income...................... Ps. 2,140 Ps. 1,037 Ps. 1,217
====== ====== ======
Discontinued operations
Steel....................................... Ps. (540) Ps. 31 Ps. --
Steam coal.................................. -- (57) --
------ ------ ------
Total discontinued operations............... Ps. (540) Ps. (26) Ps. --
====== ====== ======
Depreciation and amortization expense
Steel....................................... Ps. 1,249 Ps. 1,261 Ps. 1,231
Steam coal.................................. 162 161 192
------ ------ ------
Total depreciation and amortization expense. Ps. 1,411 Ps. 1,422 Ps. 1,423
====== ====== ======
Capital expenditures
Steel....................................... Ps. 1,542 Ps. 579 Ps. 663
Steam coal.................................. 537 151 126
------ ------ ------
Total capital expenditures.................. Ps. 2,079 Ps. 730 Ps. 789
====== ====== ======
1999 2000
---------- ----------
Total assets
Steel....................................... Ps. 31,896 Ps. 30,011
Steam coal.................................. 5,540 5,166
------ ------
Total assets................................ Ps. 37,436 Ps. 35,177
====== ======
Total liabilities
Steel....................................... Ps. 22,613 Ps. 23,921
Steam coal.................................. 2,749 3,207
------ ------
Total liabilities........................... Ps. 25,362 Ps. 27,128
====== ======
(1) Net sales in the steel segment include other sales, which amount to Ps.351,
Ps.214 and Ps.131 in 1998, 1999 and 2000.
F-52
Translation from Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1999 and 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The investment in shares presented in the consolidated balance sheet as of
December 31, 1999 and 2000 for Ps.500 and Ps.445, respectively, is part of the
steel segment.
Sales to the Company's two largest steel customers represented 12% and 4%,
8% and 8%, and 11% and 7%, of the Company's total steel sales for the years
ended December 31, 1998, 1999 and 2000, respectively.
Operating income (loss) in each segment in accordance with U.S. GAAP, if
employee profit sharing, cost of inactive plant, deferred charges and other
items had been treated as operating expenses, would have been as follows:
1998 1999 2000
------- ------- -------
Steel............ Ps. 117 Ps. 548 Ps. 734
Steam coal....... 594 142 54
--- --- ---
Total..... Ps. 742 Ps. 690 Ps. 788
=== === ===
F-53
REPORT OF ARTHUR ANDERSEN, INDEPENDENT AUDITORS
Translation from a report originally issued in Spanish
To the Shareholders of
Altos Hornos de Mexico, S.A. de C.V.:
We have made a limited review of the accompanying consolidated balance sheet
of ALTOS HORNOS DE MEXICO, S.A. DE C.V. (incorporated in Mexico) AND
SUBSIDIARIES (collectively referred to as the "Company") as of June 30, 2001,
and the related consolidated statements of income (loss), changes in
shareholders' equity and changes in financial position for the six-month
periods ended June 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We have previously audited the consolidated financial statements as of
December 31, 2000 and for the year then ended, on which we issued our
unqualified auditors' report dated April 3, 2001 (except with respect to the
restatement to constant Mexican pesos as of June 30, 2001, and the matter
discussed in Note 2 c), as to which the date is September 30, 2001).
We conducted our limited review in accordance with standards established by
the American Institute of Certified Public Accountants. A limited review
consist principally of applying analytical review procedures to different
elements of the consolidated financial statements, interviewing those officers
of the Company who are responsible for financial and accounting matters,
reading the minutes of stockholder and board of director meetings, and
obtaining an understanding of the system established for the preparation of
interim consolidated financial statements.
Since this limited review does not constitute an audit conducted in
accordance with auditing standards generally accepted in the United States, we
are unable to express an opinion on the accompanying interim consolidated
financial statements.
During our limited review, we did not become aware of any matters that would
require any material modifications of the accompanying interim consolidated
financial statements for them to be in conformity with accounting principles
generally accepted in Mexico.
Accounting practices used by the Company in preparing the accompanying
interim consolidated financial statements conform with accounting principles
generally accepted in Mexico but do not conform with accounting principles
generally accepted in the United States (U.S. GAAP). A description of these
differences and a reconciliation of consolidated net income (loss) and
shareholders' equity to U.S. GAAP are set forth in Note 21.
Monterrey, N.L., Mexico
September 30, 2001
F-54
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2000 and June 30, 2001
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
December 31, June 30, June 30,
2000 2001 2001
----------- ---------- ----------
(Unaudited) (Unaudited)
Assets
- ------
Current:
Cash and cash equivalents............................ Ps. 162 Ps. 121 US$ 13
Trade accounts receivable, net....................... 1,461 1,098 121
Due from affiliated companies........................ 401 160 18
Other accounts receivable............................ 236 265 29
Inventories.......................................... 3,465 3,435 379
Prepaid expenses..................................... 59 42 5
------ ------ -----
Total current assets.............................. 5,784 5,121 565
Non-current:
Other long-term receivables.......................... 4 68 7
Assets subject to sale............................... 55 53 6
Due from affiliated companies........................ 7 7 1
Investment in shares................................. 445 263 29
Employee housing developments........................ 311 319 35
Property, plant and equipment, net................... 26,256 25,141 2,775
Deferred charges, net................................ 2,315 2,136 235
------ ------ -----
Total non-current assets.......................... 29,393 27,987 3,088
------ ------ -----
Total assets...................................... Ps. 35,177 Ps. 33,108 US$ 3,653
====== ====== =====
Liabilities and shareholders' equity
- ------------------------------------
Current:
Bank loans........................................... Ps. 16,273 Ps. 15,938 US$ 1,759
Current portion of long-term debt.................... 241 273 30
Interest payable..................................... 809 830 92
Due to suppliers and contractors..................... 2,050 2,067 228
Taxes payable........................................ 173 299 33
Due to affiliated companies.......................... 30 34 4
Other payables....................................... 1,857 1,958 216
------ ------ -----
Total current liabilities......................... 21,433 21,399 2,362
Long-term:
Long-term debt....................................... 208 92 10
Retirement, pension plan and seniority premiums...... 1,207 984 108
Deferred income taxes................................ 3,789 3,312 366
Other long-term payables............................. 491 457 50
------ ------ -----
Total long-term liabilities....................... 5,695 4,845 534
------ ------ -----
Total liabilities................................. 27,128 26,244 2,896
Shareholders' equity:
Capital stock........................................ 8,216 8,216 907
Reserve for repurchase of shares..................... 357 357 39
Retained earnings.................................... 2,446 3,592 396
Net income (loss) for the period..................... 1,146 (543) (61)
Cumulative initial effect of deferred income taxes... (3,860) (3,860) (426)
Unamortized actuarial liability effect............... (168) (7) --
Cumulative restatement effect........................ (115) (908) (100)
Minority interest.................................... 27 17 2
------ ------ -----
Total shareholders' equity........................ 8,049 6,864 757
------ ------ -----
Total liabilities and shareholders' equity........ Ps. 35,177 Ps. 33,108 US$ 3,653
====== ====== =====
The accompanying notes are an integral part of these consolidated balance sheets.
F-55
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Consolidated Statements of Income (Loss)
For the six months ended June 30, 2000 and 2001
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$), except per share data
June 30, June 30, June 30,
2000 2001 2001
----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
Net sales Ps. 6,815 Ps. 5,020 US$ 554
Cost of sales..................................................... 4,800 4,469 493
Depreciation...................................................... 608 607 67
------- ------- -------
Gross profit (loss)............................................ 1,407 (56) (6)
Selling and administrative expenses............................... 400 327 36
------- ------- -------
Operating income (loss)........................................ 1,007 (383) (42)
Financing and related costs:
Interest expense............................................... 454 429 47
Interest income................................................ (24) (22) (2)
Foreign exchange loss (gain)................................... 19 (57) (6)
Gain from monetary position.................................... (1,095) (499) (55)
------- ------- -------
(646) (149) (16)
Other expenses, net............................................... 81 88 10
Severance payments................................................ (40) 206 23
------- ------- -------
Income (loss) before provisions for taxes, employee profit
sharing and participation in results of associated companies. 1,612 (528) (59)
Provisions for:
Deferred income taxes.......................................... 586 8 1
Current income taxes........................................... 47 11 1
Asset taxes.................................................... 153 166 18
Employee profit sharing........................................ 12 2 --
Credit to asset tax for immediate deducton of fixed assets..... (132) (162) (17)
Amortization of tax loss carryforwards......................... (47) (10) (1)
------- ------- -------
619 15 2
Participation in results of associated
companies....................................................... -- (1) --
------- ------- -------
Net income (loss) for the period............................... Ps. 993 Ps. (544) US$ (61)
======= ======= =======
Distribution of consolidated net
income (loss) for the period:
Net income (loss) of majority interest......................... Ps. 992 Ps. (543) US$ (61)
Net income (loss) of minority interest......................... 1 (1) --
------- ------- -------
Ps. 993 Ps. (544) US$ (61)
======= ======= =======
Basic earnings (loss) per share................................ Ps. 2.77 Ps. (1.52) US$ (0.17)
======= ======= =======
Basic weighted average shares outstanding (000's).............. 357,873 357,873 357,873
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-56
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S. A. de C. V. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the year ended December 31, 2000 and the six months ended June 30, 2001
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001, except for shares outstanding
Cumulative
Initial Effect Unamortized
Reserve for of Deferred Actuarial Cumulative
Shares Capital Repurchase Retained Income Liability Restatement
Outstanding Stock of Shares Earnings Taxes Effect Effect
----------- --------- ----------- --------- ------------- ----------- ----------
Balances as of December 31, 1999.......... 357,872,502 Ps. 8,216 Ps. 357 Ps. 2,446 Ps. -- Ps. (71) Ps. 1,097
Cumulative initial effect of deferred
income taxes.......................... -- -- -- -- (3,860) -- --
Comprehensive income (loss)............ -- -- -- 1,146 -- (97) (1,212)
----------- ----- --- ----- ------ ---- ------
Balances as of December 31, 2000.......... 357,872,502 8,216 357 3,592 (3,860) (168) (115)
Comprehensive income (loss)............ -- -- -- (543) -- 161 (793)
----------- ----- --- ----- ------ ---- ------
Balances as of June 30, 2001
(Unaudited).............................. 357,872,502 Ps. 8,216 Ps. 357 Ps. 3,049 Ps. (3,860) Ps. (7) Ps. (908)
=========== ===== === ===== ====== ==== ======
Total Total
Majority Minority Shareholders'
Interest Interest Equity
---------- ------- ------------
Balances as of December 31, 1999.......... Ps. 12,045 Ps. 29 Ps. 12,074
Cumulative initial effect of deferred
income taxes.......................... (3,860) (6) (3,866)
Comprehensive income (loss)............ (163) 4 (159)
------ --- ------
Balances as of December 31, 2000.......... 8,022 27 8,049
Comprehensive income (loss)............ (1,175) (10) (1,185)
------ --- ------
Balances as of June 30, 2001
(Unaudited).............................. Ps. 6,847 Ps. 17 Ps. 6,864
====== === ======
The accompanying notes are an integral part of these consolidated statements.
F-57
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Consolidated Statements of Changes in Financial Position
For the six months ended June 30, 2000 and 2001
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
June 30, June 30, June 30,
2000 2001 2001
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
Resources generated by (used in) operations:
Income (loss) for the period.............................................. Ps. 993 Ps. (544) US$ (61)
Add (deduct) - Items that do not affect cash:
Depreciation and amortization.......................................... 744 727 80
Provision for pension and retirement plans and seniority premiums...... 77 91 10
Participation in results of associated companies....................... -- 1 --
Reserve for severance payments......................................... (40) 206 23
Deferred income taxes.................................................. 586 8 1
Other provisions and reserves.......................................... 216 97 12
------ ---- ---
2,576 586 65
Resources generated by (used in) working capital:
(Increase) decrease in trade accounts receivable.......................... (357) 418 46
(Increase) decrease in due from affiliated companies...................... (160) 24 3
Decrease (increase) in other accounts receivable.......................... 28 (13) (1)
(Increase) decrease in inventories........................................ (248) 13 1
(Increase) decrease in assets subject to sale............................. (2) 1 --
(Increase) decrease in prepaid expenses................................... (23) 18 2
Increase in interest payable.............................................. 56 22 2
Increase (decrease) in due to suppliers and contractors................... 1 (7) (1)
(Decrease) increase in taxes payable...................................... (67) 124 14
Increase in due to affiliated companies................................... 4 5 1
(Decrease) in other payables.............................................. (264) (343) (39)
------ ---- ---
(1,032) 262 28
------ ---- ---
Net resources generated by operations.................................. 1,544 848 93
Investing activities:
Additions to property, plant and equipment................................ (455) (194) (21)
Net book value of retirements of property, plant and equipment............ 39 16 2
Employee housing developments............................................. 5 (8) (1)
Deferred charges, net..................................................... (51) 74 8
Decrease in other long-term investments................................... -- 14 2
------ ---- ---
Net resources used in investing activities............................. (462) (98) (10)
Financing activities:
Other long-term receivables............................................... 11 (63) (7)
Payments on bank loans.................................................... (101) (53) (6)
Effect of changes in purchasing power on long-term bank debt.............. (721) (367) (41)
Effect of changes in purchasing power of deferred income taxes............ (163) (79) (9)
Loans from affiliated companies........................................... 1 -- --
Seniority premiums........................................................ (82) (185) (20)
Increase (decrease) in other long-term payables........................... 85 (44) (5)
------ ---- ---
Net resources used in financing activities............................. (970) (791) (88)
------ ---- ---
Net increase (decrease) in cash and cash equivalents................... 112 (41) (5)
Cash and cash equivalents:
Beginning of period....................................................... 93 162 18
------ ---- ---
End of period............................................................. Ps. 205 Ps. 121 US$ 13
====== ==== ===
The accompanying notes are an integral part of these consolidated statements.
F-58
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 1. Activities of the Company
Altos Hornos de Mexico, S.A. de C.V. ("AHMSA" or the "Company"), a
subsidiary of Grupo Acerero del Norte, S.A. de C.V. ("GAN"), is the largest
integrated steel producer in Mexico. AHMSA's principal activity is the
production and sale of flat steel products and heavy and light structural
sections.
AHMSA's significant subsidiaries are as follows:
Consolidated:
. Minera Carbonifera Rio Escondido, S.A. de C.V. ("MICARE") is dedicated
to the mining and sale of steam coal, that is used by the Comision
Federal de Electricidad ("Mexican Federal Power Commission" or "CFE") to
produce electricity for its thermoelectric plants.
. Minera del Norte, S.A. de C.V. ("MINOSA") and Cerro de Mercado, S.A. de
C.V. ("CERRO") are dedicated to the extraction, exploitation and sale of
iron ore, which is used by AHMSA in the production of steel products.
. Minerales Monclova, S.A. de C.V. ("MIMOSA") is dedicated to the mining
of metallurgical coal that is used principally by AHMSA in the
production of steel products.
. La Perla Minas de Fierro y Carbon, S.A. de C.V. ("LA PERLA") is
dedicated to the mining of iron ore and owns a pellet plant and a slurry
pipeline which is used to transport iron ore to the pellet plant, which
is located at AHMSA's steel-producing facilities. LA PERLA also provides
administrative services to the Company and to affiliated companies.
. Centro de Servicio Placa y Lamina, S.A. de C.V. ("CSPYL") formerly
Ryerson de Mexico, S.A. de C.V. ("RYERSON") was incorporated to
strengthen the Company's distribution network and AHMSA's presence in
the domestic market. (See Note 4 a)).
Unconsolidated:
. Linea Coahuila-Durango, S.A. de C.V. ("LCD") is a railroad company and a
50% joint venture with Industrias Penoles, S.A. de C.V. ("PENOLES"). It
is used to transport the metallurgical coal to AHMSA's steel producing
facilities.
. Inmobiliaria Dos Carlos, S.A. de C.V. ("DOS CARLOS") is a real estate
firm dedicated to develop a residential project called "Valle de Reyes"
in Monterrey, Mexico which includes a golf course. The Company is in the
process of obtaining the permits to begin the project, which at the date
of these consolidated financial statements have not been obtained.
Note 2. Noncompliance, suspension of payments, potential partners and debt
restructuring
a) Noncompliance
Since 1998, international steel prices have fallen sharply due mainly to the
Asian financial crisis, which worsened toward the end of that year with the
crisis in Russia, during 1999 with the crisis in Brazil and has continued in
the year 2000, affecting the American and European steel industry
significantly. This has caused a constant deterioration in the profit margins
over the last years, and combined with its high indebtedness of approximately
US$1,900 of bank debt, resulted in AHMSA not complying with certain terms of
some of its
F-59
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
credit agreements in 1999 and failing to pay principal and interest for US$39
on a syndicated loan whose agent is JP Morgan Chase Bank (successor to Morgan
Guaranty Trust Company of New York) (Morgan) and scheduled payment of US$25 of
interest with respect to the Senior Notes.
AHMSA informed The Chase Manhattan Bank (as trustee) of some defaults with
the Senior Notes, as well as the manner in which this was remedied by
management, together with its external legal counsel. These events refer to
situations such as:
. Lamina y Placa Comercial, S.A. de C.V. (LPC) transaction:
The Company's advance of funds to GAN for US$42 for the purchase of 49% of
the shares of LPC (which was exchanged for 60.15% of the shares of DOS CARLOS
on September 9, 1999) GAN transferred its rights to invest in LPC to AHMSA and
paid interest on the advances received, as a result of which the transaction
was completed as if it had been carried out directly by AHMSA. On March 1,
1999, the Board of Directors, including the unrelated Directors, ratified the
mandate and the transfer of funds for the acquisition of LPC, and an opinion
was obtained from BBVA-Bancomer, S.A., formerly Bancomer, S.A. ("Bancomer")
that the interest rate on the advances was no less favorable than that which
could have been obtained from an unrelated third party.
. Commission payments to GAN:
Since February 1997, AHMSA had, with the approval of its Board of Directors,
been paying GAN a 2.5% commission on bank loans and advances from customers
where GAN acts as the guarantor. Such payment constituted an event of default
under the Indenture. On March 1, 1999, the payment of the commissions was
ratified by the Board of Directors, including the unrelated Directors, and an
opinion was obtained from Banco Mercantil del Norte, S.A. ("Banorte") stating
that the 2.5% rate is no less favorable to the Company than the terms that
could be obtained from a third party.
. Affiliate transactions:
During 1998 and through March 1999, MICARE and AHMSA made loans to
affiliated companies that were restricted by the bank debt agreements and the
Indentures. However, the loans made by AHMSA and MICARE were paid by GAN in
cash or in kind, including the corresponding interest. On March 26,1999, the
Board of Directors, including the unrelated Directors, approved and ratified
the transactions made with GAN and its subsidiaries.
During 1998, the Company and its subsidiaries purchased certain businesses
from GAN, including: Hojalata Mexicana, S.A. de C.V., Forjacero, S.A. de C.V.,
LCD, GAN International Trading, S.A. de C.V., Carboelectrica Sabinas, S. de
R.L. de C.V. and Ediciones Vulcano, S.A. de C.V. The purchases totaled Ps.157
and, certain of the transactions constituted events of default under the
Indenture. On March 1, 1999, the Board of Directors, including the unrelated
Directors, ratified the transactions.
During March 1999, AHMSA purchased 20,000,000 of its own shares from GAN for
Ps.207. On March 1, 1999, the Board of Directors, including the unrelated
Directors, ratified the transaction, and the Company obtained an opinion from
Bancomer that the transaction was carried out at market value and under
conditions no less favorable that those that could have been obtained from a
third party.
On March 31, 1999, MICARE purchased an airplane from GAN for US$6.9. On
April 23, 1999, the purchase was ratified by the Board of Directors, including
the unrelated Directors. The purchase was subject to certain conditions which
were not met; therefore Antair, S.A. de C.V. (direct subsidiary of GAN) was
authorized to sell the airplane and give the funds obtained of US$4.2 to MICARE.
F-60
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
During 1998, AHMSA guaranteed certain loans obtained by GAN for a total of
US$42 (nominal value).
The Company's management took some corrective measures to remedy most of
the aforementioned situations, except for the nonpayment of the syndicated loan
with Morgan and the Senior Notes, additionally the Company did not comply with
the current ratio and the interest coverage ratio committed to in its loan
agreements and the substitution of the guarantee granted by the Company to GAN.
The aforementioned issue obligated AHMSA to initiate on April 26, 1999, a
restructuring process to renegotiate its debt with its creditors, based on its
ability to pay (still under negotiation). Therefore, principal and interest
payments on the debt were suspended and the search for a potential partner
began. The main financial institutions formed an unofficial Creditor Steering
Committee ("Committee"), whose main objective is to oversee the negotiations of
the debt restructuring process by representatives of such institutions as
follows:
Bank of America, N.A.
JP Morgan Chase Bank, (successor to Morgan Guaranty Trust Company of
New York)
Scotiabank Inverlat, S.A.
Banco Nacional de Mexico, S.A.
BBVA-Bancomer, S.A.
Banco Mercantil del Norte, S.A.
Wells Fargo Bank Minnesota, N.A., in its capacity as trustee for the
Old Notes
West Merchant Bank Limited
Export-Import Bank of the United States
AHMSA entered into a non-binding letter of intent with the Committee setting
forth a framework for a restructuring. The letter of intent provided for three
alternative plans for the restructuring of the indebtedness:
Plan A, the restructuring in connection with a US$400 equity investment in
AHMSA by Aceralia Corporacion Siderugica, S.A. ("Aceralia") in order to
implement the plan by June 15, 2000.
Plan B, provided the restructuring independent of a business combination
transaction.
Plan C, which was to be pursued if Plan B was not implemented by August 15,
2000, provided for an exchange by GAN of its entire equity interest in AHMSA
for all of the capital stock of a debt-free MICARE and up to 6% of the capital
stock in AHMSA (based on the success of certain asset sales).
b) Suspension of Payments
Due to the issues indicated above and because some of its creditors filed
certain lawsuits against the Company, on May 24, 1999, AHMSA and certain of its
subsidiaries requested a judicial declaration of Suspension of Payments status
("Suspension of Payments"), which was granted on May 25 and May 28, 1999 by the
first judge of the First Instance Court in Monclova, Coahuila. The Company's
filing for Suspension of Payments constituted an event of default on
substantially all of its debt obligations.
The Company proposed a preventive payments agreement, which must be approved
by its creditors; the contingency of AHMSA being liquidated exists in the event
it is not approved.
F-61
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
As a result of the Suspension of Payments ordered:
. All debts AHMSA had incurred up to the date of Suspension of Payments
were deemed due and payable; therefore, all balances were recorded under
current liabilities representing as of June 30, 2001 Ps.18,272 (nominal
value).
. AHMSA was granted an automatic stay from collection of any indebtedness
arising out of transactions completed prior to the Suspension of
Payments.
. Interest ceased to accrue on all outstanding indebtedness, other than
ordinary interest with respect to secured indebtedness (as defined under
applicable Mexican bankruptcy and Suspension of Payments laws) to the
extent of the security; the additional interest that would have been
accruing during the six months ended June 30, 2000 and 2001 was Ps.1,016
and Ps.1,007, respectively.
. All lawsuits filed for the collection of any monetary obligation against
AHMSA were suspended, except for tax obligations, proceedings for the
enforcement of labor liabilities or secured credits (as defined under
applicable Mexican law) and any enforcement of such secured credits;
. A trustee (sindico) was appointed by the court to supervise AHMSA's
operations (AHMSA's management retained administrative control and
continued operations in the ordinary course of business under the
trustee's supervision).
. For purposes of recognition and classification of AHMSA's debt
obligations and in order to provide certainty and equal treatment to all
creditors, all credit obligations (other than obligations entitled to be
paid currently under Suspension of Payments law) stated in foreign
currency were converted into pesos at the rate of exchange prevailing on
the date of the judicial declaration of Suspension of Payments. For
AHMSA, MICARE, MIMOSA and MINOSA, which obtained a judicial declaration
of Suspension of Payments on May 25, 1999, this rate of exchange was
Ps.9.359 per 1 U.S. dollar and for CERRO, which obtained a judicial
declaration of Suspension of Payments on May 28, 1999, this rate of
exchange was Ps.9.672 per 1 U.S. dollar. As a result, AHMSA did not
record exchange losses of Ps.814 and exchange profit of Ps.902 in the
consolidated statement of income (loss) as of June 30, 2000 and 2001,
respectively.
. During the first half of 2000 and 2001, there were disbursements mainly
for professional advisory fees, which totaled Ps.97 and Ps.87,
respectively, and were recorded under other expenses in the consolidated
statements of income (loss).
. The suspension of the Company's common stock on the Mexican Stock Market
and AHMSA ADR listing on the New York Stock Exchange.
. The convertible note holders lost the right to convert such notes into
capital stock of the Company.
During the Suspension of Payments period, the Company may continue its
operations and pay trade payables and supplies. There may be additional effects
that may arise at the conclusion of the Suspension of Payments and the final
negotiations with the creditors, which effects are unknown at this time.
c) Business Combination and Restructuring plan
Business combination
From September 1999 through February 2000 a potential restructuring
considered a merger with Industrias Monterrey, S.A. de C.V. ("IMSA"). After it
became apparent to AHMSA and GAN that such a business
F-62
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
combination would not be advantageous, on February 23, 2000, they entered into
negotiations with Aceralia regarding a potential cash investment in AHMSA and
signed a non-binding letter of intent providing for the creation of a joint
venture.
On July 19, 2000, the Committee reported that it would not approve a
restructuring involving a joint venture with Aceralia. They rejected the
proposal for the following reasons:
. Aceralia did not provide a firm commitment.
. The committee considered the up-front cash payment to be paid to AHMSA
to be too low.
. Aceralia would manage and control the joint venture.
. There was no assurance that the joint venture would generate cash flow
for AHMSA.
. AHMSA would have been obligated to supply the joint venture substantial
raw or unfinished materials at cost for 20 years.
. The projected profit margins for the joint venture would be too low.
. The committee were doubtful of the ability of AHMSA to generate payments
from the joint venture sufficient to pay the restructured debt.
Agreement for a restructuring plan:
On August 25, 2000 the Company entered into a non-binding term sheet for the
restructuring of its outstanding indebtedness along the lines of Plan B
mentioned in a) above. The Company's management, the Committee and all
interested parties finally signed on May 29, 2001 a non-binding letter of
intent in which they agreed to restructuring terms and conditions along the
lines set forth in some agreements attached to it (Credit Agreement, the
Indenture, the corporate by-laws, the three agreements governing the AHMSA
Creditor Voting Trust, the Stock Option Agreement and the Registration Rights
Agreements) and intent also to work towards a prompt filing of a registration
statement relating to the restructuring.
The proposed restructuring plan classifies the claims into five general
categories, and provides for the treatment of the holders of claims in each of
those categories, as follows:
1. Capital Leases
Those capital leases that have been approved by the Court to continue in
full force and effect.
2. Holders of Preferred Claims
Consists of claims granted valid preferences by the Court, including in this
case the claims that will be paid in full, pursuant to their existing
agreements. These claims are held by Bancomext, Banca Cremi, SNC and Banco
Santander S.A. (which Banca Cremi and Banco Santander claims relate to loans to
finance the construction of housing for AHMSA's employees, who pay for the
homes through deductions from their salaries).
3. Holders of Claims for Indebtedness for Borrowed Money
Consists of (a) holders of Old Senior Notes (yankee bond) and Old Discount
Convertible Notes (convertible notes); (b) claims for indebtedness for borrowed
money of MICARE; (c) claims under the Old SEN Facility (Morgan); and (d) other
claims for indebtedness for borrowed money.
F-63
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Holders of these claims receive their pro rata share (based on the amount of
their claim from a total of US$1,846.2 of the considerations set forth in the
agreement.
4. Suppliers
Consists of suppliers to whom amounts are outstanding for goods or services
supplied on or prior to May 25, 1999. These claims total approximately US$125.4
net from advances payments.
5. Equity Holders
Equity holders will maintain their existing interests subject to dilution by
the new common stock being issued pursuant to the terms of the restructuring
plan.
Under the restructuring plan, holders of the Company's debt will receive
302,000,000 shares of common stock representing 40% of the outstanding common
stock on a fully diluted basis, subject to a three-year purchase option and
additional two-year right of first refusal in favor of a special purpose
vehicle created by the parent company of AHMSA, and in the case of shares to be
issued to the creditors of MICARE, a nine-year purchase option in AHMSA's
favor. In order that the issuance of this common stock may be accomplished in a
tax efficient manner under Mexican law, the following steps will be taken:
1. GAN will form a new wholly-owned subsidiary ("NewCo"), which will assume
US$551.2 of AHMSA's indebtedness in exchange for an equal U.S. dollar amount
of claims against AHMSA.
2. NewCo will then capitalize its claim against AHMSA in exchange for the
issuance by AHMSA to NewCo of 397,127,498 new shares of AHMSA's common
stock, representing 52.6% of AHMSA's outstanding capital stock on a fully
diluted basis.
3. The holders of the Old Notes and Old Loans will then contribute the
US$551.2 of indebtedness in NewCo exchange for the issuance of 302,000,000
shares of NewCo's common stock representing 76.0% of NewCo's outstanding
capital stock on a fully diluted basis.
4. NewCo will then merge into AHMSA, so that AHMSA would be the surviving
entity. Each share of NewCo common stock will be converted into a share of
AHMSA common stock. As a result of the merger, GAN, the holders of the Old
Notes and Old Loans and AHMSA's other shareholders will own 50.1%, 40.0% and
9.9%, respectively, of the Company's outstanding capital stock on a fully
diluted basis.
To consummate the restructuring plan there are several conditions that must
be met prior to the closing date. Some of them are:
. All holders of preferred claims against AHMSA recognized in the
Suspension of Payments proceeding must have consented to the
restructuring plan and agreed to be bound by the terms of the suspension
of payments settlement agreement (the "Settlement Agreement") to be
filed with and approved by the Mexican Bankruptcy Court.
. All other holders of claims against AHMSA (including supplier claims),
other than holders of claims with an aggregate principal amount of less
than US$25 must have consented to the restructuring plan and agreed to
be bound by the terms of the Settlement Agreement.
. The U.S. Securities and Exchange Commission must have declared the
registration statement effective and not have instituted any stop order
with respect to the registration statement.
F-64
Translation from financial statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
. The Civil Court of First Instance for the Judicial District of Monclova,
Coahuila, Mexico, must have lifted Suspension of Payments and the
Suspension of Payments of each of AHMSA's subsidiaries.
. AHMSA must have delivered disclosure schedules to the New Credit
Agreement entered into pursuant to the restructuring plan that have not
been objected to by the holders of 40% or more of claims who are
entitled to receive promissory notes under the New Credit Agreement.
. The aggregate amount of indebtedness that AHMSA has incurred since
December 31, 2000 (net of repayments of indebtedness made during such
period) must not exceed US$40.
. A material adverse change to AHMSA's business, operations or financial
condition must not have occurred since December 31, 2000.
. AHMSA has generated US$50 of cash to pay restructuring fees and expenses
associated with the restructuring plan.
. The creditors of GAN must have approved the restructuring plan to the
extent required under the terms of the GAN Suspension of Payments and
GAN must have emerged from Suspension of Payments on terms satisfactory
to GAN, AHMSA and a majority of the outstanding claims against AHMSA.
. All necessary Mexican governmental approvals must have been obtained for
the restructuring plan including the necessary approvals from the
Mexican National Commission of Foreign Investment.
. The creditors shall have received favorable legal opinions of United
States and internal and external Mexican counsel to AHMSA and GAN.
. Each of the parties approving the restructuring plan must have granted a
general release to each other party for any actions or failures to act
in connection with the Old Notes and Old Loans occurring on or prior to
the closing date.
. AHMSA's suppliers must have agreed to a payment schedule for outstanding
suppliers' credits reasonably acceptable to AHMSA and AHMSA's creditors.
. Bancomext must have agreed that no principal payments in respect of its
preferred claims against AHMSA are due prior to 2003.
. Holders of no more than US$35.5 of aggregate principal amount of Old
Loans elect to receive new notes under the new indenture pursuant to the
restructuring plan.
AHMSA's ability to continue as a going concern will depend on whether the
Company successfully resolves the debt restructuring process, its
noncompliance, and the effects of the Suspension of Payments mentioned in this
note, as well as on recovering the level of generating cash flow referred to in
the following note.
Note 3. Cash flow
Notwithstanding the relief from debt service and collection actions afforded
by the Suspension of Payments, the financial condition, results of operations,
and cash flows of the Company have deteriorated during the last quarter of 2000
and the first nine months of 2001, as a result of the adverse developments in
the general economic environment, international steel industry conditions and
other internal events, which have impacted the Company in the following ways:
a) International prices have decreased 30% during the last 18 months.
b) From December 1999 to December 2000, natural gas costs have increased
178%.
F-65
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
c) The appreciation of the Mexican peso against the U.S. dollar; which
influences the sales price in Mexican pesos mainly because those prices
are referenced to the U.S. dollar, together with the increase in
domestic input costs, which increases as a function of inflation.
d) During the second half of 2000 MICARE's situation was affected by fewer
deliveries to the CFE, since steam coal production decreased
significantly during the last quarter of the year due to an unusually
rainy season in the coal area, affecting production capacity in the open
pit mines. Due to this, the Company failed to deliver 363,000 tonnes to
CFE, which represented a revenue decrease of approximately US$10.9.
e) The Company is unable to obtain financing for its operations and capital
expenditures, other than advance payments from customers and accelerated
payments of accounts receivable in exchange for discounted terms.
f) MINOSA and MIMOSA are experiencing serious delays in the underground
mine developments. Also, during the third quarter of 2001, MINOSA
considerably decreased its iron ore deliveries to AHMSA due to
operational problems from changes of mines, and MIMOSA, due to
exploitation zone changes, decreased its coal deliveries to AHMSA. After
consuming their inventory, in both cases, the Company was forced to
obtain these materials from external sources. The Company believes that
this situation will be remedied during the fourth quarter.
g) During the third quarter of 2001, orders of steam coal of CFE to MICARE
decreased by 100,000 tonnes due to required maintenance on its coal-fed
electric plants. This situation will continue during the fourth quarter,
with an approximate 100,000 tonnes monthly decrease.
h) As of September 30, 2001, there is balance due to the CFE of US$6.2,
which is due to differences in the coal deliveries during the first half
of 2001. The Company plans to pay this balance in kind during the
remainder of the year.
The Company has been unable to generate sufficient cash flow to adequately
fund obligations and operations. As a result as of September 30, 2001, the
Company:
. Has not made required payroll withholding tax payments in excess of Ps.260
to the Mexican government. If the Company does not comply with this
obligation, it could result in the seizure of the Company's assets by
Mexican tax authorities.
. Have not made necessary capital expenditures to permit the continued
extraction of raw materials necessary for the production of steel,
requiring the purchase of more costly raw materials from third party
suppliers.
. Has past due payments of US$21 on loans and financial leases not included
in the Suspension of Payments with Bancomext, Arrendadora Bankamerica, The
Capita Corporation, Hewlett Packard and Caterpillar Financial Services, Co.
. The Company has been unable to obtain necessary performance bonds required
by customers or to obtain such bonds at costs far in excess of historical
levels.
. The Company's shortage of cash requires it to extend its payments of
suppliers and rebate the inventory. Additionally, the terms and
discounting accounts receivable, offering of collateral for its supply
expenditures, and its inability to obtain bank financing due to the
Suspension of Payments described in Note 2 b), has considerably
deteriorated the Company's working capital.
F-66
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The Company's Management has been taking the steps outlined below in an
effort to improve its financial condition, results of operations, and cash
flows in the short to medium term, as follows:
a) Continued the cost and spending reduction program, trying to reduce
fixed costs and stabilize variable unit costs.
b) A 10% reduction in non-unionized personnel and unionized employees, and
have extended the time period for the payment of severance (see Note 4
b)). The amount of these payments will be Ps.656.
c) Withholding 10% of the salaries of all employees with the rank of
manager or higher (approximately 189 employees).
d) On September 7, 2001, an increase of import duties on 39 steel products
from countries with which Mexico does not have free trade agreements
became effective. This increase will provide better selling conditions
for the Company. Due to the aforementioned, the Company decided to
increase the price of steel starting September 1, 2001 by a percentage
based on market trends and the Mexican peso exchange rate. However, such
increase has not been enough to cover the cost of sales.
e) In order to control the cost of natural gas, starting in July 2000, the
Company established a program to substitute natural gas for coal
injection. With this program, gas consumption decreased 54% in the last
half of 2000. In addition, hedging contracts were entered into for
controlling gas prices for the period December 2000 to February 2001;
and on February 8, 2001, the Company negotiated a contract with PEMEX
GAS and PETROQUIMICA BASICA (PEMEX) to guarantee a price of 4 U.S.
dollars per million BTUs applicable from January 1, 2001 through
December 31, 2003. During the past few months the average price of gas
has been below the negotiated price; however, during all the hedging
period and up to September 30, 2001, the Company has reported a net gain
of US$8 on this contract. If the Company decides to cancel the contract,
the cost would represent an expense of US$27.
During the month of September 2001, natural gas consumption increased 45%
due to having alternated natural gas with coal injection as a strategy to
lower the cost benefiting from the gas price reduction.
Beginning in September 2001, a new hedging contract went into effect at a
maximum of 3.9 U.S. dollars per million BTUs and a minimum of 3.1 U.S.
dollars per million BTUs for a consumption of one million of million BTUs
per month. However, since the current consumption is higher than the
maximum in the contract, the excess is consumed at market price (in
September - 2.11 U.S. dollars per million BTUs).
f) MICARE is negotiating with CFE a new contract for the delivery of coal
to one of its plants for an additional term of 10 years. The
negotiations are estimated to conclude during the last quarter of 2001.
The new contract would establish an increase in the selling price from
the previous contract.
g) Additionally the Company had obtained 12 months financing (partial
payments) for the payment of Social Securities taxes in the amount of
Ps.131. As of September 30, 2001 the Company owes Ps.86 under such
agreements.
h) Continuing to market assets not directly related to the core business,
such as the oxygen plants, railroad cars, real estate, etc.
For the above mentioned reasons, as of September 30, 2001, the Company has
focused its cash flows on the maintenance of plant operations.
F-67
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Note 4. Others events
a) Joint Venture Termination
On March 9, 2000, AHMSA signed an agreement with Ryerson Tull, Inc.
("RYERSON TULL") to acquire a 50% interest in CSPYL (formerly "RYERSON")
subject to court approval.
Due to the delays in obtaining court approval for the acquisition of it
shareholders' equity, Ryerson, through its subsidiary Ryerson Industries de
Mexico, S.A. de C.V., exercised its right to retire as shareholders of CSPYL.
On June 15, 2001, at an extraordinary shareholders' meeting was approved the
reduction of CSPYL's common stock and agreed to return to Ryerson Industries de
Mexico, S.A. de C.V. its capital contribution through delivery of approximately
US$16 in various assets and inventories of CSPYL. This will end the joint
venture between AHMSA and Ryerson Tull, and CSPYL became a 100% subsidiary of
AHMSA.
b) Personnel Reduction
The Company has continued its personnel reduction plan for unionized and
non-unionized employees. From January to September 2001, it has reduced
approximately 1,600 positions, which represent 10% of the total workforce, the
Company has recorded a severance liability of Ps.656. Since this amount was
higher than the actuarial calculation, the latter had to be update, and at June
30, 2001 a severance payment reserve for Ps.199 net of deferred taxes and the
cancellation of the corresponding retirement, pension plan and seniority
premium liabilities, it was recorded in the consolidated income (loss)
statement.
c) Sale of the lime processing plant
On November 1, 1999, MINOSA sold the assets of its lime processing plant
located in Santa Catarina, N.L. to Refractarios Basicos, S.A. de C.V.
("REBASA") for US$19. In connection with this sale, REBASA has committed to
supply 100% of the lime that AHMSA will require for its productive processes
over the next 10 years. Since MINOSA is under Suspension of Payments status,
the final sale of the assets is subject to the corresponding legal
authorization from the Suspension Court or the release from Suspension of
Payments status. In anticipation of the sale, a lease contract was signed,
establishing a monthly rent payment of U.S.$137,500, ending October 2001, with
the possibility of extension upon the agreement of both parties.
Note 5. Basis of consolidation and presentation
The accompanying unaudited consolidated financial statements included herein
have been prepared by the Company in accordance with accounting principles
generally accepted in Mexico ("Mexican GAAP"). In the opinion of management,
these unaudited financial statements contain all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position as of June 30, 2001, and its results of operations and changes in
financial position for the six months ended June 30, 2000 and 2001.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included elsewhere in this Prospectus. The Company has made no
significant changes in accounting polices during the six months ended June 30,
2001 (except for the application of New Mexican Bulletin C-2 mentioned in Note
6 a)).
F-68
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
The results of operations for the six months ended June 30, 2000 and 2001
are not necessarily indicative of the results to be expected for the entire
year.
U.S. dollar amounts shown in the financial statements have been included
solely for the convenience of the reader and are translated from Mexican pesos,
as a matter of arithmetic computation only, at the noon buying rate for Mexican
pesos on June 30, 2001 of 9.06 pesos per U.S. dollar published by the Federal
Reserve Bank of New York. Such translation should not be construed as a
representation that the Mexican peso amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or any other rate
of exchange.
The consolidated financial statements include those of AHMSA and all of its
subsidiaries.
Among the significant subsidiaries consolidated are:
%
Participation
-------------
MICARE.. 100
MINOSA.. 100
CERRO... 100
MIMOSA.. 100
LA PERLA 100
CSPYL... 100
As of June 30, 2001, the balance amounts of CSPYL are as follows:
Current Assets......... Ps. 249
Fixed Assets........... 241
Other non-current...... 2
---
Total Assets........... Ps. 492
===
Current liabilities.... Ps. 347
Non-current liabilities 1
---
Total liabilities...... Ps. 348
===
LCD and DOS CARLOS are accounted under the equity method.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Equity in earnings and changes in equity of subsidiaries that were bought or
sold during the year were included in the consolidated financial statements
from or up to the date of the transactions and were restated in terms of the
purchasing power of the Mexican peso as of June 30, 2001.
F-69
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 6. Significant accounting policies
The significant accounting policies followed by the Company are in
conformity with Mexican GAAP, 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 to be included therein. Actual results could differ from those
estimates.
a) New accounting principle
Mexican Bulletin C-2, "Financial Instruments", was issued in December 1999
by the Mexican Institute of Public Accountants ("MIPA") and became effective in
2001. Bulletin C-2 requires recognition of all derivatives on the balance sheet
as either assets or liabilities and the measurement of certain of these
instruments and the related hedged items at their fair value. In addition, the
Mexican standard will require that all gains and losses on derivative hedging
instruments be recorded in current earnings, regardless of the nature of the
instrument. As of June 30, 2001, the Company does not have any significant
derivative financial instruments (See Note 15).
b) Recognition of the effects of inflation in the financial statements
The Company restates its financial statements to reflect the purchasing
power of the Mexican peso as of the most recent reporting date, thereby
comprehensively recognizing the effects of inflation. The financial statements
of prior periods have also been restated in terms of the purchasing power of
the Mexican peso as of the most recent reporting date. Accordingly, prior
period amounts differ from those previously reported. As a result, the amounts
reported for the most current period are comparable with those of prior periods
since all periods are expressed in terms of the same purchasing power.
To recognize the effects of inflation in terms of Mexican pesos with
purchasing power as of the most recent reporting date, the following procedures
are used:
. Balance sheet:
Inventories are restated to their most recent production or purchase cost,
not exceeding realizable value. Therefore, coal inventories recovered in the
washing plant, referred to in Note 11, are valued at their latest recovery cost.
Laminating rollers are amortized based on units of production determined by
the Company's technician.
Inventory of scrap is valued at its recovery cost, in accordance with its
market value, less the contribution margin and the cost incurred to process it.
Scrap is a by-product of AHMSA's production of molten pig iron that can be
reused as a secondary raw material.
Property, plant and equipment of domestic origin are restated using the
National Consumer Price Index ("NCPI") factors. Machinery and equipment of
foreign origin are restated based on the inflation rate of the country of
origin and the period-end exchange rate.
F-70
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Depreciation of fixed assets is computed using the straight-line method
based on restated values, applying rates that correspond to the estimated
useful lives of the assets. Depreciation of additions begins in the year after
the asset is placed in service.
Deferred charges are restated using factors derived from the NCPI,
cumulative from the date of generation.
Investments subject to depletion, which include initial expenses of
exploration and development of long fronts are valued based on the latest costs
incurred. The depletion of these investments is determined upon beginning the
mineral exploitation based on the number of tonnes extracted for annual sales,
in relation to the estimated number of tonnes in reserve in the deposits.
Investment in shares of unconsolidated subsidiaries are restated using the
equity method, based on the subsidiaries' financial statements restated on the
same basis as those of the Company.
Shareholders' equity and nonmonetary items other than inventory and
property, plant and equipment of foreign origin are restated using factors
derived from the NCPI, cumulative from the date of contribution or generation.
. Statement of income:
Revenues and expenses that are associated with a monetary item (trade
receivables, cash, liabilities, etc.) are restated using the NCPI, taking into
account inflation from the month in which they arise through the most recent
reporting date.
Cost of sales is restated to the estimated replacement cost at the time of
the sale, through the use of standard costs that are periodically updated.
Other costs and expenses associated with nonmonetary items are restated from
the time incurred through period end, as a function of the restatement of the
nonmonetary assets that are being consumed or sold.
The gain from monetary position in the consolidated statement of income
(loss) represents the effect of inflation on monetary items. This amount is
determined by applying to net monetary assets or liabilities at the beginning
of each month the factor of inflation derived from the NCPI and is restated
through period-end with the corresponding factor.
. Other statements:
The consolidated statement of changes in financial position presents the
changes in financial resources measured in constant Mexican pesos, based on the
financial position at the prior year end, restated to Mexican pesos as of the
end of the most recent reporting period.
The cumulative restatement effect shown in the consolidated statement of
changes in shareholders' equity consists principally of the gain or loss from
holding nonmonetary assets, which represents the change in the specific price
level of those assets in relation to general inflation, as measured by the NCPI.
F-71
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
c) Cash and cash equivalents
Cash equivalents include short-term highly liquid investments with an
original maturity of three months or less (including Mexican treasury bills)
and bank deposits valued at market (cost plus accrued interest).
As of June 30, 2001, there are bank deposits amounting to Ps.88, which the
Company may not withdraw, and they are presented net of the corresponding
liability in the consolidated balance sheet.
d) Stripping costs
In open pit mining, the overburden above the mineral must be removed before
the mineral can be removed from the pit. The costs incurred in removing the
overburden (prepaid stripping costs) are deferred for proper matching with the
revenue that they generate. Prepaid stripping costs are classified as inventory
and treated as current assets in the balance sheet. If a portion of the prepaid
stripping costs is expected to benefit a period longer than one year, that
portion is classified as a noncurrent asset.
e) Employee housing developments
Employee housing developments are recorded at cost of construction and/or
acquisition.
Certain houses are leased under contracts that include clauses under which
the Company has the option to sell the unit to employees. The Company may
terminate the contracts under certain circumstances. If the purchase sale
option is exercised, the purchase price is paid over a maximum of 10 years,
with an annual interest rate of 6.0% under a collective bargaining agreement.
These receivables are included in the consolidated balance sheet under the
employee housing developments item and totaled Ps.59 and Ps.61 as of December
31, 2000 and June 30, 2001, respectively.
Additionally, certain housing developments for employees and workers are
leased under rental contracts that establish minimum monthly rent payments.
Since these developments are in remote locations and will not be sold to
employees, they are depreciated over 15 years using the straight-line method.
Also, the Company maintains housing for its employees at the remote mine
locations, which is depreciated using the straight-line method.
F-72
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
f) Deferred charges
At December 31, 2000 and June 30, 2001, deferred charges pending
amortization consisted of the following:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Mining exploration and development costs Ps. 1,184 Ps. 1,207
Costs and expenses of SAP............... 337 329
Intangible employee benefit assets...... 300 32
Stripping costs......................... 290 344
Deferred start-up costs................. 111 110
Other................................... 93 114
----- -----
Ps. 2,315 Ps. 2,136
===== =====
The amortization of deferred charges for the six months ended June 30, 2000
and 2001 was as follows:
June 30, June 30,
2000 2001
----------- -----------
(Unaudited) (Unaudited)
Mining exploration and development costs Ps. 88 Ps. 66
Costs and expenses of SAP............... 20 21
Stripping costs......................... 25 17
Deferred start-up costs................. 1 2
Other................................... 2 14
--- ---
Ps. 136 Ps. 120
=== ===
The Company capitalizes the exploration costs incurred in the commercial
development of the explored reserves related to individual mines by an
allocation of the common costs incurred to the reserves proven during
exploration. The Company is currently exploring new deposits of iron ore and
has discovered a deposit with proven reserves of approximately 171 million
tonnes in the state of Oaxaca, which was certified by Midland Standard Inc., an
expert in mining, geology and measurement of reserves. The Company has a
concession to explore mineral reserves in this area which expires in 2002. This
project is pending derived from the legal situation of the Company.
In mine development, the Company is carrying out significant preparations at
a new Site II and MINE V of MICARE. Internal geologists have estimated the
reserves at 48 and 22 million tonnes of coal, respectively. These projects
began exploitation in the year 2000. Additionally, in MIMOSA's MINE VI the
Company's geologists have estimated reserves at 27 million tonnes. The Company
expects to begin exploitation in 2004.
Costs and expenses incurred in connection with the administrative and
accounting system ("SAP") were capitalized and are being amortized over a
10-year period. This project was concluded in January 2000.
Start-up costs for each new steel production line are amortized over a
period of five years commencing the earlier of when the production line reaches
70.0% of its installed capacity of two years after the date the first
F-73
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
costs were deferred. As of December 31, 2000 and June 30, 2001, the Company had
invested Ps.75 and Ps.78 respectively in an electrical power plant project, and
currently the Company is in the process of finding a strategic partner for
developing this project.
g) Employee benefit obligations
According to Mexican labor laws, the Company must pay seniority premiums to
all employees that leave with 15 or more years of service. Additionally,
certain payments are made based on certain conditions, in addition to the
seniority premium benefits, to administrative personnel and unionized employees.
When there is a significant reduction in personnel due to the restructuring
of the labor force or the closing of a plant, the corresponding indemnity
costs, net of the corresponding reduction in the projected benefit obligation
and the related items to be amortized, are charged to results.
h) Revenue recognition
Revenues are recognized when the products are shipped or delivered to the
customer and the customer assumes responsibility for the products.
i) Income Tax, Asset Tax and Employee Profit Sharing
On January 1, 2000, a revised Bulletin D-4 issued by the MIPA went into
effect. This bulletin establishes the accounting treatment for the deferred
effects of income and asset taxes and employee profit sharing. It consists of
recognizing liabilities and assets from deferred income and asset taxes that
may result from the future tax effects of all the temporary differences between
the book and tax basis of assets and liabilities. For the computation of
deferred employee profit sharing effects, only the temporary differences that
result from the reconciliation between net income for the period and the
taxable basis for employee profit sharing, which are expected to reverse within
a specific timeframe, are considered.
j) Financing and related costs
Financing and related costs include interest income and expense, foreign
exchange gains or losses and gains or losses from monetary position, except as
stated in Note 2 b).
The Company pays interest on the advances from customers, which is
calculated in accordance with the period of time elapsed between the receipt of
the advance and the time the client has to pay according to its credit terms.
However, interest is also paid to those customers who prepay before the period
established in their credit terms. The interest incurred for those concepts was
Ps.238 and Ps.258 as of June 30, 2000 and 2001, respectively.
Transactions denominated in foreign currencies are recorded at the exchange
rate at the date on which they occur. The assets and liabilities denominated in
foreign currencies are valued at the exchange rate in effect at the balance
sheet date. The resulting exchange fluctuations are credited or charged to
income as foreign exchange gains or losses, except as stated in Note 2 b).
The Company capitalizes the integral cost of financing incurred during the
period of construction or installation of fixed assets, amortizing these costs
over the average term of depreciation of the corresponding
F-74
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
assets. During the periods from January 1 to June 30, 2000 and 2001, no
integral cost of financing was capitalized since the Company did not make any
significant investments in fixed assets and, in any case, costs of acquisition
were financed with the Company's own resources.
k) Restatement of shareholders' equity
Capital stock and retained earnings are restated by applying a factor
derived from the NCPI from the date contributed or earned. The restatement
represents the amount necessary to maintain shareholders' equity in terms of
the purchasing power at period end.
l) Minority interest
As of June 30, 2001, the minority interest principally represents the
minority shareholders' proportionate share of the earnings and equity of 5% of
Hullera Mexicana, S.A. de C.V. and 49% of Hojalata Mexicana, S.A. de C.V.
m) Other expenses, net
June 30, June 30,
2000 2001
----------- -----------
(Unaudited) (Unaudited)
Expenses for debt restructuring and Suspension of Payments Ps. 97 Ps. 87
Penalties and surcharges.................................. 16 23
Recovery of damages....................................... (41) 5
Nondeductible expenses.................................... 17 3
Other..................................................... (8) (30)
--- ----
Ps. 81 Ps. 88
=== ==
n) Basic earnings (loss) per share
Basic earnings (loss) per share are computed by dividing the net majority
income (loss) for the period by the weighted-average shares outstanding during
each period.
o) Realizability of long-lived assets
The Company continually evaluates the carrying value and the economic useful
lives of its long-lived assets, including property, plant and equipment, based
on the Company's operating results and anticipated future cash flows from such
assets. The estimated future cash flows of the Company are dependent upon a
variety of factors including the future condition of the Company's production
facilities, economic regulatory and other developments in Mexico, the worldwide
demand for steel products and the demand from CFE for steam coal.
p) Comprehensive income (loss)
Comprehensive income (loss) includes the net income (loss) for the period
the unamortized actuarial liability effect and the result from holding
nonmonetary assets, which are presented in the consolidated statement of
changes in stockholder's equity.
F-75
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 7. Reclassification of financial statements
Certain items of the consolidated financial statements as of June 30, 2000
and December 31, 2000 have been reclassified to conform with the presentation
of the consolidated financial statements as of June 30, 2001.
Note 8. Foreign currency position
As of December 31, 2000 and June 30, 2001, foreign currency balances were:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Monetary assets:
U.S. dollar.......................................... Ps. 456 Ps. 637
Other currencies..................................... 11 9
----- -----
467 646
----- -----
Monetary liabilities:
U.S. dollar.......................................... 1,634 1,263
Other currencies..................................... 6 --
----- -----
1,640 1,263
----- -----
Net monetary liability position in foreign currencies Ps. 1,173 Ps. 617
===== =====
The Company's principal transactions denominated in foreign currencies for
the six months ended June 30, 2000 and 2001 were as follows:
June 30, June 30,
2000 2001
----------- -----------
(Unaudited) (Unaudited)
Sales............................. Ps. 558 Ps. 479
=== ===
Purchases of parts, minerals, etc. Ps. 295 Ps. 295
=== ===
Interest expense, net............. Ps. 137 Ps. 82
=== ===
Technical assistance.............. Ps. 1 Ps. 1
=== ===
Fees.............................. Ps. 61 Ps. 45
=== ===
The following table summarizes export sales by geographic area:
June 30, June 30,
2000 2001
----------- -----------
(Unaudited) (Unaudited)
North America Ps. 469 Ps. 431
Europe....... 85 --
South America 4 48
--- ---
Ps. 558 Ps. 479
=== ===
F-76
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
At present, the Company does not hedge any of its foreign currency
denominated assets or liabilities and does not hold any derivatives or off
balance sheet financial instruments. Management believes that the risk
associated with the Company's foreign currency denominated assets and
liabilities is mitigated, in part, by (i) the Company's export sales of steel
products, which are denominated in foreign currencies, (ii) the Company's
domestic sales of steel products and steam coal, which are generally set by
reference to international, dollar-denominated steel prices and steam coal
prices, respectively and (iii) as a result of the Suspension of Payments, all
the debt denominated in a foreign currency as of May 25 and May 28, 1999, was
converted in to Mexican peso at the exchange rate on that date.
Since the final effects of the Suspension of Payments are not known, there
is a possibility of increasing liabilities in foreign currency.
As of May 25 and May 28, 1999, December 31, 2000, June 30, 2001 and
September 30, 2001 the exchange rates for the Mexican peso published by Banco
de Mexico with respect to the foreign currencies indicated above are as follows:
May 25, May 28, December 31, June 30, September 30,
1999 1999 2000 2001 2001
------- ------- ------------ -------- -------------
U.S. dollar........... 9.3589 9.6715 9.5997 9.0900 9.5542
British pound sterling 15.0912 15.5952 13.6402 12.8832 13.9491
Japanese yen.......... 0.0781 0.0807 0.0866 0.0764 0.0805
German mark........... 5.0688 5.2381 4.2603 3.9412 4.4785
As of September 30, 2001, there has been no significant change in the
Company's foreign currency position as compared to June 30, 2001.
Note 9. Trade accounts receivable
Trade accounts receivable arise from the sale of products and services to
unrelated third parties. Trade receivables, including balances with the
Company's largest customers, as of December 31, 2000 and June 30, 2001, are as
follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Lamina y Placa de Monterrey, S.A. de C.V. and Subsidiaries Ps. 188 Ps. 168
CFE....................................................... 268 93
Abinsa, S.A. de C. V...................................... 21 26
Arco Metal, S.A. de C. V.................................. 90 1
Other..................................................... 940 870
----- -----
1,507 1,158
Less--Allowance for doubtful accounts..................... (46) (60)
----- -----
Ps. 1,461 Ps. 1,098
===== =====
F-77
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 10. Other accounts receivable
The balance in other accounts receivable consisted of the following:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Advances to employees................ Ps. 111 Ps. 88
Recoverable taxes.................... 37 26
Other................................ 96 161
Less--Allowance for doubtful accounts (8) (10)
--- ---
Ps. 236 Ps. 265
=== ===
Note 11. Inventories
Inventories as of December 31, 2000 and June 30, 2001 consisted of the
following:
December 30, June 30,
2000 2001
------------ -----------
(Unaudited)
Operating materials....................... Ps. 1,432 Ps. 1,279
Raw materials............................. 398 332
Advances to suppliers and goods-in-transit 216 234
Finished goods............................ 303 348
Stripping costs and long walls............ 350 333
Production-in-progress.................... 244 310
Iron ore.................................. 233 202
Steam coal................................ 271 364
Metallurgical coal........................ 18 33
Obsolete material......................... 47 55
Allowance for obsolete inventories........ (47) (55)
----- -----------
Ps. 3,465 Ps. 3,435
===== ===========
Using an analysis of the production processes prepared by the technical
department of the raw material division of the coal mines, a new process for
recovering additional coal in the washing plant was identified, which complies
with the necessary quality requirements to consider it a mineral available for
sale and can be placed on the market, 1,150,000 and 220,000 tonnes were
recovered through this process during 2000 and the first half 2001,
respectively. As of December 31, 2000 and June 30, 2001, the inventory for this
concept is Ps.71 and Ps.51, respectively.
As of December 31, 2000 and June 30, 2001, the balance of obsolete material,
which is similar to the corresponding reserve, has not been restated.
F-78
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 12. Property, plant and equipment
As of December 31, 2000 and June 30, 2001 property, plant and equipment
consisted of the following:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Land.............................. Ps. 1,134 Ps. 1,184
Buildings......................... 11,341 11,464
Machinery and equipment........... 46,581 44,613
Transportation equipment.......... 1,770 1,702
Computer equipment................ 474 458
Furniture and fixtures............ 360 371
Construction-in-progress.......... 856 997
Capitalized financing costs....... 2,227 2,227
Other............................. 487 481
------- -------
65,230 63,497
Less-Accumulated depreciation..... (38,974) (38,356)
------- -------
Property, plant and equipment, net Ps. 26,256 Ps. 25,141
======= =======
The average annual rates of depreciation used in December 31, 2000 and June
30, 2001 were as follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Buildings............... 3% 3%
Machinery and equipment. 5% 4%
Transportation equipment 13% 12%
Furniture and fixtures.. 11% 12%
Computer equipment...... 23% 26%
The Company and its subsidiaries value fixed assets of foreign origin at the
exchange rate in effect on June 30, 2000, which reflects a reduction in the
parity with respect to December 31, 2000. This represented a decrease in the
value of the previously mentioned assets and a loss from holding nonmonetary
assets of Ps.926.
F-79
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 13. Transactions and balances with affiliated companies
a) Transactions with affiliated companies for the six months ended June 30,
2000 and 2001 were as follows:
June 30, June 30,
2000 2001
----------- -----------
Revenues from: (Unaudited) (Unaudited)
Sales..................... Ps. 196 Ps. 43
=========== ===========
Administrative services... Ps. 4 Ps. 1
=========== ===========
Interest.................. Ps. 5 Ps. 6
=========== ===========
Commissions for guarantees Ps. 6 Ps. 5
=========== ===========
Other..................... Ps. 1 Ps. 1
=========== ===========
June 30, June 30,
2000 2001
----------- -----------
Expenses for: (Unaudited) (Unaudited)
Commission for guarantees... Ps. 33 Ps. 36
=========== ===========
Train and air transportation Ps. 144 Ps. 125
=========== ===========
Other expenses.............. Ps. 1 Ps. --
=========== ===========
The sales above include Ps. 196 and Ps. 43 in sales to CSPYL for the six
months ended June 30, 2000 and 2001.
b) As of December 31, 2000 and June 30, 2001, net amounts due to and from
affiliated companies were as follows:
December 31, June 30,
2000 2001
------------ -----------
Due from affiliates, short-term: (Unaudited)
CSPYL and Subsidiaries...................... Ps. 223 Ps. --
GAN......................................... 69 49
Antair, S.A. de C.V......................... 39 40
AC Gres S.A. de C.V......................... 30 31
Grupo Agromex, S.A. de C.V. and Subsidiaries 23 26
Other....................................... 17 14
--- --
Ps. 401 Ps. 160
=== ===
F-80
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Due from affiliates, long-term:
AC Gres, S.A. de C. V.......... Ps. 7 Ps. 7
== ==
Due to affiliates, short-term:
LCD............................ Ps. 18 Ps. 21
Filahsa, S.A. de C.V........... 4 9
Other.......................... 8 4
-- --
Ps. 30 Ps. 34
== ==
Since February 1997, AHMSA has been paying GAN a 2.5% commission on bank
loans and advances from customers where GAN is the guarantor.
As of June 30, 2001, GAN and its subsidiaries owed the Company a total of
US$14.2. On July 1, 2001, Promotora de Vivienda Mexico, S.A. de C.V.,
Inmobiliaria Sabinas, S.A. de C.V., Promogan, S.A. de C.V. and Inmobiliaria
Hispanoamericana, S.A. de C.V. (direct subsidiaries of GAN) signed an agreement
with AHMSA, secured by assets owned by them with a value of US$47.9 (subject to
senior security interests) provided that such GAN subsidiaries would guarantee
the aforementioned GAN debt over a period of 18 months, unless both parties
agreed to an extension. If these subsidiaries fail to make payments pursuant to
this guarantee agreement, AHMSA may seize the assets pledged to secure the
guarantee (subject to senior security interests).
Note 14. Bank debt
Short-term bank debt as of December 31, 2000 and June 30, 2001 was as
follows:
December 31, June 30,
Lender 2000 2001
------ ------------ -----------
(Unaudited)
Senior Notes (Yankee Bond) Ps. 3,952 Ps. 3,867
Morgan.................... 2,110 2,066
Bank of America........... 1,161 1,137
Convertible Notes......... 697 686
Other..................... 8,353 8,182
------ -----
Ps. 16,273 Ps. 15,938
====== ======
F-81
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The financial liabilities that are not under Suspension of Payments at
December 31, 2000 and June 30, 2001 are comprised as follows:
Long-term debt:
December 31, June 30,
Lender 2000 2001
------ ----------- ----------
(Unaudited)
Bancomext........................ Ps. 297 Ps. 236
Arrendadora Bankamerica.......... 122 104
The Capita Corporation........... 30 25
---- ----
449 365
Current portion of long-term debt (241) (273)
---- ----
Ps. 208 Ps. 92
==== ====
On December 20, 1995, AHMSA and Bancomext entered into a loan agreement in
which Bancomext financed AHMSA's export sales for US$40. This agreement
included a collection order that allowed AHMSA to collect the notes receivable
on behalf of Bancomext, subsequently transferring the funds collected. On
May 17, 1999, Bancomext revoked such collection order.
On May 2, 2000, both parties negotiated a payment schedule that allows AHMSA
to reimburse in 24 monthly payments, beginning on June 15, 2000, the funds
collected on behalf of Bancomext, which amounted to US$38.5 plus accrued
interest of US$4.3. The balance bears interest at LIBOR plus 5.4% per annum. As
of September 30, 2001 the Company owes Bancomext a total of US$22.8.
In May and December 2000 the judge that had granted the Suspension of
Payments authorized AHMSA and some of its subsidiaries to comply with the
payments established in the financial lease agreements with Arrendadora
Bankamerica and The Capita Corporation because the equipment leased was
considered absolutely necessary for the Company and its subsidiaries in order
to continue ordinary operations. This was based on Article 139 of the
Bankruptcy and Suspension of Payments Law. As of September 30, 2001 the Company
owes Arrendadora Bankamerica and The Capita Corporation a total of US$14.0.
The Company have operating leases with Caterpillar Financial Services, Co.
for the use of certain heavy-duty machinery and equipment. As of September 30,
2001 the Company owes Caterpillar Financial Services, Co. a total of US$2.3.
Note 15. Financial instruments
The carrying amounts and fair values, converted into millions of U.S.
dollars, of the Company's debt instruments for which such amounts are
substantially the same, are summarized as follows:
December 31, 2000 June 30, 2001
- ------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- -------- ---------- ----------- -----------
(Unaudited) (Unaudited)
Long-term debt US$ 45.8 US$ 45.5 US$ 39.7 US$ 39.8
F-82
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The market value of the long-term bank loan is based on the value of the
discounted flows. The discount rate is estimated using the current rates
offered for debts with similar maturity dates.
On February 8, 2001 the Company negotiated a contract with PEMEX to
guarantee a gas price of 4 U.S. dollars per million BTUs applicable from
January 1, 2001 through December 31, 2003. During the past few months the
average price of gas has been below the negotiated price; however, during all
the hedging period and up to September, the Company has reported a net income
of US$8 on this contract. If the Company decides to cancel the contract, the
cost would represent an expense of approximately US$27. Beginning September
2001, new hedging went into force at a maximum of 3.9 U.S. dollar per million
BTUs and a minimum of 3.1 U.S. dollars per million BTUs for a consumption of
one million of million BTUs per month. However, since the current consumption
is higher than the maximum in the contract, the excess is consumed at market
price (in September - 2.11 U.S. dollars per million BTUs).
Note 16. Other payables
Other current payables consist of the following:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Advances from customers....... Ps. 737 Ps. 453
Severance payments............ 269 216
Reserve for water usage rights 191 212
CFE........................... 7 100
REBASA........................ 77 75
Other......................... 576 902
----- ---
Ps. 1,857 Ps. 1,958
===== =====
As of June 30, 2001, advances from customers included advances from IMSA and
Trinity Industries de Mexico, S.A. de C.V. of Ps.149 and Ps.148, respectively.
There are long-term supply contracts for steel products included in the
consolidated balance sheet under other long-term payables. As of December 31,
2000 and June 30, 2001, the balances were Ps.368 and Ps.255, respectively.
Note 17. Shareholders' equity
As of June 30, 2001, the Company's capital stock is represented by
388,375,502 common shares, without par value, fully subscribed and paid of
which the Company has repurchased 30,503,000.
Dividends paid to individuals or foreign residents are subject to income tax
withholding at an effective rate ranging from 7.5% to 7.7%, depending on the
year in which the earnings were generated. In addition, if earnings for which
no corporate tax has been paid are distributed, the tax must be paid upon
distribution of the dividends.
F-83
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Consequently, the Company must keep a record of earnings subject to each tax
rate. Earnings for which corporate taxes have been paid amount to approximately
Ps.221.
Capital reductions are subject to taxes on the excess of the reduction over
the price-level adjusted paid-in capital, in accordance with the formula
prescribed by the income tax law.
The net income of each company is subject to the legal requirement that 5%
thereof be transferred to a legal reserve each year until such reserve equals
20% of capital stock. This reserve cannot be distributed to shareholders except
as stock dividends. As of June 30, 2001, the legal reserve was Ps.55.
As of June 30, 2001, the reserve for the repurchase of shares of the
Company's common stock was Ps.357. As of the date of these consolidated
financial statements, the Company owns shares equivalent to 7.9% of the
388,375,502 shares outstanding. The last market value of AHMSA's shares,
recorded by the Mexican Stock Exchange before the suspension of the Company's
common stock on that market (see Note 2 b)), was Ps.2.52 Mexican pesos per
share.
Note 18. Tax environment in Mexico
a) Income and asset tax regulations
The Company is subject to income taxes and asset taxes. Income taxes are
computed on an unconsolidated basis taking into consideration the taxable and
deductible effects of inflation, such as depreciation calculated on restated
asset values and the deduction of purchases in place of cost of sales, which
permit the deduction of current costs; taxable income is increased or reduced
by the effects of inflation on certain monetary assets and liabilities through
the inflationary component, which is similar to the gain or loss from monetary
position. The income tax rate is 35%, with the obligation 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 long-term liability.
The asset tax is computed at an annual rate of 1.8% on the average of the
majority of restated assets less certain liabilities. The tax is paid only to
the extent that it exceeds the income taxes of the year. Any required payment
of asset tax is creditable against the excess of income taxes over asset taxes
for the preceding three and following 10 years. As of June 30, 2000 and 2001
the Company obtained tax benefits by using an asset tax credit for the
immediate deduction of fixed assets in the amount of Ps.132 and Ps.162,
respectively.
b) Employee profit sharing
Employee profit sharing is calculated for the Company and each subsidiary at
a rate of 10% of taxable income on an unconsolidated basis, after certain
adjustments, such as the elimination of price-level adjusted depreciation, the
inflationary component and unrealized exchange gains and losses.
F-84
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
c) Tax loss carryforwards, recoverable asset taxes and unused asset tax credits
At December 31, 2000, the Company has tax loss carryforwards for income tax
purposes, recoverable asset taxes and asset tax credits, all of which are
indexed for inflation as of June 30, 2001, and such carryforwards are
calculated based on the results of each individual company, rather than on a
consolidated basis, in the following restated amounts:
Recoverable Unused
Tax Loss Asset Tax Asset Tax
Expiration Carryforwards Carryforwards Credits
---------- ------------- ------------- ---------
2001... Ps. 359 Ps. 194 Ps. 2
2002... 76 66 31
2003... 93 6 394
2004... 3,092 7 --
2005... 70 1 --
2006... 35 1 --
2007... 1,702 -- --
2008... 2,601 -- --
2009... 438 11 --
2010... 726 53 --
----- --- ---
Ps. 9,192 Ps. 339 Ps. 427
===== === ===
The unused asset tax credits arose from the Company's investments in
property, plant and equipment in the state of Coahuila, where AHMSA's principal
steel facilities are located.
The Company's tax loss carryforwards and recoverable asset taxes may only be
applied to offset the Company's stand-alone tax liabilities and not those of
the Company's subsidiaries. Certain subsidiaries of the Company also have tax
loss carryforwards and recoverable asset taxes. Each entity is required to file
a separate tax return.
d) Reconciliation of statutory rate and effective tax rate
In accordance with Mexican GAAP, the following items represent the principal
differences between the income or loss rate computed for financial reporting
purposes and that for tax purposes:
June 30, June 30,
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Pretax income (loss) for financial reporting purposes 35 35
Permanent differences:
Result from monetary position..................... (24) 33
Inflationary component............................ 22 (62)
Nondeductible items............................... 2 (12)
Other............................................. 1 4
- --- - ---
36 (2)
= === = ===
F-85
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 19. Deferred income taxes
The temporary differences that generated deferred income tax assets
(liabilities) are as follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Property, plant and equipment Ps. (6,696) Ps. (6,385)
Inventories.................. (963) (878)
Reserves..................... 238 184
Tax loss carryforwards....... 3,217 3,661
Pension plan................. 258 333
Advances from customers...... 410 274
Deferred charges............. (672) (711)
Investment in shares......... 80 81
Recoverable asset taxes...... 339 129
------ ------
Ps. (3,789) Ps. (3,312)
====== ======
The changes in the balance of the deferred income tax activity for the six
months ended June 30, 2001 are as follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Initial liability................................. (3,860) Ps. (3,789)
Gain on monetary position......................... 318 79
Provision for the year............................ (723) (8)
Deferred income tax recorded in severance payments -- 105
Result of holding nonmonetary assets.............. 476 301
------ ------
Ending balance.................................... (3,789) Ps. (3,312)
====== ======
Note 20. Pension plan cost
The plan assets are held in trust at a bank and consist mainly of short-term
Mexican government securities. The plan assets also include approximately
1,666,000 shares of the Company's stock, which were purchased on the Mexican
Stock Exchange between 1993 and 1999. There are no funding requirements for
employee benefit liabilities under Mexican law. The Company does not have a
formal funding policy and makes its contributions based on annual evaluations
of its taxes, cash flow and other factors.
The Company records the liability for retirement and pension plans and
seniority premiums based on actuarial calculations using the projected unit
credit method. Thus, the Company is providing for the liability, which at
present value, will cover the projected benefits obligation at the estimated
date of retirement of the employees.
F-86
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The liability as of December 31, 2000 and June 30, 2001 is comprised as
follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Projected benefit obligations (PBO).. Ps. 1,463 Ps. 1,203
Plan assets at fair value............ (118) (112)
----- -----
Funded status........................ 1,345 1,091
Unrecognized transition obligation... (274) (225)
Unrecognized prior service cost...... (6) (11)
Unrecognized variances in assumptions (327) 90
----- -----
Net projected benefit obligation..... 738 945
----- -----
Additional liability, net............ 469 39
----- -----
Total liability...................... Ps. 1,207 Ps. 984
===== =====
Since in December 31, 2000 and June 30, 2001 the additional liability was
Ps.168 and Ps.7 more than the unamortized actuarial net gains or losses, it was
necessary to recognize such amounts in the effect of unamortized actuarial
liability account within shareholders' equity. This item originates from the
retirement of personnel and the use of funds, which is compensated by a
reduction in the costs in subsequent years.
Severance payments to involuntarily terminated employees and workers are
charged to expense when the liability is incurred. When an agreement exists
with the union for a future reduction in personnel as a consequence of economic
slowdowns or production cutbacks, a charge to expense is made at the time such
an agreement is reached.
The cost of employee benefits is as follows:
June 30, June 30,
2000 2001
----------- -----------
(Unaudited) (Unaudited)
Service costs........................... Ps. 38 Ps. 43
Financial cost for the period........... 26 28
Amortization of past service costs...... 1 1
Amortization of transition liability.... 11 12
Amortization of variances in assumptions 4 10
-- ---
80 94
Less- Actual return on plan assets...... (3) (3)
-- ---
Net cost for the year................... 77 91
Curtailment............................. -- 170
Settlement.............................. -- 131
-- ---
Net cost................................ Ps. 77 392
== ===
F-87
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The real interest rates utilized in the actuarial calculations were as
follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Investment return rate 6.0% 6.0%
Interest rate......... 4.0% 4.0%
Salary increase rate.. 1.0% 1.0%
The changes in the net projected liability were as follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Beginning balance........ Ps. 657 Ps. 738
Provision for the year... 163 392
Contributions to the fund (6) (1)
Payments................. (76) (184)
----- ----
Ending balance........... 738 945
Additional liability..... 469 39
----- ----
Ending balance........... Ps. 1,207 Ps. 984
===== ====
The changes in the fund balance were as follows:
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Beginning balance...... Ps. 110 Ps. 118
Contributions.......... 6 1
Returns................ 6 3
Recoveries and payments (4) (10)
--- ---
Ending balance......... Ps. 118 Ps. 112
=== ===
The amortization period for unamortized items is as follows:
Remaining Years
---------------
Transition liability.... 11
Past service costs...... 12
Variances in assumptions 11
F-88
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The components of net periodic pension cost under SFAS No.87 for the six
months ended June 30, 2000 and 2001 consist of the following:
June 30, June 30,
2000 2001
----------- ----------
(Unaudited) (Unaudited)
Service cost earned during the period.................... Ps. 37 Ps. 42
Interest on projected benefit obligations................ 23 28
Actual return on plan assets............................. (3) (3)
Net amortization and deferral............................ 17 12
-- --
Net cost under U.S. GAAP................................. 74 79
Net cost under Mexican GAAP.............................. 77 91
-- --
Additional income that must be recognized under U.S. GAAP Ps. 3 Ps. 12
== ==
The pension net liability under SFAS No. 87 as of December 31, 2000 and June
30, 2001 is as follows:
December 31, June 30,
2000 2001
------------ ----------
(Unaudited)
Actuarial value of benefit obligations:
Vested benefit obligation................................ Ps. 575 Ps. 459
Non-vested benefit obligation............................ 730 613
----- -----
Accumulated benefit obligation....................... 1,305 1,072
Additional benefits related to future compensation increases 158 131
----- -----
Projected benefit obligation............................. 1,463 1,203
Plan assets at fair value................................... (118) (112)
----- -----
Unfunded projected benefit obligation.................... 1,345 1,091
Unrecognized prior service costs, net....................... (153) (137)
Unrecognized net loss....................................... (497) (86)
----- -----
Total unfunded accrued pension cost under U.S. GAAP...... 695 868
Unfunded accrued pension cost under Mexican GAAP......... 738 945
----- -----
Net liability that must be recognized under U.S. GAAP.... Ps. (43) Ps. (77)
===== =====
F-89
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
The change in the projected benefit obligation were as follows:
December 31, June 30,
2000 2001
----------- ----------
(Unaudited)
Beginning balance........................................ Ps. 1,304 Ps. 1,463
Service costs............................................ 74 42
Interest costs........................................... 46 28
Actuarial income (loss) curtailment and settlement effect 115 (146)
Benefits paid............................................ (76) (184)
----- -----
Obligation at the end of the year........................ Ps. 1,463 1,203
===== =====
Note 21. Description of differences and reconciliation of Mexican GAAP
information to approximate U.S. GAAP information
The consolidated financial statements of the Company are presented in
accordance with Mexican GAAP. Certain accounting practices applied by the
Company that conform with Mexican GAAP do not conform with accounting
principles generally accepted in the United States ("U.S. GAAP").
The reconciliation to U.S. GAAP does not include the reversal of the
restatement of the financial statements to recognize the effects of inflation
required under Mexican GAAP Bulletin B-10, ''Recognition of the Effects of
Inflation in Financial Information'', as amended. The application of Bulletin
B-10 represents a comprehensive measure of the effects of price level changes
in the inflationary Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes.
The principal differences between Mexican GAAP and U.S. GAAP are described
below together with an explanation, where appropriate, of the method used in
the determination of the adjustments that affect net income (loss) and
shareholders' equity.
a) Cash flow information
The changes in the financial statement balances included in the consolidated
statements of changes in financial position constitute cash flow activity
stated in constant Mexican pesos (including monetary and foreign exchange gains
and losses, which are considered cash gains and losses in the constant currency
financial statements).
In accordance with Mexican GAAP, the reduction in current and long-term debt
due to restatement in constant Mexican pesos and unrealized exchange losses on
net short-term liabilities are presented in the consolidated statement of
changes in financial position as a resource used by financing activities, and
the gain from monetary position is presented as a component of operating
activities. SFAS No. 95, ''Statement of Cash Flows'', does not provide guidance
with respect to inflation-adjusted financial statements.
b) Deferred income taxes and employee profit sharing
The Company follows SFAS No. 109, "Accounting for Income Taxes", for U.S.
GAAP reconciliation purposes, the objective of which is to recognize deferred
tax liabilities and assets for the future tax consequences of all temporary
differences between the book and tax bases of assets and liabilities.
F-90
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
As explained in Note 6 i), beginning in 2000 a change in the accounting
principle became effective for the accounting for income and assets taxes and
employee profit sharing in Mexico. With respect to the Company the new Mexican
accounting standard differs from U.S. GAAP as follows:
. Under Mexican GAAP all deferred taxes are classified as noncurrent, while
under U.S. GAAP the classification is based on the classification of the
related asset or liability.
. Under Mexican GAAP deferred employee profit sharing is calculated
considering only those temporary differences that arise during the period
and which are expected to turn around within a defined period, while under
U.S. GAAP essentially the same method as used for deferred income taxes is
applied.
Additionally, the restatement of imported machinery and equipment and the
capitalization of financing cost under Mexican GAAP have a different treatment
that under U.S. GAAP. As a consequence, the related deferred income tax
presented under Mexican GAAP is different than the effect calculated under U.S.
GAAP.
c) Restatement of machinery and equipment
As explained in Note 6 b), in accordance with Mexican GAAP, imported
machinery and equipment has been restated by applying the inflation rate of the
country of origin, and translating the resulting amount into Mexican pesos at
the period-end exchange rate.
Under U.S. GAAP, any restatement of machinery and equipment, both of
domestic and foreign origin, must be made in constant units of the reporting
currency, the Mexican peso, using the inflation rate of Mexico. Accordingly, a
reconciling item for the difference in methodologies of restating imported
machinery and equipment is included in the GAAP reconciliation of net majority
income (loss) and majority shareholders' equity.
d) Cost of pension plans and other employee benefits
The Company has prepared a study of pension costs under SFAS No. 87,
''Employers' Accounting for Pensions'' (see Note 20). Under Mexican GAAP, the
requirement to record liabilities for employee benefits using actuarial
computations similar to those required by SFAS No. 87 was adopted at the
beginning of 1993.
The Company has no postretirement health care insurance or other benefit
plans, other than the pension plan referred to in Note 20. Therefore, SFAS No.
106, ''Employers' Accounting for Postretirement Benefits Other Than Pensions'',
has no effect on the Company's financial statements. Similarly, the Company
does not provide any of the benefits required to be accrued under SFAS No. 112,
''Employers' Accounting for Postemployment Benefits.''
e) Capitalized interest
Under Mexican GAAP, the Company capitalizes all components of financing and
related costs (see Note 6 j)) on all or a portion of its debt by applying the
weighted average rate of interest on its debt to construction in progress. For
U.S. GAAP purposes the gain from monetary position derived from foreign debt,
and foreign exchange losses, are not capitalizable.
F-91
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
f) Deferred technical assistance fees
Under Mexican GAAP, the Company records as an expense all technical
assistance fees incurred during the year. Under U.S. GAAP, the portion of those
fees directly relating to the improvement and installation of the physical
assets in the plant were capitalized and depreciated as a part of the cost of
the related equipment.
g) Deferred start-up costs
Under Mexican GAAP, start-up costs for new production lines are deferred and
amortized over five years, as described in Note 6 f). Under U.S. GAAP, such
costs must be expensed as incurred.
h) Costs and expenses of SAP
The costs of re-engineering business processes may not be capitalized under
U.S. GAAP because such costs do not qualify as purchased or internally
developed intangible assets. In addition, the costs of the implementation of
any software related to re-engineering processes are not considered part of the
cost of the software and therefore may not be capitalized as "software" costs.
Under Mexican GAAP, however, the costs of both the implementation and the
development of software may be capitalized.
i) Environmental liability
Under U.S. GAAP, the estimated cost of remedial action to correct
environmental deficiencies or violations must be accrued and expensed as they
become known. Under Mexican GAAP, no such liability is recorded for the
estimated cost of remedial action. Under Mexican GAAP, the common practice is
to include the cost of new plant, equipment or modifications related to
correction of environmental deficiencies under fixed assets if these
expenditures result in improved efficiencies. Otherwise, these expenditures are
expensed at the time they are made. See Note 23 k) for a discussion of the
Company's estimated expenditures to comply with the Environmental Agreement and
existing Mexican environmental laws.
j) Minority interest
Under Mexican GAAP, minority interest is a component of net income (loss)
and shareholders' equity. Under U.S. GAAP, minority interest reduces net income
and is not a component of shareholders' equity. Minority interest represents
the portion of ownership of the Company's subsidiaries held by third parties.
k) Comprehensive Income (loss)
The Mexican GAAP presentation of comprehensive income (loss) by the Company
is in compliance with the presentation required by SFAS No. 130 of U.S. GAAP.
The difference is generated by the adjustment to net majority income and result
of non-monetary assets to reconcile to U.S. GAAP.
l) Concentrations of credit risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires certain disclosures not required under Mexican GAAP. The
Company's accounts receivable, which represent receivables from numerous retail
customers, and the Company's cash balances do not represent any significant
concentration of risk to the Company.
F-92
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
m) Financial Instruments
As mentioned in Note 6 a), beginning in January 2001, under Mexican GAAP a
new accounting principle Bulletin C-2 "Financial Instruments", became
effective, which requires the recognition at fair market value in the
consolidated balance sheet of all financial instruments, including derivatives
that have been contracted for a purpose other than hedging business operations
either assets or liabilities. The changes on the quoted market value of certain
of these instruments, are recorded in the income statement of the period.
Under U.S. GAAP a new accounting principle, SFAS No. 133, also became
effective in 2001. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", as amended, establishes accounting and reporting
standards, requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative instrument's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative instrument's gains
and losses to offset related results on the hedged item in the income
statement, to the extent effective, and requires that a company must formally
document, designate, and assess the effectiveness of items that receive hedge
accounting.
As of June 30, 2001 the Company does not have any significant derivative
financial instruments, therefore is not affected by these new bulletins.
Reconciliation of majority net income:
Majority net income (loss), adjusted to take into account the significant
differences between Mexican GAAP and U.S. GAAP, except for the comprehensive
effects of price-level changes, is as follows:
June 30, June 30,
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Net income (loss) of majority interest under Mexican GAAP............. Ps. 992 Ps. (543)
----- -----
Approximate U.S. GAAP adjustments-
Deferred income taxes............................................. 301 35
Deferred employee profit sharing.................................. (29) (74)
Depreciation effect from restatement of machinery and equipment... (214) (277)
Pension plan cost................................................. 3 12
Curtailment and settlement effect................................. -- 24
Capitalized interest.............................................. (23) (27)
Gain from monetary position of U.S. GAAP adjustments.............. 166 93
Amortization of deferred start-up costs........................... 1 2
Environmental liability........................................... (5) 6
Depreciation of environmental investments......................... 7 6
Deferred technical assistance fees................................ (13) (13)
Costs and expenses of SAP......................................... 19 5
Minority interest portion of U.S. GAAP adjustments................ (6) (2)
----- -----
Total adjustments..................................................... 207 (210)
----- -----
Approximate net income (loss) under U.S. GAAP......................... Ps. 1,199 Ps. (753)
===== =====
Basic earnings (loss) per share under U.S. GAAP....................... Ps. 3.35 Ps. (2.10)
===== =====
F-93
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Because Mexican GAAP requires utilization of a comprehensive method for
recognizing the effects of inflation and the financial statements are prepared
on this basis, the applicable effects of inflation on the U.S. GAAP adjustments
are calculated and included in the caption, ''Gain from monetary position
resulting from U.S. GAAP adjustments.'' The adjustments considered to be
monetary items under U.S. GAAP are deferred income taxes, deferred employee
profit sharing and environmental liability.
Statement of comprehensive income:
June 30, June 30,
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Net income (loss) under U.S. GAAP.................... Ps. 1,199 Ps. (753)
Result of holding non-monetary assets under U.S. GAAP (519) (105)
Unamortized actuarial liability effect............... -- 161
----- ----
Comprehensive income (loss) under U.S. GAAP.......... Ps. 680 Ps. (697)
===== ====
Reconciliation of majority shareholders' equity:
The following table shows an adjusted majority shareholder's equity.
Excluding the comprehensive effects of price-level changes, the table
represents the significant differences between Mexican GAAP and U.S. GAAP:
December 31, June 30,
2000 2001
----------- ----------
(Unaudited)
Majority shareholders' equity under Mexican GAAP........ Ps. 8,022 Ps. 6,847
------ ------
Approximate U.S. GAAP adjustments-
Deferred income taxes................................ (1,790) (1,972)
Deferred employee profit sharing..................... (2,526) (2,534)
Restatement of machinery and equipment............... 5,009 5,658
Additional pension liabilities....................... 43 77
Capitalized interest................................. 344 316
Deferred start-up costs.............................. (111) (110)
Deferred technical assistance fees................... 158 145
Environmental liability.............................. (109) (101)
Environmental investment recorded under fixed assets. (106) (92)
Costs and expenses of SAP............................ (294) (289)
Minority interest portion of U.S. GAAP adjustments... 5 3
------ ------
Total adjustments.................................... Ps. 623 Ps. 1,101
------ ------
Approximate shareholders' equity under U.S. GAAP..... Ps. 8,645 Ps. 7,948
====== ======
The gain from monetary position resulting from U.S. GAAP adjustments affects
income (accumulated losses) and the cumulative effect of holding nonmonetary
assets; therefore, the net effect on shareholders' equity is zero.
For purposes of the above reconciliation, capitalized interest is recorded
as an asset separate from fixed assets. Consequently, the annual restatement of
fixed assets has no effect on the reconciliation of capitalized interest
between Mexican GAAP and U.S. GAAP. The reconciliation calculation made above
for capitalized
F-94
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
interest represents the cumulative difference between interest capitalized
under Mexican GAAP and interest capitalized under U.S. GAAP, net of cumulative
amortization. Capitalized interest under Mexican GAAP and U.S. GAAP is
amortized over the useful life of the underlying fixed asset.
Deferred income taxes and employee profit sharing:
The amounts reflected as adjustments to the statement of income under U.S.
GAAP for deferred income taxes and employee profit sharing do not include the
effect of changes in the book value of fixed assets nor inventory for
restatement to replacement value. Since these changes in basis are recorded
directly in equity in the ''cumulative restatement effect'' account, the
related deferred tax and employee profit sharing effects are also recorded
directly in that account.
Under Mexican tax and labor laws, companies are obligated to pay profit
sharing to their employees; this is calculated on a basis similar to income
taxes (see Note 18). To the extent that items of income and expense are
recognized in different periods for financial reporting purposes rather than
for purposes of computing profit sharing, a deferred profit sharing provision
and the related liability have been established for U.S. GAAP purposes. For
purposes of computing the provision for employee profit sharing, the
depreciation expense is based on historical cost; therefore, the basis of fixed
assets for employee profit sharing is significantly lower than the net book
value.
The tax effect of temporary differences that generated deferred tax assets
(liabilities) under SFAS No. 109 as of December 31, 2000 and June 30, 2001 are
as follows:
Deferred Income Taxes
------------------------
December 31, June 30,
2000 2001
------------ ----------
(Unaudited)
Current:
Inventories.................................. Ps. (963) Ps. (878)
Reserves..................................... 213 219
Advances from customers...................... 410 274
------ ------
(340) (385)
------ ------
Non-current:
Property, plant and equipment................ (8,531) (8,452)
Pension plan................................. 243 304
Deferred charges............................. (587) (622)
Investment in shares......................... 80 81
Tax loss carryforwards....................... 3,217 3,661
Recoverable asset taxes...................... 339 129
------ ------
(5,239) (4,899)
------ ------
Total deferred income taxes under U.S. GAAP.... Ps. (5,579) Ps. (5,284)
------ ------
Deferred income taxes under Mexican GAAP........ Ps. (3,789) Ps. (3,312)
------ ------
Additional deferred income taxes under U.S. GAAP Ps. (1,790) Ps. (1,972)
====== ======
F-95
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Deferred Profit Sharing
-----------------------
December 31, June 30,
2000 2001
----------- ----------
(Unaudited)
Current:
Inventories................... Ps. (276) Ps. (251)
Reserves...................... 61 63
Advances from customers....... 117 78
Foreign exchange losses....... 147 152
------ ------
Ps. 49 Ps. 42
Non-current:
Property, plant and equipment. (2,499) (2,508)
Pension plan.................. 69 86
Deferred charges.............. (167) (177)
Investment in shares.......... 22 23
------ ------
(2,575) (2,576)
------ ------
Deferred profit sharing liability Ps. (2,526) Ps. (2,534)
====== ======
Cash flow information:
Under Mexican GAAP, the Company presents a consolidated statement of changes
in financial position. The changes in the financial statement balances
constitute cash flow activity stated in constant currency. (The constant
currency includes monetary and foreign exchanges gains and losses, which are
considered cash gains and losses in the constant Mexican peso financial
statements).
F-96
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
In accordance with Mexican GAAP, the reduction in current and long-term debt
due to restatement in constant Mexican pesos is presented in the statement of
changes in financial position as a resource used in financing activities and
the gain from monetary position is presented as a component of resources
applied to operating activities. SFAS No. 95, however, does not provide
guidance with respect to inflation adjusted financial statements. If the gain
from monetary position and unrealized exchange gains and losses were treated as
non-cash operating expenses, resources generated from or applied to operations
and net cash generated by or applied to financing activities would be as set
forth below. Also, under U.S. GAAP, the gain or loss on sale of property, plant
and equipment is treated as a non-cash operating activity, and the proceeds
from such sales are treated as an investing activity, as set forth below:
June 30, June 30,
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Resources generated by (used in) operations under Mexican GAAP.......... Ps. 1,544 Ps. 848
Gain from monetary position............................................. (1,095) (499)
Unrealized foreign exchange loss (gain)................................. (45) (59)
Loss (gain) on retirements of property, plant and equipment............. -- --
------ ----
Resources generated by operations under U.S. GAAP....................... Ps. 404 Ps. 290
====== ====
Resources used in investing activities under Mexican GAAP............... Ps. (462) Ps. (98)
Proceeds from sales of property, plant and equipment.................... -- --
------ ----
Resources generated by (used in) investing activities under U.S. GAAP... Ps. (462) Ps. (98)
====== ====
Resources generated by (used in) financing activities under Mexican GAAP Ps. (970) Ps. (791)
Gain from monetary position............................................. 1,095 499
Unrealized foreign exchange (loss) gain................................. Ps. 45 Ps. 59
------ ----
Resources generated by (used in) financing activities under U.S. GAAP... Ps. 170 Ps. (233)
====== ====
Fair value of financial instruments:
The fair value of the Company's cash equivalents, short term bank loans (out
of Suspension of Payments) and long term debt (out of Suspension of Payments)
approximate their carrying amounts. Cash equivalents are stated at market value
and the carrying amount of short-term bank loans (out of Suspension of
Payments) approximates fair value because of the relatively short maturities of
the loans. Virtually all of the Company's long-term debt (out of Suspension of
Payments) bears interest at variable rates tied to market indicators.
F-97
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
Statements of changes in shareholders' equity under U.S. GAAP:
December 31, June 30,
2000 2001
----------- ----------
(Unaudited)
Shareholders' equity under U.S. GAAP as of the beginning of the year Ps. 8,370 Ps. 8,645
Cumulative restatement effect....................................... (739) (105)
Income (loss) for the period........................................ 1,111 (753)
Unamortized actuarial liability effect.............................. (97) 161
----- -----
Shareholders' equity under U.S. GAAP as of the end of the year...... Ps. 8,645 Ps. 7,948
===== =====
The cumulative restatement effect as of December 31, 2000 and June 30, 2001
includes Ps.(707) and Ps.(241), respectively, of deferred income taxes and
employee profit sharing recorded directly in shareholders' equity under U.S.
GAAP, and Ps.1,180 and Ps.929 of result from holding non-monetary assets,
related to other U.S. GAAP adjustments in December 31, 2000 and June 30, 2001,
respectively.
Note 22. Mineral reserves (unaudited)
The mining subsidiaries, dedicated to the extraction and sale of iron ore
and non-metallic minerals (coal and limestone), are operated under a concession
agreement for exploration and exploitation with the Mexican Mining Board. These
licenses operate under terms of 25 to 50 years. For the six months ended June
30, 2000 and 2001, the expenses recorded for these rights were Ps.13 and Ps.12,
respectively. As of September 30, 2001, the Company has not made the required
payments of mining rights by Ps.15.
The "reserves" refer to that part of a mineral deposit that could be
economically and legally extracted at the time the estimate is prepared.
a) Iron ore mines
The following table presents estimated proven and probable geological
reserve and mineable reserve data for MINOSA's Hercules Unit, Cerro de Mercado
and La Perla as of December 31, 2000.
Reserves of Iron Ore at December 31, 2000(1)
(millions of tonnes, except percentages)
Crude Ore Concentrate
-------------------------------- --------------------------
Average Average
Iron Grade Tonnes(2) Mineable(3) Weight Recovered Iron Grade
---------- --------- ----------- ------ --------- ----------
Hercules Unit... 44.4% 207.5 89.9 55.1% 49.5 64.17%
Cerro de Mercado 46.2% 12.1 10.7 49.1% 5.2 64.66%
La Perla........ 38.3% 36.6 17.6 36.7% 6.5 62.79%
----- ----- ----
Total........ 256.2 118.2 61.2
===== ===== ====
(1) AHMSA's iron ore reserves at April 30, 1998 have been affirmed and verified
by Midland Standard, Inc., independent consultants, who are experts in
mining, geology and reserve determination. The table shows this information
updated at December 31, 2000.
F-98
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
(2) Proven and probable reserves are reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings or drill
holes; (b) grade and/or quality are computed from the results of detailed
sampling; and (c) the sites for inspection, sampling and measurement are
spaced so closely and the geologic character is sufficiently defined that
size, shape, depth and mineral content of reserves are well established.
(3) Mineable reserves are that part of a proven and probable reserve which can
be removed from its location, less an allowance for that which must be left
in place because of quality, safety, economic, or environmental
constraints. The calculation of what portion of proven and probable
reserves constitute mineable reserves is a function of the mining method,
the equipment utilized and the characteristics of the formation and the ore.
b) Coal mines
The following table presents estimated proven and probable reserves,
together with the estimated amount of such reserves that is expected to be
saleable, for MICARE and MIMOSA as of December 31, 2000.
MIMOSA and MICARE
Reserves of Coal at December 31, 2000(1)
(millions of tonnes)
Mine Proven(2) Probable(3) Saleable(4)
---- --------- ----------- -----------
MIMOSA
Metallurgical Coal.... 96.9 1.8 33.1
Unassigned(5)..... 187.2 0.0 137.8
----- ---- -----
Steam Coal(6)......... 284.1 1.8 170.9
===== ==== =====
MICARE
Steam Coal............ 102.1 1.8 48.4
Unassigned(5)......... 142.9 10.0 104.9
----- ---- -----
245.0 11.8 153.3
===== ==== =====
Total.................... 529.1 13.6 324.2
===== ==== =====
(1) AHMSA's coal reserves at December 31, 2000 have been estimated by AHMSA's
personnel. The terms "Proven" and "Probable" used here are synonymous with
"Measured" and "Indicated" under the U.S. Geological Survey ("USGS") coal
classification system. Unless otherwise indicated, all reserves are
assigned. Assigned reserves are reserves that can be extracted and
processed with the existing equipment at the mine.
(2) Proven reserves are reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; (b)
quality is computed from the results of detailed sampling; and (c) the
sites for inspection, sampling and measurement are spaced to conform with
the requirements of the USGS coal resource classification system as defined
in USGS Circular 891 for Measured Reserves.
(3) Probable reserves are reserves for which quantity and quality are computed
from information similar to that used for proven reserves but the sites for
sampling conform with the requirements of the USGS coal resource
classification system as defined in USGS Circular 891 for Indicated
Reserves.
F-99
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power as
of June 30, 2001 and millions of U.S. dollars (US$)
(4) Saleable reserves are reserves estimated by taking into account all
anticipated losses, such as extraction dilution, coal left in place for
roof support and the coal washing process.
(5) Unassigned reserves are reserves that will require substantial expenditures
for extraction and processing equipment at the mine.
(6) In addition to the metallurgical coal recoverable from MIMOSA's coal
reserves, MIMOSA also produces steam coal as a byproduct of the
metallurgical coal production process.
Note 23. Commitments and contingencies
a) On November 12, 1997, the Secretary of Finance and Public Credit (SHCP)
notified the Company of a tax assessment of Ps.281 (nominal value),
corresponding to the income tax and value-added tax of fiscal year 1994. In
this respect, the Company filed a nullification suit before the Federal Tax
Court, in which the latter resolved in favor of the Company with respect to
penalties, on November 18, 1999. However, in April 2001 the SHCP issued a new
resolution confirming the Ps.281 tax assessment. With respect to new resolution
the Company filed a new nullification suit before the Federal Tax Court.
On May 12, 1999 and November 14, 2000, SHCP notified the Company of a tax
assessment of Ps.118 and Ps.151 (nominal value), corresponding to the income
and value-added taxes of fiscal years 1995 and 1996, respectively. In this
respect, the Company filed a nullification suit before the Federal Tax Court,
which is still in process.
b) As of June 30, 2001, the Company had Ps.126 in assessments from various
governmental agencies.
In management's opinion, the ultimate liability that could result from the
matters mentioned in a) and b) will not have a significant effect on the
Company's financial position or results of operations.
c) During 1999, a request for confirmation of criteria was filed with the SHCP
so as not to accumulate the inflationary gain derived from the debts subject to
insolvency proceedings (debt in Suspension of Payments) within the taxable
income. On May 17, 2000, the Company filed an administrative proceeding before
the Federal Tax Court because the SHCP decided not to proceed with the
confirmation request.
d) Due to the current situation of the steel industry, the Company has not
complied with the minimum export requirements required by the Temporary Import
Program (PITEX). This could cause the authorities to cancel the Company's
program and could require the Company to pay fines of up to US$11,
corresponding to the ad-valorem tax on the imported machinery and equipment
imported under this program.
e) Derived from the lack of liquidity, the Company and some of its
subsidiaries have increased the payment terms to their suppliers. Additionally,
to date they have expired taxes, licenses and social security contributions
pending payment for Ps.265.
f) As of June 30, 2001, AHMSA has granted guarantees to affiliated companies
that amount to Ps.501 (nominal value).
g) As of June 30, 2001, the Company had contract commitments of approximately
US$38 from construction projects necessary to finalize the optimization and
improvement program of the installations.
F-100
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
h) GAN is the owner of 269,228,347 common shares of AHMSA which guarantee
certain liabilities of GAN for US$256.
i) Shares representing 50% of the capital stock of LCD purchased from GAN in
1998 are deposited in a trust guaranteeing a loan that LCD currently has with
PENOLES. The release of the shares is subject to the payment of that loan.
Therefore, there is a contingency that AHMSA may be affected by an amount of
Ps.85, which is the value of the shares, and consequently, the possibility of
the reversal of the original transaction exists.
j) The Company filed a writ of injunction with SHCP against the Federal Water
Rights Law, which became effective in 1997, due to the determination of the
SHCP to exclude the mining processes in its Monclova facilities from the
benefit of the mining tariff of 25% on the cost per cubic meter. As of December
31, 2000, payment had been made considering the benefit of the mining tariff,
estimating a difference to be covered of approximately Ps.223 (nominal value).
This suit is currently being reviewed by the Supreme Court of Justice of
Mexico. It is estimated that if the review petition is not settled in favor of
the Company, the amount due will not significantly differ from the contingency
amount.
k) Contingency for environmental conditions
In November 1994, an agreement for the protection of the environment was
established with the Procuraduria Federal de Proteccion al Ambiente (Federal
Bureau of Environmental Protection or PROFEPA), that established parameters
with which AHMSA must comply with regard to air contamination and residual
waste discharges. In 1998, an extension was granted by the PROFEPA that
included all the other activities that were left inconclusive under the
previous agreement. The termination of the activities established in this
agreement is in December 2003. As part of the agreement and the modernization
program, AHMSA has budgeted to invest US$11 between 2001 and 2004 for
environmental projects.
Under the revised environmental program, the mining subsidiaries were asked
to review the waste discharges generated and their impact on the environment.
As a result of the study, an action plan was proposed to the PROFEPA that
expires in 2000 which, to the date of these financial statements, has been
concluded satisfactorily.
F-101
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
Note 24. Summary financial data by operating segment
The presentation below sets forth certain financial information for the six
months ended June 30, 2000, and 2001 with respect to the Company's two
operating segments: steel and steam coal. Intersegment transactions were not
significant.
June 30, June 30,
2000 2001
----------- ----------
(Unaudited) (Unaudited)
Net Sales
Steel (1)................................... Ps. 5,719 Ps. 3,945
Steam coal.................................. 1,096 1,075
----- -----
Total net sales............................. Ps. 6,815 Ps. 5,020
===== =====
Operating Income
Steel....................................... Ps. 754 Ps. (618)
Steam coal.................................. 253 235
----- -----
Total operating income...................... Ps. 1,007 Ps. (383)
===== =====
Depreciation and Amortization Expense
Steel....................................... Ps. 650 Ps. 629
Steam coal.................................. 94 98
----- -----
Total depreciation and amortization expense. Ps. 744 Ps. 727
===== =====
Capital Expenditures
Steel....................................... Ps. 386 Ps. 165
Steam coal.................................. 69 29
----- -----
Total capital expenditures.................. Ps. 455 Ps. 194
===== =====
F-102
Translation from Unaudited Financial Statements originally issued in Spanish
Altos Hornos de Mexico, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
For the six months ended June 30, 2000 and 2001 and for the year ended December
31, 2000
Expressed in Millions of constant Mexican pesos (Ps.) with purchasing power
as of June 30, 2001 and millions of U.S. dollars (US$)
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
Total Assets
Steel............. Ps. 30,011 Ps. 27,822
Steam coal........ 5,166 5,286
------ ------
Total assets...... Ps. 35,177 Ps. 33,108
====== ======
Total Liabilities
Steel............. Ps. 23,921 Ps. 22,775
Steam coal........ Ps. 3,207 3,469
------ ------
Total liabilities. Ps. 27,128 Ps. 26,244
====== ======
(1) Net sales in the steel segment include other sales, which amount to Ps.63
and Ps.66 in 2000 and 2001.
The investment in shares presented in the consolidated balance sheet as of
December 31, 2000 and June 30, 2001 for Ps.441 and Ps.442, respectively, is
part of the steel segment.
Sales to the Company's two largest steel customers represented 12% and 10%,
and 7% and 6%, of the Company's total steel sales for the six months ended June
30, 2000 and 2001, respectively.
Operating income (loss) in each segment in accordance with U.S. GAAP, if
employee profit sharing, cost of inactive plant, deferred charges and other
items had been treated as operating expenses, would have been as follows:
June 30, June 30,
2000 2001
---------- ----------
(Unaudited) (Unaudited)
Steel..... Ps. 916 Ps. (596)
Steam coal Ps. (117) Ps. (110)
---- ----
Total.. 799 (706)
==== ====
F-103
ANNEX I--DESCRIPTION OF OLD SENIOR NOTES
General
The Old Series A Notes and the Old Series B Notes were issued under an
Indenture (the "Old Senior Note Indenture"), dated as of May 6, 1997, between
AHMSA and The Chase Manhattan Bank, as Trustee (the "Old Senior Note Trustee").
A copy of the Old Senior Note Indenture is available for inspection during
normal business hours at the corporate trust office of the Old Senior Note
Trustee, which is currently located at 450 West 33rd Street, 15th Floor, New
York, New York.
The following statements relating to the Old Senior Notes and the Old Senior
Note Indenture are summaries and are subject to the detailed provisions of the
Old Senior Note Indenture, to which reference is hereby made for a complete
statement of those provisions.
Because this section is a summary, it does not describe every aspect of the
Old Senior Notes. The summary is subject to and qualified in its entirety by
reference to the Trust Indenture Act of 1939 and to all the provisions of the
Old Senior Note Indenture, including definitions of some terms used in the Old
Senior Note Indenture. For example, in this summary, capitalized words signify
defined terms that have been given special meaning in the Indenture. The
meanings for the more important terms are described under "Certain Definitions."
Principal, Maturity and Interest
The Old Senior Series A Notes will mature on April 30, 2002. They are
limited to US$200,000,000 aggregate principal amount. Interest on the Old
Series A Notes accrues at an 11 3/8% rate per annum from the date of issue of
the Old Senior Notes or from the most recent Interest Payment Date to which
interest has been paid or for which interest has been duly provided.
The Old Series B Notes will mature on April 30, 2004. They are limited to
US$225,000,000 aggregate principal amount. Interest on the Series B Notes
accrues at an 11 7/8% rate per annum from the date of issue of the Notes or
from the most recent Interest Payment Date to which interest has been paid or
for which interest has been duly provided.
Interest on the Old Senior Notes is computed on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest on the Old Senior Notes is
payable in arrears in consecutive semiannual installments on each April 30 and
October 30, commencing on October 30, 1997, after withholding for, or on
account of, certain Mexican withholding taxes (see "--Additional Amounts") to
the person in whose name such Old Senior Note is registered, until the
principal amount thereof was been paid or made available for payment. Principal
is payable, and the Old Senior Notes may be presented for registration of
transfer or exchange, at the office or agency of AHMSA maintained for that
purpose in the Borough of Manhattan, the City and State of New York. Until
otherwise designated by AHMSA, such office or agency is the corporate trust
office of the Old Senior Note Trustee, which will act as Paying Agent, Transfer
Agent and Registrar.
The Old Senior Notes do not have the benefit of any sinking fund.
Ranking of the Notes
The Old Senior Notes rank pari passu with all existing and future unsecured,
unsubordinated indebtedness of AHMSA and senior in right of payment to all
existing and future subordinated indebtedness of AHMSA.
Form and Denomination
Old Senior Notes of each Series are represented by one or more permanent
global notes in fully registered form without coupons (each a "Global Note") in
minimum denominations of US$ 1,000 and integral multiples in excess thereof.
Each Global Note is deposited on behalf of the subscribers therefor with the
Old Senior Note Trustee at its corporate trust office as custodian for DTC and
registered in the name of Cede & Co., as nominee of DTC, for credit to the
respective accounts of Euroclear or Charstream (or to such accounts as they may
direct).
I-1
Except in the limited circumstances described below under "--Certificated
Notes," owners of beneficial interests in each Global Note will not be entitled
to receive physical delivery of Old Senior Notes in registered, certificated
(i.e., non-global) form without interest coupons ("Certificated Notes"). The
Old Senior Notes are not issuable in bearer form. Each Global Note may be
transferred, in whole or in part, only to DTC, another nominee of DTC or a
successor of DTC or its nominee.
The Company has agreed to maintain a Paying Agent and Transfer Agent in the
Borough of Manhattan, The City of New York. The Company has initially appointed
the Old Senior Note Trustee at its corporate trust office as principal Paying
Agent, Transfer Agent, Authenticating Agent and Co-Registrar for all News
Notes, The Transfer Agent will keep a register in which, subject to such
reasonable regulations as the Company may prescribe, the Company will provide
for the registration of transfer of the Old Senior Notes.
No service charge will be imposed for any registration of transfer, but the
Company may require payment by a Holder of an Old Senior Note of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
The term "Old Senior Note" as used in this Annex I means any Certificated
Note and any Global Note. Only the person or persons registered as owner of an
Old Senior Note will be deemed the "Holder" of such Old Senior Note under the
Old Senior Note Indenture and only Cede & Co. or its successor-in-interest, as
nominee of DTC, will be deemed the Holder of Old Senior Notes represented by a
Global Note. The Company, the Old Senior Note Trustee and any of their
respective agents may treat the registered Holder of an Old Senior Note as the
absolute owner thereof (whether or not such Old Senior Note may be overdue) for
the purpose of making payment and for all other purposes.
Notice to a Holder under the Old Senior Note Indenture may be given by mail
to the address of the Holder as it appears in any register kept by the Transfer
Agent or Registrar for such purpose.
Global Notes
The statements set forth herein include summaries of certain rules and
operating procedures of DTC, Euroclear and Clearstream, which affect transfers
of interests in the Global Notes.
Except as set forth below, a Global Note may be transferred, in whole or
part, only to DTC, another nominee of DTC or a successor of DTC or its nominee.
Beneficial interests in a Global Note are represented, and transfer of such
beneficial interests is effected, through accounts of financial institutions
acting on behalf of beneficial owners as direct and indirect participants in
DTC. Such beneficial interests are in denominations of US$ 1,000 and integral
multiples thereof. Investors may hold such beneficial interests directly
through DTC, Euroclear or Clearstream, if they are participants in such
systems, or indirectly through organizations that are participants in such
systems. Euroclear and Clearstream hold securities on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective depositories, which in turn hold such
securities in customers' securities accounts in the depositories' names on the
books of DTC. Morgan Guaranty Trust Company of New York, Brussels Office, acts
as depositary for Euroclear, and Citibank, N.A. acts as depositary for
Clearstream.
DTC has advised AHMSA that it is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for movement of securities certificates. DTC's participants include
securities brokers and dealers, banks (including the Old Senior Note Trustee),
trust companies, clearing corporations and certain other organizations, some of
which and/or their representatives own DTC. Access to DTC's book-entry system
is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Persons who are not participants
may beneficially own securities held by DTC only through participants.
I-2
Upon the issuance of the Global Notes, DTC credited, on its book-entry
registration and transfer system, the respective principal amounts of the Old
Senior Notes represented by such Global Notes to the accounts of the
participants.
Persons who are not DTC participants may beneficially own Old Senior Notes
held by DTC only through direct or indirect participants in DTC (including
Euroclear and Clearstream). So long as Cede & Co., as the nominee of DTC, is
registered owner of the Global Notes, Cede & Co. for all purposes will be
considered the sole Holder of the Old Senior Notes represented by the Global
Notes under the Old Senior Note Indenture and under the Old Senior Notes.
Except as provided below, owners of beneficial interests in the Global Notes
will not be entitled to have Old Senior Notes represented thereby registered in
their names, will not receive or be entitled to receive physical delivery of
such Old Senior Notes in definitive form and will not be considered the Holders
thereof under the Old Senior Note Indenture or the Old Senior Notes.
Accordingly, any person owning a beneficial interest in either of the Global
Notes must rely on the procedures of DTC and, to the extent relevant, Euroclear
or Clearstream, and, if such person is not a participant, on the procedures of
the participant through which such person owns its interest, to exercise any
rights of a Holder represented thereby. AHMSA understands that, under existing
industry practice, in the event that any owner of a beneficial interest in a
Global Note desires to take any action that Cede & Co., as the Holder of such
Global Note, is entitled to take, Cede & Co. would authorize the participants
to take such action, and the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
DTC may grant proxies or otherwise authorize DTC participants (or persons
holding beneficial interests in the Old Senior Notes through such DTC
participants) to exercise any rights of a Holder or take any other actions
which a Holder is entitled to take under the Old Senior Note Indenture or the
Old Senior Notes. Under its usual procedures, DTC would mail an omnibus proxy
to AHMSA assigning Cede & Co.'s consenting or voting rights to those DTC
participants to whose accounts the Old Senior Notes are credited on a record
date as soon as possible after such record date. Euroclear or Clearstream, as
the case may be, will take any action permitted to be taken by a Holder under
the Old Senior Note Indenture or the Old Senior Notes on behalf of a Euroclear
participant or Clearstream participant only in accordance with its relevant
rules and procedures and subject to its depositary' s ability to effect such
actions on its behalf through DTC. In order to attend meetings of Holders,
owners of beneficial interests in the Global Notes may obtain a certificate
from DTC, a DTC participant, a Euroclear participant or a Clearstream
participant stating the principal amount of Old Senior Notes beneficially owned
by such person and deposit such certificate with AHMSA at least three business
days prior to the date on which the relevant meeting of Holders is to be held.
AHMSA will then grant the appropriate receipts of such deposit which will allow
such persons to attend the meeting and to exercise their voting rights in
respect of the principal amount of Old Senior Notes beneficially owned by them
as stated in their respective certificate.
The Global Notes will not be exchangeable for Certificated Notes, except as
provided below under "--Certificated Notes."
Certificated Notes
If DTC or any successor depositary is at any time unwilling or unable to
continue as a depositary for a Global Note or ceases to be a "clearing agency"
registered under the Exchange Act and a successor depositary is not appointed
by AHMSA within 90 days after AHMSA receives notice from such depositary to
that effect, or an Event of Default (as defined under "Events of Default") has
occurred and is continuing with respect to the Series A Notes or the Series B
Notes, the Trustee will complete, authenticate and deliver Old Series A Notes
or Old Series B Notes, as the case may be, in certificated, registered form
duly executed by AHMSA and deposited with the Old Senior Note Trustee on the
issue date of the Old Senior Notes in exchange for such Global Note. In
addition, AHMSA may determine that any Global Note will be exchanged for
Certificated Notes.
I-3
A Holder of Certificated Notes may transfer such Certificated Notes by
surrendering them at the office or agency maintained by AHMSA for such purpose
in the Borough of Manhattan, The City of New York, which initially will be the
office of the Old Senior Note Trustee, or at the office of any Transfer Agent.
Neither the Registrar, the Co-Registrar, if any, nor any Transfer Agent is
required to register the transfer or exchange of any Certificated Notes for a
period of 15 days preceding any interest payment date, or register the transfer
or exchange of any Old Senior Notes previously called for redemption.
In the event any Certificated Note is mutilated, defaced, destroyed, lost or
stolen, AHMSA will execute and, upon AHMSA's request, the Old Senior Note
Trustee will authenticate and deliver, a new Certificated Note of like tenor
(including the same date of issuance) and equal principal amount, registered in
the same manner, dated the date of its authentication and bearing interest from
the date to which interest has been paid on such Certificated Note, in exchange
and substitution for such Certificated Note (upon surrender and cancellation
thereof) or in lieu of and substitution for such Certificated Note. In case
such Certificated Note is destroyed, lost or stolen, the applicant for a
substitute Certificated Note must furnish to AHMSA and the Old Senior Note
Trustee such security or indemnity as may be required by them to hold each of
them harmless, and, in every case of destruction, loss or theft of such
Certificated Note the applicant shall also furnish to AHMSA satisfactory
evidence of the destruction, loss or theft of such Certificated Note and of the
ownership thereof. Upon the issuance of any substituted Certificated Note,
AHMSA may require the payment by the registered Old Senior Note Holder thereof
of a sum sufficient to cover fees and expenses connected therewith.
Payment of Principal and Interest
The interest payable on an Old Senior Note, including any Additional Amounts
(as defined under "--Additional Amounts"), other than at maturity is paid to
the Holder in whose name such Old Senior Note is registered at the close of
business on the April 15 or October 15 (whether or not a business day), as the
case may be, next preceding the due date for such payment. Interest payable at
maturity, including any Additional Amounts, is payable to the person to whom
principal is payable.
Payments of principal of and any interest due with respect to the Old Senior
Notes at maturity is made in immediately available funds against surrender of
the Old Senior Notes at the corporate trust office of the Old Senior Note
Trustee or at the offices of one of the other Paying Agents appointed pursuant
to the Old Senior Note Indenture.
Payments of interest on the Global Notes to be paid other than at maturity
are made to DTC or its nominee as the registered owner thereof in immediately
available funds. See "--Global Notes." Upon receipt of any payment of principal
of or interest on a Global Note, DTC credits DTC participants' accounts with
payment in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note as shown on the records of DTC.
Payments by DTC participants to owners of beneficial interests in such Global
Note held through such participants are the responsibility of such
participants, as is the case with securities held for the accounts of customers
registered in "street name." Distributions with respect to Old Senior Notes
held through Euroclear or Clearstream are credited to the cash accounts of
Euroclear participants or Clearstream participants in accordance with the
relevant system's rules and procedures, to the extent received by its
depositary. Neither AHMSA nor the Old Senior Note Trustee has any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
If any Old Senior Notes have been issued in other than global form, payments
of interest on such Old Senior Notes to be paid other than at maturity are made
by check to the Holder thereof at such Holder's address appearing on the
Register. Payments of any interest on the Old Senior Notes may also be made, in
the case of a Holder of at least US$ 1,000,000 aggregate principal amount of
Old Senior Notes, by wire transfer to a U.S. dollar account maintained by the
payee with a bank in the United States; provided that such Holder elects
payment by wire transfer by giving written notice to the Old Senior Note
Trustee or a Paying Agent to such effect designating such account no later than
15 days immediately preceding the relevant due date for payment (or such other
date as the Old Senior Note Trustee may accept in its discretion).
I-4
Any monies paid by AHMSA to the Old Senior Note Trustee for the payment of
the principal of or any interest or Additional Amounts on any Old Senior Notes
and remaining unclaimed at the end of two years after such principal, interest
or Additional Amounts become due and payable will be repaid to AHMSA upon its
written request, and upon such repayment all liability of the Old Senior Note
Trustee with respect thereto will cease.
If the due date for payment of principal, interest or Additional Amounts in
respect of any Old Senior Note is not a business day, the Holder thereof is not
entitled to payment of the amount due until the next succeeding business day
and is not entitled to any further interest or other payment in respect of any
such delay.
Additional Amounts
All payments made by AHMSA under or with respect to the Notes are made after
withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed, levied,
collected, withheld or assessed by or on behalf of Mexico, any subdivision
thereof or any authority therein or thereof having power to tax ("Mexican
Taxes"). AHMSA pays such additional amounts ("Additional Amounts") in respect
of Mexican Taxes as will result in receipt by the Holders of the Old Senior
Notes of such amounts as would have been received by them had no such
withholding or deduction been required, except that no such Additional Amounts
are payable for or on account of:
(1) any Mexican Taxes, to the extent that such Mexican Taxes would not
have been imposed but for the fact that such Holder or beneficial owner was
(A) a resident or citizen of Mexico, or maintained a permanent
establishment or fixed base in Mexico or any of its respective
territories or any political subdivision thereof to which the income in
respect of such Old Senior Note was attributable or otherwise had some
connection with Mexico other than the mere ownership of, or receipt of
any payment in respect of, such Old Senior Note; or
(B) presented such Old Senior Note (where presentation is required)
more than 30 days after the date on which the payment in respect of such
Old Senior Note first became due and payable or provided for, whichever
is later, except to the extent that the Holder or beneficial owner of
such Old Senior Note would have been entitled to Additional Amounts in
respect of such Mexican Taxes on presenting such Old Senior Note for
payment on any date during such 30-day period;
(2) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, duty, assessment or other governmental charge;
(3) any tax, duty, assessment or other governmental charge which is only
payable otherwise than by withholding or deduction from payments in respect
of the Old Senior Notes;
(4) any Mexican Taxes that would not have been imposed but for the
failure of the Holder or beneficial owner of such Old Senior Note to comply
with any certification, identification, information, documentation or other
reporting requirement if (i) such compliance is required by law, regulation,
administrative practice or an applicable treaty as a precondition to
exemption from, or reduction in the rate of, deduction or withholding of,
Mexican Taxes and (ii) at least 60 days prior to the first interest payment
date with respect to which AHMSA applies this clause (4), AHMSA will have
notified the Holders of the Old Senior Notes that such Holders or beneficial
owners of the Old Senior Notes will be required to comply with such
requirement;
(5) any Mexican Taxes imposed at a rate in excess of the 4.9% reduced
rate in effect on the date hereof and uniformly applicable in respect of
payments made by AHMSA to all Holders or beneficial owner eligible for the
benefits of a treaty for the avoidance of double taxation to which Mexico is
a party without regard to the particular circumstances of such Holders or
beneficial owners (provided that, upon any subsequent increase in the rate
of Mexican Taxes that would be applicable to payments to all such Holders
I-5
or beneficial owners without regard to their particular circumstances except
for the eligibility under any such treaty, such increased rate will be
substituted for the 4.9% rate for purposes of this clause (5)), but only to
the extent that (i) the reasonable request of AHMSA (subject to the
conditions set forth below), information, documentation or other evidence
(not described in paragraph (4) above) concerning whether such Holder or
beneficial owner is eligible for benefits under a treaty for the avoidance
of double taxation to which Mexico is a party if necessary to determine the
appropriate rate of deduction or withholding of Mexican Taxes under such
treaty or under any law, and (ii) at least 60 days prior to the first
payment date with respect to which AHMSA will make such reasonable request,
AHMSA will have notified the Holders of the Old Senior Notes, in writing,
that such Holders or beneficial owners of the Old Senior Notes will be
required to provide such information, documentation or other evidence; or
(6) any combination of items (1), (2), (3), (4) and (5);
nor are Additional Amounts paid with respect to any payment in respect of the
Old Senior Notes to any Holder who is a fiduciary or partnership or other than
the sole beneficial owner of such payment to the extent such payment would be
required by the laws of Mexico (or any political subdivision or taxing
authority thereof or therein) to be included in the income for tax purposes of
a beneficiary or settlor with respect to such fiduciary or partner in such
partnership or a beneficial owner who would not have been entitled to such
Additional Amounts had it been the Holder of the Old Senior Note.
Notwithstanding the foregoing, the limitations on AHMSA's obligation to pay
Additional Amounts set forth in clauses (4) and (5) above will not apply if:
(a) the provision of information, documentation or other evidence
described in such clauses (4) and (5) would be materially more onerous, in
form, in procedure or in the substance of information disclosed, to a Holder
or beneficial owner of an Old Senior Note (taking into account any relevant
differences between U.S. and Mexican law, regulation or administrative
practice) than comparable information or other reporting requirements
imposed under U.S. tax law, regulation and administrative practice (such as
IRS Forms 1001, W-8 and W-9); or
(b) Rule 3.32.11 issued by the Secretaria de Hacienda y Credito Publico
(Ministry of Finance and Public Credit) on March 21, 1997 or a substantially
similar successor of such rule is in effect, unless the provision of the
information, documentation or other evidence described in clauses (4) and
(5) is expressly required by statute, regulation, ruling or administrative
practice in order to apply Rule 3.32.11 (or a substantially similar
successor of such rule), AHMSA cannot obtain such information, documentation
or other evidence on its own through reasonable diligence and AHMSA
otherwise would meet the requirements for application of Rule 3.32.11 (or
such successor of such rule). In addition, such clauses (4) and (5) will not
be construed to require that a non-Mexican pension or retirement fund or a
non-Mexican financial institution or any other Holder or beneficial owner of
a Note register with the Ministry of Finance and Public Credit for the
purpose of establishing eligibility for an exemption from or reduction of
Mexican withholding tax. Furthermore, compliance with any such requirements
under clause (4) or requests under clause (5) will not require the
disclosure to AHMSA, any Paying Agent or any governmental authority of the
nationality, residence or identity of the Holder or beneficial owner of a
Note that is not eligible for any exemption from withholding or deduction of
all or any part of such Mexican Taxes (other than such compliance that can
be satisfied by a custodian, nominee or other agent of such Holder or
beneficial owner certifying to the effect that such Holder or beneficial
owner is not eligible for any exemption from withholding or deduction of all
or any part of such Mexican Taxes, provided that payment by such custodian,
nominee or agent to such Holder or beneficial owner is not otherwise subject
to any such requirement).
AHMSA will provide the Old Senior Note Trustee with documentation evidencing
the payment of Mexican Taxes in respect of which AHMSA has paid any Additional
Amounts. Copies of such documentation will be made available to any Holder of a
Old Senior Note and any relevant Paying Agent upon request therefor.
I-6
Any reference herein, in the Old Senior Note Indenture or in the Old Senior
Notes to principal, premium, interest, redemption price, repurchase price or
any other amount payable under or with respect to the Old Senior Notes will be
deemed also to refer to any Additional Amounts which may be payable under the
undertakings referred to in this provision.
In the event that Additional Amounts actually paid with respect to the Old
Senior Notes are based on rates of deduction or withholding of taxes, duties,
assessments or governmental charges in excess of the appropriate rate
applicable to the Holder or beneficial owner of an Old Senior Note and, as a
result thereof, such Holder or beneficial owner is entitled to make a claim for
a refund or credit of such excess, then such Holder or beneficial owner shall,
by accepting the Old Senior Notes, be deemed to have assigned and transferred
all right, title and interest to any such claim for a refund or credit of such
excess to AHMSA. By making such assignment, however, the Holder or beneficial
owner makes no representation or warranty that AHMSA will be entitled to
receive such claim for a refund or credit and such Holder or beneficial owner
incurs no other obligation with respect thereto, including, without limitation,
no obligation to execute any other instrument of transfer or to incur any
expense in connection with such transfer.
As of the date of this Prospectus and Consent Solicitation, AHMSA is
obligated, as a result of the Mexican withholding tax of 4.9% (provided that
the requirements set forth herein are complied with) to pay Additional Amounts
to Holders of the Old Senior Notes with respect to all interest payments made
on the Old Senior Notes.
Redemption at the Option of AHMSA
Optional Redemption
The Old Series A Notes and the Old Series B Notes are not redeemable at the
option of AHMSA except in the event of certain changes in Mexican law (as
described below under "Tax Redemption") or in the event of certain issuances
and sales of Common Stock by AHMSA (as described below under "--Public Equity
Redemption").
Tax Redemption
If, as a result of any amendment to, or change in, the laws (or any
regulation or rulings thereunder) of Mexico or any political subdivision or
taxing authority thereof or therein affecting taxation or any amendment to or
change in an official interpretation, administration or application of such
laws, regulations or rulings (including a holding by a court of competent
jurisdiction), which amendment or change of such laws, regulations or rulings
becomes effective on or after the date on which the Old Senior Notes were
originally issued, AHMSA is obligated, after making any and all reasonable
endeavors to avoid such requirement, to pay Additional Amounts in respect of
the Old Series A Notes or the Old Series B Notes in excess of the Additional
Amounts that AHMSA is obligated to pay if payments made on the Notes of such
series were subject to withholding or deduction of Mexican Taxes at the rate of
15 percent, then, at AHMSA's option, the Notes of such series may be redeemed
in whole, but not in part, at any time, on giving not less than 30 nor more
than 60 days' notice mailed to each Holder of Old Senior Notes of such series
at such Holder's address appearing in the applicable Old Senior Note register
at a redemption price equal to 100% of their principal amount together with
accrued and unpaid interest thereon up to but not including the date fixed for
redemption and any Additional Amounts which would otherwise be payable with
respect thereto; provided, however, that
(i) no such notice of redemption may be given earlier than 90 days prior
to the earliest date on which AHMSA would be obligated to pay such
Additional Amounts were a payment on the Notes of such series then due; and
(ii) at the time such notice of redemption is given, such obligation to
pay such Additional Amounts remains in effect.
I-7
Prior to the publication of any notice of redemption pursuant to this
provision, AHMSA will deliver to the Trustee
(i) a certificate signed by a duly authorized officer of AHMSA stating
that AHMSA is entitled to effect such redemption and setting forth a
statement of facts showing that the conditions precedent of the right of
AHMSA so to redeem have occurred; and
(ii) an opinion of independent Mexican legal counsel of recognized
standing to the effect that AHMSA has or will become obligated to pay such
Additional Amounts as a result of such change or amendment. Such notice,
once delivered by AHMSA to the Trustee, will be irrevocable.
Public Equity Redemption
At any time prior to April 30, 2000, AHMSA was permitted to may redeem up to
one-third of the aggregate principal amount of the Old Series A Notes
originally issued and up to one-third of the aggregate principal amount of the
Old Series B Notes originally issued with the Net Cash Proceeds of one or more
Common Stock Offerings, provided, that
(i) in the case of a redemption of Old Series A Notes, not less than
US$130.0 million aggregate principal amount of the Old Series A Notes would
remain outstanding after giving effect to all such redemptions; and
(ii) in the case of a redemption of Old Series B Notes, not less than
US$150.0 million aggregate principal amount of the Old Series B Notes would
remain outstanding after giving effect to all such redemptions.
Any such redemption must occur within 90 days after the closing of any such
Common Stock Offering (and upon not less than 30 nor more than 60 days' notice
to each Holder). The redemption price in the case of the Old Series A Notes
will be equal to 11 3/8 % of the principal amount thereof together with accrued
and unpaid interest thereon up to but not including the date fixed for
redemption (subject to the right of Holders on relevant record dates to receive
interest due on the relevant interest payment date) and any Additional Amounts
which would otherwise be payable with respect thereto. The redemption price in
the case of the Old Series B Notes will be equal to 11 7/8 % of the principal
amount thereof together with accrued and unpaid interest thereon up to but not
including the date fixed for redemption (subject to the right of Holders on
relevant record dates to receive interest due on the relevant interest payment
date) and any Additional Amounts which would otherwise be payable with respect
thereto. Any such redemption of Old Series A Notes will be made on a pro rata
basis among all Holders of the Old Series A Notes and any such redemption of
Old Series B Notes will be made on a pro rata basis among all Holders of the
Old Series B Notes.
Repurchase at the Option of the Holders
In the event of any Change in Control (as defined below) occurring prior to
the maturity of the Old Series A Notes or the Old Series B Notes, as the case
may be, each Holder of Old Senior Notes has the right, at the Holder's option,
to require AHMSA to repurchase all or any part of the Notes held by such Holder
(provided that the principal amount of the Notes tendered to AHMSA by such
Holder for repurchase is US$ 1,000 or an integral multiple thereof) on the date
60 days after the date of the occurrence of such Change in Control (the
"Repurchase Date") at a repurchase price equal to the sum of
(i) 100% of the principal amount of the Old Senior Notes being
repurchased;
(ii) the accrued and unpaid interest thereon to the Repurchase Date and;
(iii) any Additional Amounts which would otherwise be payable.
I-8
Within seven business days after the occurrence of a Change in Control,
AHMSA will mail to the Old Senior Note Trustee and to all Holders at their
addresses on the relevant Old Senior Note register (and to beneficial owners as
required by applicable law) a notice regarding the Change in Control stating
among other things that
(i) the last date on which the repurchase right may be exercised;
(ii) the repurchase price;
(iii) the Repurchase Date;
(iv) the name and address of the Old Senior Note Trustee and of any other
office or agency maintained for the purpose of the surrender of Old Senior
Notes for redemption; and
(v) the procedures that Holders must follow to exercise their rights
hereunder.
To exercise this right, the Holder must deliver a written notice (a "Holder
Repurchase Notice") to the Old Senior Note Trustee or to any other office or
agency maintained for the purpose of receiving Holder Repurchase Notices prior
to the close of business on the Repurchase Date. The Holder Repurchase Notice
must state
(i) the portion of the principal amount of Old Series A Notes or Old
Series B Notes, as the case may be, to be repurchased (which must be US$
1,000 or an integral multiple thereof); and
(ii) that such Old Senior Notes are to be repurchased by AHMSA on the
Repurchase Date pursuant to the applicable provisions of the Old Senior
Notes.
Any Holder Repurchase Notice may be withdrawn by the Holder by a written
notice of withdrawal delivered to the Old Senior Note Trustee or to any other
office or agency maintained for that purpose on or prior to the Repurchase
Date. The notice of withdrawal will state the principal amount as to which the
withdrawal notice relates and the principal amount, if any, that remains
subject to the original Holder Repurchase Notice.
Payment of the repurchase price for an Old Senior Note for which a Holder
Repurchase Notice has been delivered and not withdrawn is conditioned upon
delivery of the Old Senior Note to the Old Senior Note Trustee or to any other
office or agency maintained for that purpose, at any time (whether prior to, on
or after the Repurchase Date) after delivery of the Holder Repurchase Notice.
Payment of the repurchase price for the Old Senior Note will be made promptly
following the later of the Repurchase Date and the time of delivery of the Old
Senior Note. If the Old Senior Note Trustee holds, in accordance with the
applicable Old Senior Note Indenture, money sufficient to pay the repurchase
price of the Old Senior Note on the Repurchase Date, then, on and after the
Repurchase Date, the Old Senior Note will cease to be outstanding and interest
thereon will cease to accrue, whether or not the Old Senior Note is delivered
to the Old Senior Note Trustee or to any other office or agency maintained for
that purpose, and all other rights of the Holder will terminate (other than the
right to receive the repurchase price upon delivery of the Old Senior Note).
A "Change in Control" shall be deemed to have occurred if at such time after
the issue date of the Old Senior Notes:
(a) The Permitted Holders, in the aggregate, shall cease to have voting,
disposition and economic rights in respect of at least 30% of the
outstanding Capital Stock of AHMSA; or
(b) any person (including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act), other than a Permitted Holder,
together with any Affiliates or Related Persons of such person, shall have
voting, disposition or economic rights in respect of a greater percentage of
the outstanding Capital Stock of AHMSA than the percentage of such Capital
Stock in respect of which the Permitted Holders, in the aggregate, have
voting, disposition and economic rights; or
(c) any person (other than a Permitted Holder), together with any
Affiliates or Related Persons of such person, shall succeed in having a
sufficient number of its nominees elected to the Board of Directors of AHMSA
such that the number of such nominees exceeds the number of nominees of the
Permitted Holders elected to the Board of Directors of AHMSA.
I-9
For purposes of calculating the percentage interest of outstanding Capital
Stock held indirectly by any person, such person's percentage interest of the
Capital Stock of AHMSA shall be determined as the product of such person's
percentage interest in any intermediate entity and such intermediate entity's
percentage interest in AHMSA (or, in the case of multiple intermediate
entities, the product of each such intermediate entity's percentage ownership
interest in the other intermediate entities in the chain of ownership and in
AHMSA).
For the purpose of clauses (b) and (c) only, "Permitted Holder" includes any
entity directly controlled by a Permitted Holder within the meaning of clauses
(a), (b) and (c) above.
For purposes of this definition, a pledge of the Capital Stock of AHMSA
shall be deemed not to impair the disposition rights of any person with respect
to such Capital Stock.
Certain Covenants
Limitation on Incurrence of Indebtedness
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
directly or indirectly, create, incur, assume, issue, guarantee or in any
manner become directly or indirectly liable for or with respect to the payment
of (collectively, to "incur") any Indebtedness, except for Permitted
Indebtedness; provided that AHMSA and any of its Consolidated Subsidiaries will
be permitted to incur Indebtedness if, at the time of such incurrence and after
giving pro forma effect to the incurrence of such Indebtedness, the
Consolidated Debt Service Coverage Ratio of AHMSA for the immediately preceding
four fiscal quarters for which financial statements are available, taken as one
period, is greater than 2.25 to 1.0.
"Permitted Indebtedness" means the following:
(a) Indebtedness of AHMSA and its Consolidated Subsidiaries outstanding
on the date of the Old Senior Note Indenture after giving effect to the
application of the net proceeds of the Old Senior Notes;
(b) the Old Senior Notes;
(c) Indebtedness of AHMSA or any of its Consolidated Subsidiaries owed to
AHMSA or any of its Consolidated Subsidiaries, provided that any such
Indebtedness of AHMSA owed to a Consolidated Subsidiary ranks junior in
right of payment to the Notes;
(d) Acquired Indebtedness of AHMSA or any of its Consolidated
Subsidiaries, provided that immediately after giving effect to the
incurrence of such Acquired Indebtedness and the application of the proceeds
therefrom, AHMSA would be able to incur at least US$ 1.00 of Indebtedness
(other than Permitted Indebtedness) under the Old Senior Note Indenture;
(e) Indebtedness of AHMSA or any of its Consolidated Subsidiaries under
Guarantees of Indebtedness otherwise permitted to be incurred under the Old
Senior Note Indenture;
(f) Indebtedness of AHMSA or any of its Consolidated Subsidiaries to the
extent it is issued in exchange for, or the proceeds of which are used to
repay, refund, refinance, defease, discharge, or otherwise retire for value,
Indebtedness permitted under the first paragraph under "--Limitation on
Incurrence of Indebtedness" or under clause (a), (b) or (d) above or clause
(g) below ("Refinancing Indebtedness") in a principal amount not to exceed
the principal amount of the Indebtedness so repaid, refunded, refinanced,
defeased, discharged or otherwise retired (or if such Refinancing
Indebtedness provides for an amount less than the stated principal amount
thereof to be due and payable upon a declaration of acceleration thereof,
with an original issue amount not to exceed such principal amount) and with
an Average Life and stated maturity equal to or greater than that of the
Indebtedness so repaid, refunded, refinanced, defeased, discharged or
otherwise retired, plus customary fees, expenses and costs related to the
incurrence of such Refinancing Indebtedness; provided that
I-10
(1) Refinancing Indebtedness of any Consolidated Subsidiary of AHMSA
will not be exchanged for or used to repay, refund, refinance, defease,
discharge, or otherwise retire for value outstanding Indebtedness of
AHMSA; and
(2) with respect to any Refinancing Indebtedness exchanged for or
used to repay, refund, refinance, defease, discharge, or otherwise
retire for value Indebtedness which ranks junior in right of payment to
the Notes, such Refinancing Indebtedness will be subordinated in right
of payment at least to the same extent as the Indebtedness to be
refunded or refinanced would be were such Indebtedness to remain
outstanding;
(g) Capital Expenditure Indebtedness of AHMSA or any of its Consolidated
Subsidiaries;
(h) Indebtedness of AHMSA or any of its Consolidated Subsidiaries under
Currency Agreements, Interest Rate Agreements and Commodity Price
Agreements, provided that such agreements
(1) are designed solely to protect AHMSA or its Consolidated
Subsidiaries against fluctuations in foreign currency exchange rates,
interest rates or commodity prices, as the case may be, and are not for
purposes of speculation; and
(2) do not increase the Indebtedness of the obligor under such
agreements outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates, interest rates or
commodity prices, as the case may be, or by reason of fees, indemnities
and compensation payable thereunder;
(i) Indebtedness of AHMSA or any of its Consolidated Subsidiaries
pursuant to Permitted Working Capital Facilities in an aggregate amount not
exceeding the greater of
(i) the sum of
(A) 75% of the net book value (after allowance for doubtful
accounts) of the Trade Accounts Receivable of AHMSA and its
Consolidated Subsidiaries (other than Trade Accounts Receivable of
AHMSA and its Consolidated Subsidiaries pledged under Indebtedness
outstanding other than pursuant to a Permitted Working Capital
Facility); plus
(B) 30% of the net book value (after applicable write-downs for
obsolescence, quality problems and the like) of Inventory of AHMSA
and its Consolidated Subsidiaries (other than Inventory of AHMSA and
its Consolidated Subsidiaries pledged under Indebtedness outstanding
other than pursuant to a Permitted Working Capital Facility), in each
case (A) and (B) calculated on a consolidated basis in accordance
with Mexican GAAP; and
(ii) US$ 100 million at any time outstanding; and
(j) Indebtedness of AHMSA or any of its Consolidated Subsidiaries
incurred to finance the acquisition of an ownership interest in the Apasco
Joint Venture in an aggregate amount not to exceed US$ 30 million.
Notwithstanding the foregoing, AHMSA will not permit its Consolidated
Subsidiaries to incur Indebtedness (including Permitted Indebtedness (other
than under subparagraphs (c), (d) and (h) of such definition)) if, after giving
effect to such incurrence and any application of the proceeds thereof to repay
Indebtedness, the aggregate outstanding amount of such Indebtedness would
exceed 20% of the total amount of Indebtedness of AHMSA and its Consolidated
Subsidiaries then outstanding on a consolidated basis.
Limitation on the Issuance of Capital Stock of Subsidiaries
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
directly or indirectly, issue or sell any shares of Capital Stock of any
Consolidated Subsidiary of AHMSA (including options, warrants or other rights
to purchase shares of such Capital Stock) other than to AHMSA or a Wholly Owned
Subsidiary of AHMSA, provided that, in respect of Capital Stock other than
Preferred Stock, AHMSA and its Consolidated Subsidiaries may issue or sell
shares of Capital Stock of any Consolidated Subsidiary of AHMSA if the entire
proceeds from such issuance or sale are applied as set forth under
"--Limitation on Certain Asset Dispositions" below.
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Limitation on Restricted Payments
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
make, directly or indirectly, any Restricted Payment unless:
(a) no Event of Default or event or condition that with the lapse of
time, giving of notice or both would become an Event of Default has occurred
and is continuing at the time of or after giving effect to such Restricted
Payment;
(b) immediately after giving effect to such Restricted Payment, AHMSA
would be able to incur at least US$ 1.00 of Indebtedness (other than
Permitted Indebtedness) pursuant to the first paragraph under " Limitation
on Incurrence of Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
April 29, 1997 would not exceed an amount equal to the sum of
(i) 50% of the Consolidated Net Income (or, in the event such
aggregate Consolidated Net Income is a loss, minus 100% of such loss) of
AHMSA and its Consolidated Subsidiaries accrued on a cumulative basis
during the period (treated as a single accounting period) commencing on
the first day of the quarter in which the Notes are issued and ending on
the last day of AHMSA's fiscal quarter immediately preceding the date of
such proposed Restricted Payment for which financial statements are
available, plus
(ii) 100% of the aggregate Net Cash Proceeds received by AHMSA on or
after April 29, 1997 from cash contributions of capital or the issuance
or sale (other than to a Subsidiary of AHMSA) of Capital Stock of AHMSA
(other than Redeemable Stock and any Capital Stock repurchased by AHMSA
under subparagraph (3) of the third succeeding paragraph below) or
warrants, options or rights to purchase shares of Capital Stock of AHMSA
(other than Redeemable Stock), plus
(iii) 100% of the aggregate Net Cash Proceeds received by AHMSA on or
after April 29, 1997 from the issuance and sale (other than to a
Subsidiary of AHMSA) of debt securities that have been converted into or
exchanged for Capital Stock of AHMSA (other than Redeemable Stock), to
the extent such securities were originally sold for cash, together with
100% of the aggregate Net Cash Proceeds received by AHMSA at the time of
such conversion or exchange, plus
(iv) to the extent not otherwise included in Consolidated Net Income
of AHMSA and its Consolidated Subsidiaries, an amount equal to the net
reduction in Investments in any person (other than reductions in
Permitted Investments) made by AHMSA on or after April 29, 1997
resulting from the payment in cash or in property of distributions
accounted for as returns of capital, repayment of loans or advances or
other transfers of assets, in each case to AHMSA or any of its
Consolidated Subsidiaries from such person, plus
(v) US$ 5 million.
As used herein, "Restricted Payment" means any of the following:
(a) the declaration or payment of any dividend or any other distribution on
Capital Stock of AHMSA or any of its Consolidated Subsidiaries or any payment
made to the direct or indirect holders (in their capacities as such) of Capital
Stock of AHMSA or any of its Consolidated Subsidiaries, other than
(1) dividends or distributions payable solely in Capital Stock (other
than Redeemable Stock) of AHMSA; or
(2) dividends or distributions on the Common Stock of any Consolidated
Subsidiary of AHMSA of which AHMSA receives at least a pro rata share;
(b) the making of any principal payment on, or the repurchase, redemption,
defeasance or other acquisition or retirement for value of, prior to any
scheduled maturity, scheduled principal payment or scheduled sinking fund
payment, any indebtedness of AHMSA or any of its Consolidated Subsidiaries that
ranks junior in right of payment to the Notes except as permitted under clause
(2) of the proviso in paragraph (f) of the definition of "Permitted
Indebtedness;"
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(c) the repayment, redemption or other acquisition or retirement for value
of any Capital Stock of AHMSA or any of its Consolidated Subsidiaries, other
than any such repayment, redemption, acquisition or retirement of
(i) any such Capital Stock for value represented by the Capital Stock of
AHMSA (excluding Redeemable Stock);
(ii) any such Capital Stock held by AHMSA or any of its Consolidated
Subsidiaries; or
(iii) any Capital Stock of a Consolidated Subsidiary of AHMSA held by any
person that is not an Affiliate of AHMSA; or
(d) the making of any Investment (other than a Permitted Investment).
For purposes of determining the amount expended for Restricted Payments,
cash distributed will be valued at the face amount thereof and property other
than cash will be valued at its Fair Market Value.
The Indenture does not prohibit, so long as (with respect to clauses (ii),
(iii), (v), (vii) and (ix) below) no Event of Default or event or condition
that with the lapse of time, giving of notice or both would become an Event of
Default has occurred and is continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration the payment of such
dividend would have been permitted on the date of declaration thereof (for
purposes of the calculation required by subparagraph (c) of the first
paragraph under "--Limitation on Restricted Payments," such payment will be
deemed to have been paid on such date of declaration);
(ii) the purchase, redemption, acquisition or retirement for value of any
shares of Capital Stock of AHMSA solely out of the Net Cash Proceeds (less
any amounts of such Net Cash Proceeds applied pursuant to clause (iv) below)
of a substantially concurrent issuance and sale (other than to a Subsidiary
of AHMSA) of Capital Stock of AHMSA (other than Redeemable Stock);
(iii) the purchase by AHMSA of shares of its Capital Stock pursuant to
the terms of AHMSA's share repurchase program as in effect on the date of
the Indenture;
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of AHMSA or any of its Consolidated
Subsidiaries that ranks junior in right of payment to the Notes in exchange
for, or out of the Net Cash Proceeds (less any amounts of such Net Cash
Proceeds applied pursuant to clause (ii) above) of the substantially
concurrent issuance and sale (other than to a Subsidiary of AHMSA) of
Capital Stock of AHMSA (other than Redeemable Stock);
(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of AHMSA or any of its Consolidated
Subsidiaries that ranks junior in right of payment to the Notes in exchange
for, or out of the Net Cash Proceeds of, the substantially concurrent sale
(other than from or to a Subsidiary) of Indebtedness of AHMSA incurred
pursuant to clause (ii) of the proviso in paragraph (f) of the definition of
"Permitted Indebtedness" above;
(vi) the purchase, redemption, acquisition or retirement of any shares of
Redeemable Stock of AHMSA (or options, warrants or other rights to acquire
such Redeemable Stock) solely in exchange for or out of the Net Cash
Proceeds of the substantially concurrent sale of shares of Redeemable Stock
of AHMSA (A) having an Average Life equal to or greater than the Average
Life of the Redeemable Stock being purchased, redeemed, acquired or retired
and (B) that cannot be redeemed or otherwise retired including pursuant to
an offer to purchase or otherwise at the option of the holder thereof)
earlier than the Redeemable Stock being purchased, redeemed, acquired or
retired;
(vii) payments or distributions to persons that are not Affiliates of
AHMSA or any of its Subsidiaries in the nature of satisfaction of
dissenter's rights pursuant to or in connection with a consolidation, merger
or transfer that complies with the provisions of the Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of AHMSA;
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(viii) the purchase or redemption of any Indebtedness from Net Cash
Proceeds to the extent permitted under "--Limitation on Certain Asset
Dispositions" below;
(ix) payments or distributions to GAN in connection with transactions
described in the third paragraph under "Related Party Transactions--Service-
and Trade-related Transactions--Administrative, Technical and Other
Services" and in the fifth paragraph under "Related Party
Transactions--Financing Transactions" to the extent permitted under
"--Limitation on Transactions with Affiliates" below; and
(x) Investments (other than Permitted Investments) made by AHMSA or any
of its Consolidated Subsidiaries
(a) in any joint venture or partnership or other person primarily
engaged in a business substantially related, ancillary or complementary
to the business engaged in by AHMSA and its Consolidated Subsidiaries on
the date of the Indenture; and
(b) of any kind up to US$ 5 million, provided that the total amount
of Investments (other than Permitted Investments) made by AHMSA or any
of its Consolidated Subsidiaries under this clause (x) does not exceed
US$ 15 million at any one time outstanding.
For purposes of calculating the aggregate amount of Restricted Payments made
pursuant to clause (c) of "-- Limitation on Restricted Payments," payments made
pursuant to clauses (i), (ii), (iv), (vii), (ix) and (x) of a paragraph will be
included in such amount to the extent that such payments do not reduce
Consolidated Net Income, and payments made pursuant to clauses (iii), (v), (vi)
and (viii) of this paragraph will be excluded from such amount.
Limitation on Liens
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of
any kind, except for Permitted Liens, on or with respect to any property or
assets of AHMSA or any of its Consolidated Subsidiaries (including Capital
Stock of any Subsidiary of AHMSA held by AHMSA or any Subsidiary of AHMSA),
whether owned at the date of the Indenture or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon.
As used herein, "Permitted Liens" means the following types of Liens:
(a) Liens securing Indebtedness of AHMSA that
(i) ranks pari passu in right of payment to the Notes, provided that the
Notes are secured equally and ratably with such Indebtedness for so long as
such Indebtedness will be so secured; or
(ii) ranks subordinate in right of payment to the Notes, provided that
the Notes are secured prior to such Indebtedness for so long as such
Indebtedness will be so secured;
(b) Liens outstanding on the date of the Indenture;
(c) Liens for taxes that are not delinquent or that are being contested in
good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of AHMSA or its Consolidated
Subsidiaries, as the case may be, in conformity with Mexican GAAP;
(d) statutory Liens of landlords, carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the ordinary
course of business of AHMSA or any of its Consolidated Subsidiaries and which
have not been discharged for a period of not more than 60 days after notice
thereof or which are being contested in good faith by appropriate proceedings;
I-14
(e) (i) pledges or deposits made in connection with workers' compensation,
unemployment insurance and other types of social security;
(ii) good faith deposits in connection with bids, tenders, contracts
(other than for payment of Indebtedness) or leases to which AHMSA or any of
its Consolidated Subsidiaries is a party;
(iii) deposits to secure public or statutory obligations of AHMSA or any
of its Consolidated Subsidiaries;
(iv) deposits of cash or United States or Mexican government bonds to
secure surety or appeal bonds to which AHMSA or any of its Consolidated
Subsidiaries is a party; or
(v) deposits as security for taxes or import duties contested in good
faith, in each case (i) through (v) made by AHMSA or any of its Consolidated
Subsidiaries in the ordinary course of business;
(f) easements, rights-of-way, restrictions, minor defects or irregularities
in title and other similar encumbrances incurred in the ordinary course of
business
(i) which, in the aggregate, are not substantial in amount;
(ii) which, with respect to property of substantial value, do not detract
in any material respect from the value of the property subject thereto; and
(iii) which do not interfere in any material respect with the ordinary
conduct of the business of AHMSA and any of its Consolidated Subsidiaries
taken as a whole;
(g) any attachment or judgment Lien, unless the judgment such Lien secures
is not discharged or execution thereof stayed pending appeal within 60 days
after the entry of such judgment or is not discharged within 60 days after the
expiration of any stay pending appeal;
(h) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness by
AHMSA or any of its Consolidated Subsidiaries, provided that such Liens attach
solely to the assets of the acquired entity and do not extend to or cover any
property or assets of AHMSA or any of its Consolidated Subsidiaries other than
the assets acquired in connection with the incurrence of such Acquired
Indebtedness;
(i) Liens created to secure all or any part of the purchase price of
property or assets acquired or constructed (including construction of
improvements or additions to improvements on existing property) by AHMSA or any
of its Consolidated Subsidiaries after the issue date of the Notes or to secure
Indebtedness (including, without limitation, Capital Expenditure Indebtedness)
incurred solely to finance the acquisition or construction (including
construction of improvements or additions to improvements on existing property)
of such property ("Purchase Money Liens") by AHMSA or any of its Consolidated
Subsidiaries, provided that such Purchase Money Liens
(i) attach solely to the property or asset which is the subject of the
transaction giving rise to such Lien and receivables relating to such
property and do not extend to or cover any other property; and
(ii) attach within 180 days of the date of the acquisition, completion or
construction of such property;
(j) pledges by AHMSA or any of its Consolidated Subsidiaries of receivables
relating to property to the seller or lessor of such property which is the
subject of any Capitalized Lease Obligation or operating lease, in an aggregate
amount not to exceed US$ 10 million at any one time outstanding;
(k) Liens securing Indebtedness owed to AHMSA or any of its Consolidated
Subsidiaries by any of its Consolidated Subsidiaries;
(l) Liens securing Indebtedness incurred under Permitted Working Capital
Facilities permitted under clause (i) of the definition of "Permitted
Indebtedness;"
I-15
(m) Liens on AHMSA's ownership interest in the Apasco Joint Venture securing
Indebtedness permitted under clause (j) of the definition of "Permitted
Indebtedness;"
(n) any renewal of or substitution for, in whole or in part, any Lien
permitted by any of the foregoing clauses (a) through (m), provided that the
Lien so renewed or substituted does not extend to any additional property or
assets; and
(o) Liens not otherwise permitted by any of the foregoing clauses (a)
through (n) above, provided that the obligations secured by such Liens do not,
in the aggregate, exceed US$ 5 million at any time outstanding.
The foregoing does not authorize the incurrence of any Indebtedness not
otherwise permitted under "--Limitation on Incurrence of Indebtedness."
Limitation on Sale and Leaseback Transactions
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
enter into any Sale and Leaseback Transaction unless
(a) AHMSA or such Consolidated Subsidiary could have incurred, and
secured a Lien on, Indebtedness in an amount equal to the Attributable Debt
relating to such Sale and Leaseback Transaction under "--Limitation on
Incurrence of Indebtedness" and "Limitations on Liens"; and
(b) the proceeds of such Sale and Leaseback Transaction are at least
equal to the fair market value of the property and AHMSA or such
Consolidated Subsidiary, as the case may be, applies or causes to be applied
an amount in cash equal to the net proceeds from such sale to
(i) purchase Notes or Indebtedness of AHMSA ranking senior to or pari
passu with the Notes; or
(ii) purchase assets or businesses substantially related, ancillary
or complementary to the business of AHMSA on the date of the Indenture,
in each case within 180 days of the effective date of any such Sale and
Leaseback Transaction.
Notwithstanding the foregoing, the provisions of this paragraph do not apply
to any Sale and Leaseback Transaction involving capital assets which is
effected within 180 days of the acquisition of such capital assets if
(a) such capital assets were acquired for cash and not financed with
Indebtedness; and
(b) the proceeds of such Sale and Leaseback Transaction are at least
equal to the fair market value of such capital assets.
Limitation on Certain Asset Dispositions
AHMSA will not, and will not permit any Consolidated Subsidiary to, in any
transaction or series of related transactions, make any Asset Disposition unless
(a) the consideration received by AHMSA or such Consolidated Subsidiary
from such Asset Disposition is equal to or greater than the Fair Market
Value of the assets or Capital Stock subject to such Asset Disposition; and
(b) at least 75% of the consideration received in respect of such Asset
Disposition is in the form of cash or Cash Equivalents.
For purposes of this paragraph, "cash" shall be deemed to include
(a) any liabilities, as shown on the most recent balance sheet of AHMSA
or such Consolidated Subsidiary, of AHMSA or such Consolidated Subsidiary,
as the case may be (other than liabilities that are junior in right of
payment to the Notes), that are assumed by the transferee (including any
Indebtedness of a Consolidated Subsidiary all of the Capital Stock of which
is purchased by the transferee); and
(b) any notes or other obligations received by AHMSA or the Consolidated
Subsidiary, as the case may be, from such transferee that are immediately
converted by AHMSA or such Consolidated Subsidiary, as the case may be, into
cash or Cash Equivalents (but only to the extent of the cash or Cash
Equivalents received).
I-16
If AHMSA or any Consolidated Subsidiary engages in an Asset Disposition,
AHMSA may apply, or cause one or more of its Consolidated Subsidiaries to
apply, within 270 days of such Asset Disposition, all or any portion of the Net
Cash Proceeds of such Asset Disposition to
(i) the permanent repayment or repurchase of any Indebtedness of AHMSA or
any of its Consolidated Subsidiaries which ranks pari passu to the Notes; or
(ii) the purchase of assets or businesses substantially related,
ancillary or complementary to the business of AHMSA and its Consolidated
Subsidiaries as of the date of the Indenture.
The aggregate amount of Net Cash Proceeds of all Asset Dispositions not used as
set forth in clause (i) or (ii) of this paragraph constitutes "Excess
Proceeds." Excess Proceeds shall be segregated from the other assets of AHMSA
and its Consolidated Subsidiaries and invested only in Cash Equivalents until
such time as such Excess Proceeds are applied as specified below.
When the aggregate amount of Excess Proceeds exceeds US$10.0 million, AHMSA
will, within 30 days, make an offer to purchase (an "Excess Proceeds Offer"),
pursuant to procedures set forth in the Indenture, from all Holders of Notes
and from all holders of any other Indebtedness of AHMSA that ranks pari passu
with the Notes and contains a substantially similar purchase requirement, the
maximum principal amount of Notes and such pari passu Indebtedness that may be
purchased from all Excess Proceeds at a purchase price in cash equal to 100% of
the principal amount of such Notes and such pari passu Indebtedness, plus
accrued interest up to but excluding the date fixed for purchase and Additional
Amounts which would otherwise be payable with respect thereto. To the extent
that the aggregate amount of Notes and such pari passu Indebtedness tendered
and not withdrawn pursuant to such Excess Proceeds Offer is less than the
amount of Excess Proceeds, AHMSA may use such portion of the Excess Proceeds
that is not used to purchase Notes and such pari passu Indebtedness so tendered
for general corporate purposes. If the aggregate amount of Notes and pari passu
Indebtedness validly tendered and not withdrawn exceeds the Excess Proceeds,
the Notes and any such other pari passu Indebtedness to be purchased will be
selected on a pro rata basis. Upon completion of an Excess Proceeds Offer
pursuant to this paragraph, the amount of Excess Proceeds shall be reset to
zero.
Limitations Concerning Distributions and Transfers by Subsidiaries
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
suffer to exist any encumbrance or restriction on the ability of any
Consolidated Subsidiary of AHMSA
(a) to pay directly or indirectly dividends or make any other
distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to AHMSA or any other Consolidated Subsidiary of AHMSA;
(b) to make loans or advances to AHMSA or any other Consolidated
Subsidiary of AHMSA; or
(c) to transfer any of its property or assets to AHMSA or any other
Consolidated Subsidiary of AHMSA.
Notwithstanding the foregoing, AHMSA may, and may permit any of its
Consolidated Subsidiaries to, suffer to exist any such encumbrance or
restriction
(a) pursuant to an agreement relating to any Acquired Indebtedness
permitted to be incurred under "-- Limitation on Incurrence of
Indebtedness," which encumbrance or restriction is not applicable to any
person or the properties or assets of any person, other than the person so
acquired, or the property or assets of the person so acquired or its
Consolidated Subsidiaries;
(b) pursuant to the Indenture or an agreement in effect on the issue date
of the Notes;
(c) pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of a
Consolidated Subsidiary, provided that consummation of such transaction
would not result in an Event of Default or an event or condition that with
the lapse of time or the giving of notice or both would become an Event of
Default and that such encumbrance or restriction terminates if such
agreement is terminated or such transaction is abandoned;
I-17
(d) pursuant to an agreement relating to Indebtedness restricting the
sale or other disposition of property securing such Indebtedness if such
agreement does not expressly restrict the ability of a Consolidated
Subsidiary to pay dividends or make distributions, loans or advances;
(e) that restricts in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset;
(f) that arises by virtue of any Lien on any property or assets of AHMSA
or any of its Consolidated Subsidiaries not otherwise prohibited by the
terms of the Indenture and is limited to the property or assets subject to
such Lien;
(g) that arises in the ordinary course of business and applies solely to
property or assets that are
(i) not material to the operation of AHMSA and its Consolidated
Subsidiaries taken as a whole; and
(ii) in the aggregate not of substantial value;
(h) pursuant to an agreement effecting a renewal, refunding or extension
of Indebtedness incurred pursuant to an agreement referred to in clause (a)
or (b) above; provided, however, that the provisions contained in such
renewal, refunding or extension agreement relating to such encumbrance or
restriction are no more restrictive in any material respect than the
provisions contained in the agreement the subject thereof, as determined in
good faith by the Board of Directors of AHMSA and evidenced by a resolution
of the Board of Directors provided to the Trustee; or
(i) pursuant to the operation of applicable law or regulation.
Limitation on Issuance of Guarantees by Subsidiaries
AHMSA will not permit any Subsidiary to Guarantee any Indebtedness of AHMSA,
unless
(a) such Subsidiary simultaneously executes and delivers one or more
supplemental indentures to the Indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of the Notes by such Subsidiary in an
amount at least equal to the amount of Guaranteed Indebtedness that is
Guaranteed by such Subsidiary; and
(b) such Subsidiary waives and will not in any manner whatsoever claim or
take the benefit or advantage of any rights or reimbursements, indemnity or
subrogation or any other rights against AHMSA or any other Subsidiary as a
result of any payment by such Subsidiary under the Subsidiary Guarantee;
provided that this paragraph will not be applicable to
(i) any Guarantee of any Subsidiary that existed at the time such
person became a Subsidiary and was not incurred in connection with, or
in contemplation of, such person becoming a Subsidiary (or any extension
or renewal of such Guarantee to the extent such extension or renewal is
for the same or a lesser amount and on terms no less favorable to the
Subsidiary making the Guarantee, as determined in good faith by the
Board of Directors of AHMSA and evidenced by a resolution of the Board
of Directors provided to the Trustee); or
(ii) any Guarantee of any Consolidated Subsidiary if at the time such
Guarantee is provided such Subsidiary would have incurred the Guaranteed
Indebtedness pursuant to "--Limitation on Incurrence of Indebtedness"
after giving pro forma effect to the incurrence of such Guaranteed
Indebtedness.
If the Guaranteed Indebtedness is pari passu with the Old Senior Notes, then
the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee. If the Guaranteed Indebtedness is
subordinated to the Old Senior Notes, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated to the Old Senior Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Subsidiary may
provide that it will be automatically and unconditionally released and
discharged upon
(i) any sale, exchange or transfer, to any person not an Affiliate of
AHMSA, of all the Capital Stock in such Subsidiary owned by AHMSA or any of
AHMSA's Subsidiaries or all or substantially all the assets of such
Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture); or
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(ii) the release or discharge of the Guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
Limitation on Transactions with Affiliates
AHMSA will not, and will not permit any of its Consolidated Subsidiaries to,
directly or indirectly, in one transaction or any series of related
transactions, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase or lease any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or make any payment (including the payment of guarantee fees described in
the fifth paragraph under "Related Party Transactions--Financing
Transactions"), loan, advance or capital contribution to, or for the benefit
of, an Affiliate of AHMSA or any direct or indirect holder of 10% or more of
the shares of Capital Stock of AHMSA then outstanding or with an Affiliate of
any such holder (such transaction or series of transactions, an "Affiliate
Transaction") unless
(a) such Affiliate Transaction is on terms that are no less favorable to
AHMSA or such Consolidated Subsidiary, as the case may be, than would be
available in a comparable arm's-length transaction with an unrelated person;
(b) with respect to an Affiliate Transaction involving aggregate
consideration greater than US$2.0 million or an Affiliate Transaction
occurring outside the ordinary course of business, such Affiliate
Transaction is approved by a majority of the Board of Directors, including a
majority of the disinterested directors, and evidenced by a Board Resolution
delivered to the Old Senior Note Trustee;
(c) with respect to an Affiliate Transaction involving aggregate
consideration greater than US$15.0 million, an opinion as to the fairness
(from a financial point of view) of such Affiliate Transaction to AHMSA or
such Consolidated Subsidiary, as the case may be, is issued to AHMSA by an
independent investment banking firm of international standing or an
independent consulting, engineering or accounting firm internationally
recognized as an expert with experience in evaluating or appraising the
terms and conditions of transactions similar to the Affiliate Transaction
for which such opinion is required; and
(d) with respect to any payment or distribution to GAN in connection with
transactions described in the third paragraph under "Related Party
Transactions--Service- and Trade-related Transactions--Administrative,
Technical and Other Services;"
(i) such payment or distribution, together with all other such
payments and distributions made to GAN during the 12-month period ending
on the last day of AHMSA's fiscal quarter immediately preceding the date
of such proposed payment or distribution for which financial statements
are available, in the aggregate, does not exceed 0.5% of the net sales
of AHMSA and its Consolidated Subsidiaries for such period, calculated
on a consolidated basis in accordance with Mexican GAAP; and
(ii) the nature and terms of the transactions with respect to which
such payments or distributions are proposed to be made shall be
documented in reasonable detail; provided that AHMSA will not, and will
not permit any of its Consolidated Subsidiaries to, directly or
indirectly, enter into any guarantee with, or for the benefit of, an
Affiliate of AHMSA (other than AHMSA to the extent permitted under
"--Limitation on Issuance of Guarantees by Subsidiaries" and any
Consolidated Subsidiary of AHMSA to the extent permitted under
"--Limitation on Incurrence of Indebtedness") or any direct or indirect
holder of 10% or more of the shares of Capital Stock of AHMSA then
outstanding or with or for an Affiliate of such holder.
Notwithstanding the foregoing, Affiliate Transactions shall not include:
(a) the payment of reasonable and customary fees to directors or
executive officers of AHMSA or any of its Consolidated Subsidiaries;
(b) service and trade-related transactions in the ordinary course of
business including
(i) the purchase by AHMSA of spare parts, maintenance supplies and
other miscellaneous products from Subsidiaries of GAN;
I-19
(ii) the sale through a Subsidiary of GAN of AHMSA's exports to the
United States; and
(iii) ordinary course sales to affiliated customers;
provided that all transactions under this clause (b) are on
commercially reasonable terms that are no less favorable to AHMSA
than would be available in a comparable arm's-length transaction with
an unrelated person;
(c) any transaction between or among AHMSA and any of its Consolidated
Subsidiaries or between or among any Consolidated Subsidiaries of AHMSA;
(d) any transaction by AHMSA or any of its Consolidated Subsidiaries
constituting a Permitted Investment, provided that neither GAN nor any
person who holds 10% or more of the voting securities of AHMSA has an
interest in such transaction in excess of US$ 15.0 million; or
(e) the declaration or payment of any dividend or other distribution to
shareholders of AHMSA in their capacity as shareholders permitted under
"--Limitation on Restricted Payments."
Existence
Subject to the provisions described under "--Merger, Consolidations and
Certain Sales and Purchases of Assets" below, AHMSA will, and will cause each
Material Subsidiary of AHMSA to, do or cause to be done, all things necessary
to preserve and keep in full force and effect its existence, rights (charter
and statutory) and franchises; provided, however, that AHMSA will not be
required to preserve the existence of any Material Subsidiary, and AHMSA or any
Material Subsidiary will not be required to preserve any such right or
franchise, if in the judgment of AHMSA the preservation thereof is no longer
desirable in the conduct of the business of AHMSA or such Material Subsidiary,
as the case may be, and the loss thereof is not disadvantageous in any material
respect to the Holders.
Maintenance of Properties
AHMSA will cause all properties used or useful in the conduct of its
business or the business of any Subsidiary of AHMSA to be maintained and kept
in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
AHMSA may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; provided, however,
that nothing in this provision will prevent AHMSA from discontinuing the
operation or maintenance of any of such properties if such discontinuance is,
in the judgment of AHMSA, desirable in the conduct of its business or the
business of any Subsidiary and not disadvantageous in any material respect to
the Holders.
Payment of Taxes and Other Claims
AHMSA will pay or discharge or cause to be paid or discharged,
(a) before the same becomes delinquent, all taxes, assessments or
governmental charges levied or imposed upon AHMSA or any of its Subsidiaries
or upon the income, profits or property of AHMSA or any of its Subsidiaries
(other than taxes, assessments or governmental charges the nonpayment of
which would not have a material adverse effect on the conduct of the
business, financial position or results of operations of AHMSA or any of its
Material Subsidiaries and which, if unpaid, would not result in a lien upon
the property of AHMSA or any of its Material Subsidiaries), and
(b) all lawful claims for labor, materials and supplies, which are for at
least US$ 1,000,000 and remain unpaid for at least 60 days after the due
date therefor and which, if unpaid, might by law become a lien upon the
property of AHMSA or any of its Material Subsidiaries; provided, however,
that AHMSA will not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings if reserves or other appropriate provision, if any, as required
by Mexican GAAP have been made therefor.
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Maintenance of Insurance
AHMSA will, and will cause each of its Material Subsidiaries to, keep at all
times all of their properties which are of an insurable nature insured against
loss or damage with insurers believed by AHMSA to be responsible to the extent
that property of similar character is usually so insured by Mexican
corporations similarly situated and owning like properties in accordance with
good business practice. AHMSA will, and will cause its Material Subsidiaries
to, use the proceeds from any such insurance policy to repair, replace or
otherwise restore the property to which such proceeds relate, except to the
extent that AHMSA determines that the repair, replacement or restoration of
such property is not desirable in the conduct of its business or the business
of any Material Subsidiary and that such failure to repair, replace or restore
is not disadvantageous in any material respect to the Holders.
Maintenance of Books and Records
AHMSA will, and will cause each of its Subsidiaries to, maintain books,
accounts and records in accordance with Mexican GAAP.
Further Assurances
AHMSA will, at its own cost and expense, execute and deliver to the Old
Senior Note Trustee all such other documents, instruments and agreements and do
all such other acts and things as may be reasonably required to enable the Old
Senior Note Trustee to exercise and enforce its rights under the Old Senior
Note Indenture and under the documents, instruments and agreements required
under the Old Senior Note Indenture and to carry out the intent of the Old
Senior Note Indenture.
Provision of Financial Statements and Reports
AHMSA will file with the Old Senior Note Trustee and furnish, or cause the
Old Senior Note Trustee to furnish, without cost to the Holders, by mail to all
Holders
(a) copies of the annual reports, interim reports and other documents
which AHMSA files with or furnishes to the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act, or any successor provision thereto, and
(b) in the event that AHMSA is not required to file such reports, in the
case of annual financial statements, and to the extent it would have been
otherwise required for other financial statements, an English language
version of such financial statements and related notes, prepared in
accordance with or reconciled to U.S. GAAP, and an accompanying management's
discussion and analysis of financial condition and results of operations
substantially in the format that would be required to be included in AHMSA's
annual and other reports filed with the Commission as a foreign private
issuer if AHMSA were required to file such reports with the Commission.
In each case (a) and (b), AHMSA will furnish such information to the Trustee
and the Holders of Notes within 15 days after the date on which AHMSA is or
would be required to file the same with the Commission.
Merger, Consolidations and Certain Sales and Purchases of Assets
AHMSA may not, in a single transaction or a series of related transactions,
consolidate with or merge into any other person or permit any other person to
consolidate with or merge into AHMSA, or directly or indirectly, transfer,
convey, sell, lease or otherwise dispose of all or substantially all of its
properties and assets as an entirety, unless in any such transaction:
(a) in a transaction in which AHMSA does not survive or in which AHMSA
sells, leases or otherwise disposes of all or substantially all of its
assets, the successor entity to AHMSA is organized under the laws
I-21
of the United States of America or any State thereof or the District of
Columbia or the United Mexican States or any State thereof and such
successor entity expressly shall have assumed, by a supplemental Indenture
executed and delivered to the Old Senior Note Trustee in form reasonably
satisfactory to the Old Senior Note Trustee, all of AHMSA's obligations
under the Old Senior Notes and the Old Senior Note Indenture and the
performance of the covenants contained in the Old Senior Note Indenture;
(b) immediately before and after giving effect to such transaction, no
Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default shall have occurred
and be continuing;
(c) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (assuming that the transaction or
series of related transactions occurred on the first day of the four-quarter
period immediately prior to the consummation of such transaction or series
of related transactions with the appropriate adjustments with respect to the
transaction or series of related transactions being included in such pro
forma calculation), AHMSA (or the successor entity if AHMSA is not the
continuing obligor under the Indenture) could incur at least US$ 1.00 of
additional Indebtedness (other than Permitted Indebtedness) under
"--Limitation on Incurrence of Indebtedness";
(d) AHMSA or the successor entity to AHMSA shall expressly agree to
indemnify each holder of a Note (or holder of a beneficial interest therein)
against any tax, levy, assessment or governmental charge payable by
withholding or deduction thereafter imposed on such Holder solely as a
consequence of such transaction with respect to payments in respect of' the
Notes or any purchase thereof by AHMSA; and
(e) AHMSA shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger,
conveyance, transfer, or lease and, if a supplemental Indenture is required
in connection with such transaction, such supplemental Indenture, complies
with the provisions of the Old Senior Note Indenture and that all of the
conditions precedent provided in the Old Senior Note Indenture relating to
such transaction have been satisfied.
Events of Default
The following "Events of Default" under the Old Senior Note Indenture will
apply separately to Old Senior Notes of each series:
(a) default in payment of principal on any Old Senior Note of such series
(including any Additional Amounts) at maturity or otherwise; or
(b) default in the payment of the redemption price or repurchase price of
any Old Senior Note of such series; or
(c) default for 30 days in payment of any interest on any Old Senior Note
of such series (including any Additional Amounts); or
(d) the failure of AHMSA to observe or perform any other covenant with
respect to such series of Old Senior Notes in the Old Senior Note Indenture
or such series of Old Senior Notes for a period of 30 days after receipt of
written notice of such failure from the Old Senior Note Trustee or from
Holders of at least 25% of the outstanding aggregate principal amount of the
Old Senior Notes of such series to which such covenant relates; or
(e) certain events of bankruptcy, insolvency, receivership or
reorganization; or
(f) a default by AHMSA or any Subsidiary on any mortgage, indenture or
instrument under which there may be issued, secured or evidenced any
indebtedness for borrowed money of AHMSA or any Subsidiary in an amount
exceeding US$ 10,000,000 (or the equivalent thereof in other currency or
currency units) which default
(i) constitutes the failure to pay the principal (or any premium
relating thereto) of, or interest or additional amounts on, such
indebtedness when due (after the expiration of any applicable grace
period); or
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(ii) results in any such indebtedness of AHMSA or any Subsidiary
having an outstanding principal amount in excess of US$ 10,000,000 (or
the equivalent thereof in other currency or currency units) becoming or
being declared due and payable prior to the date on which it would
otherwise have become due and payable; or
(g) the rendering of a final judgment or judgments (not subject to appeal
by a court or courts of competent jurisdiction) against AHMSA or any
Subsidiary in an amount in excess of US$ 10,000,000 (or the equivalent
thereof in other currency or currency units) which remains undischarged or
unstayed for a period of 60 days after the date on which the right to appeal
has expired; or
(h) all or a substantial part of the property and assets or shares of
AHMSA and its Subsidiaries taken as a whole, or of any Material Subsidiary
and its Subsidiaries taken as a whole, are nationalized or expropriated by
any governmental authority, or any license, permit or other authorization
material to the conduct of the business of AHMSA and its Subsidiaries taken
as a whole is revoked, and such revocation has not been stayed, vacated or
suspended within a period of 60 days (or, if stayed or suspended, thereafter
ceases to be stayed or suspended); or
(i) it has become unlawful for AHMSA to perform or comply with its
obligations under the Old Senior Note Indenture or the Notes.
The Old Senior Note Indenture provides that if an Event of Default (other
than an Event of Default arising from certain events of bankruptcy, insolvency,
receivership or reorganization) shall occur and be continuing with respect to
any series of Old Senior Notes, the Old Senior Note Trustee or the Holders of
at least 25% of the outstanding aggregate principal amount of the Old Senior
Notes of such series may declare to be due and payable immediately the sum of
(a) the outstanding principal amount of the Old Senior Notes of such
series;
(b) the accrued and unpaid interest thereon to the date of such
declaration; and
(c) any Additional Amounts which would otherwise be payable with respect
thereto. Upon certain conditions such declaration may be annulled and past
defaults (except, unless theretofore cured, non-payment of principal or
interest on the Notes) may be waived as provided in the Old Senior Note
Indenture. For information as to waiver of defaults, see "--Modification and
Waiver."
If any Event of Default arising from certain events of bankruptcy, insolvency,
receivership or reorganization occurs, all outstanding Notes will ipso facto
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder.
The Old Senior Note Indenture requires AHMSA to furnish to the Old Senior
Note Trustee quarterly a statement as to the performance by AHMSA of certain of
its obligations under the Old Senior Note Indenture and to deliver to the Old
Senior Note Trustee notice of any default in the performance of any covenant,
agreement or condition contained in the Old Senior Note Indenture forthwith
upon becoming aware of such default. The Old Senior Note Indenture provides
that the Old Senior Note Trustee will, within 90 days after the occurrence of a
default with respect to any series of Old Senior Notes, give to the Holders of
the Old Senior Notes of such series notice of all uncured defaults known to it;
provided that, except in the case of default in the payment of principal or
interest on any of the Old Senior Notes, the Old Senior Note Trustee will be
protected in withholding such notice if and so long as the Old Senior Note
Trustee in good faith determines that the withholding of such notice is in the
interest of the Holders of the Old Senior Notes. The term "default" for the
purpose of this provision only means the happening of any of the Events of
Default specified above excluding any grace periods.
The Old Senior Note Indenture contains a provision entitling the Old Senior
Note Trustee, subject to the duty of the Old Senior Note Trustee to act with
the required standard of care during default, to be indemnified by the Holders
of the Old Senior Notes of any series before proceeding to exercise any right
or power under the Indenture at the request of Holders of such series. The Old
Senior Note Indenture provides that the Holders of a
I-23
majority in outstanding aggregate principal amount of any series of Old Senior
Notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Old Senior Note Trustee or
exercising any trust or power conferred on the Old Senior Note Trustee with
respect to the Old Senior Notes of such series, provided that the Old Senior
Note Trustee may decline to act if the Old Senior Note Trustee being advised by
counsel determines such direction is contrary to law or if the Old Senior Note
Trustee determines in good faith that the proceeding so directed would be
illegal or would involve it in personal liability or would be unjustly
prejudicial to the Holders of the Old Senior Notes of such series not
consenting.
Governing Law and Submission to Jurisdiction
The Old Senior Note Indenture and the Old Senior Notes will be governed by
the laws of the State of New York. Each of the parties to the Old Senior Note
Indenture will submit to the jurisdiction of Federal and State courts located
in the Borough of Manhattan, City and State of New York and each party will
submit to the jurisdiction of the courts of its own corporate domicile
(domicilio social), for purposes of all legal actions and proceedings
instituted in connection with the Old Senior Notes and the Old Senior Note
Indenture. AHMSA has appointed GANAHMSA as its authorized agent upon which
process may be served in any such action.
Currency Indemnity
U.S. dollars are the sole currency of account and payment for all sums
payable by AHMSA under or in connection with the Old Senior Notes, including
damages, and AHMSA is not entitled to make any payments with respect to the Old
Senior Notes in any currency other than U.S. dollars. Any amount received or
recovered in a currency other than U.S. dollars (whether as a result of, or of
the enforcement of, a judgment or order of a court of any jurisdiction, in the
winding-up or dissolution of AHMSA or otherwise) by any Holder of an Old Senior
Note in respect of any sum expressed to be due to it from AHMSA shall only
constitute a discharge to AHMSA to the extent of the U.S. dollar amount which
the recipient is able to purchase with the amount so received or recovered in
that other currency on the date of that receipt or recovery (or, if it is not
practicable to make that purchase on that date, on the first date on which it
is practicable to do so). If that U.S. dollar amount is less than the U.S.
dollar amount expressed to be due to the recipient under any Old Senior Note,
AHMSA will indemnify it against any loss sustained by it as a result. In any
event, AHMSA will indemnify the recipient against the cost of making any such
purchase. For the purposes of this paragraph, it will be sufficient for the
Holder of an Old Senior Note to certify in a satisfactory manner (indicating
the sources of information used) that it would have suffered a loss had an
actual purchase of U.S. dollars been made with the amount so received in that
other currency on the date of receipt or recovery (or, if a purchase of U.S.
dollars on such date had not been practicable, on the first date on which it
would have been practicable, it being required that the need for a change of
date be certified in the manner mentioned above). These indemnities constitute
a separate and independent obligation from AHMSA's other obligations, will give
rise, to the extent permitted by applicable law, to a separate and independent
cause of action, will apply irrespective of any indulgence granted by any
Holder of an Old Senior Note and will continue in full force and effect despite
any other judgment, order, claim or proof for a liquidated amount in respect of
any sum due under any Old Senior Note. See "Risk Factors--Exchange Rates."
Modification of the Old Senior Note Indenture
The Old Senior Note Indenture may be amended by the Old Senior Note Trustee
and AHMSA for the purpose of curing any ambiguity, or of curing, correcting or
supplementing any defective provision contained therein, or in any other manner
in which the parties may mutually deem necessary or desirable and which AHMSA
and the Old Senior Note Trustee determine will not adversely affect the
interests of the Holders of the Old Senior Notes of any series.
With the consent of the Holders of at least a majority in aggregate
principal amount of the Old Senior Notes of any series then outstanding, the
Old Senior Note Trustee and AHMSA may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the Old
Senior Note Indenture or
I-24
modify in any manner the rights of the Holders of the Old Senior Notes of such
series, including the waiver of certain Events of Default, provided, however,
that no such modification or amendment may, without the consent of the Holders
of at least 66% in aggregate principal amount of the Old Senior Notes of such
series then outstanding, amend, change or modify, in any material respect, the
obligation of AHMSA to make and consummate an Excess Proceeds Offer with
respect to any Asset Disposition in accordance with "--Limitation on Certain
Asset Dispositions"; and provided, further, that without the consent of the
Holder of each Old Senior Note of such series, no such supplemental indenture
shall
(i) extend the maturity of the Old Senior Notes of such series, or reduce
the rate or extend the time of payment of interest thereon; or
(ii) reduce the principal amount thereof or the amount payable thereon in
the event of acceleration or the amount thereof payable in bankruptcy; or
(iii) amend, change or modify, in any material respect, the obligation of
AHMSA to repurchase the Old Senior Notes of such series in the event of a
Change in Control in accordance with "--Repurchase at the Option of the
Holders," including, in each case, amending, changing or modifying, in any
material respect, any definition relating thereto;
(iv) change the currency thereof or place of any payment thereon; or
(v) reduce the aforesaid percentage of Old Senior Notes of such series
the Holders of which are required to consent to any such supplemental
indenture.
Defeasance and Covenant Defeasance
Defeasance and Discharge
Notwithstanding any previous defeasance and discharge of certain restrictive
covenants as described under "--Defeasance of Certain Covenants" below, AHMSA
may elect to defease and discharge all its obligations with respect to any
series of Old Senior Notes (except for certain obligations to exchange or
register the transfer of Old Senior Notes, to replace stolen, lost or mutilated
Old Senior Notes, to maintain paying agencies and to hold moneys for payment in
trust) upon the deposit in trust for the benefit of the Holders of Old Senior
Notes of such series of cash, U.S. government obligations or both, which
(through the payment of principal and interest in respect thereof in accordance
with their terms) will provide money in an amount sufficient to pay the
principal of and any premium and interest on the Old Senior Notes of such
series at maturity thereof in accordance with the terms of the Old Senior Note
Indenture and the Old Senior Notes of such series. Such defeasance and
discharge may occur only if, among other things, AHMSA has delivered to the Old
Senior Note Trustee an opinion of counsel, or there has been published by the
United States Internal Revenue Service a ruling, in either case, to the effect
that Holders of such Old Senior Notes will not recognize gain or loss for U.S.
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to U.S. federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred.
Defeasance of Certain Covenants
AHMSA may defease and discharge certain restrictive covenants applicable to
Old Senior Notes of any series ("Covenant Defeasance"), including those
described under "--Certain Covenants" and under "--Merger, Consolidations and
Certain Sales and Purchases of Assets," and the occurrence of certain Events of
Default will be deemed not to be or result in an Event of Default, in each case
with respect to such Old Senior Notes, by depositing, in trust for the benefit
of the Holders of such Old Senior Notes, cash, U.S. government obligations or
both, which (in the case of such U.S. government obligations, through the
payment of principal and interest in respect thereof in accordance with their
terms) will provide money in an amount sufficient to pay the principal of and
any premium and interest on such Old Senior Notes on their respective
maturities in accordance with the terms of the Old Senior Note Indenture and
such Old Senior Notes. Covenant Defeasance may occur only if,
I-25
among other things, AHMSA has delivered to the Old Senior Note Trustee an
opinion of counsel to the effect that Holders of such Old Senior Notes will not
recognize gain or loss for U.S. federal income tax purposes as a result of such
deposit and Covenant Defeasance and will be subject to U.S. federal income tax
on the same amount, in the same manner and at the same times as would have been
the case if such deposit and Covenant Defeasance had not occurred.
In the event AHMSA exercises this option with respect to any Old Senior
Notes and such Old Senior Notes are declared due and payable because of the
occurrence of any Event of Default, the cash and U.S. government obligations so
deposited in trust would be sufficient to pay amounts due on such Old Senior
Notes at the time of their respective maturities but may not be sufficient to
pay amounts due on such Old Senior Notes upon any acceleration resulting from
such Event of Default. In such case, AHMSA would remain liable for such
payments.
Concerning the Trustee
AHMSA and its Subsidiaries may maintain deposit accounts and conduct other
banking transactions with the Old Senior Note Trustee in the ordinary course of
business.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the Old
Senior Note Indenture. Reference is made to the Old Senior Note Indenture for
the full definition of all such terms.
"Acquired Indebtedness" means Indebtedness of any person existing at the
time such person became a Subsidiary or assumed in connection with the
acquisition of assets from such person and not incurred in connection with, or
in contemplation of, such person becoming a Subsidiary or such acquisition.
"Affiliate" of any person means any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person. For the purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies of
such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Apasco Joint Venture" means the joint venture in connection with which
AHMSA or any of its Consolidated Subsidiaries intends to borrow up to $30
million as provided under clause (j) of the definition of "Permitted
Indebtedness" and transfer certain equipment and parcels of land (other than
land on which there is any part of the Steelmaking Facility or the Steam Coal
Facility) containing lime deposits identified pursuant to a feasibility study
and in which AHMSA or any of its Consolidated Subsidiaries shall not have a
controlling interest and to which AHMSA or any of its Consolidated Subsidiaries
intends to sell slag.
"Asset Disposition" means any sale, lease, conveyance, transfer or other
disposition (or any series of related sales, leases, conveyances, transfers or
dispositions) by AHMSA or any of its Consolidated Subsidiaries of any Capital
Stock of a Consolidated Subsidiary of AHMSA (whether or not upon issuance), or
any property or other assets of AHMSA or any of its Subsidiaries (each referred
to for the purposes of this definition as a "disposition"), whether for cash or
other consideration, other than
(a) a disposition by a Wholly Owned Subsidiary of AHMSA to AHMSA or
another Wholly Owned Subsidiary of AHMSA;
(b) a disposition by AHMSA to a Wholly Owned Subsidiary of AHMSA;
(c) the disposition in any single transaction or series of related
transactions of any assets or Capital Stock or other ownership interest by
AHMSA or its Consolidated Subsidiaries if the aggregate gross proceeds
thereof (exclusive of indemnities) do not exceed US$l.0 million (such
proceeds, to the extent not in cash, to be determined in good faith by the
Board of Directors) in any 12-month period;
I-26
(d) a disposition of inventory of steel or related products or steam coal
in the ordinary course of business;
(e) an exchange of assets for like kind assets, provided that the assets
received are to be used in the lines of business engaged in by AHMSA or any
of its Consolidated Subsidiaries on the date of the Indenture or are
reasonably related extensions of such lines of business;
(f) any disposition of properties and assets of AHMSA and any of its
Subsidiaries that is subject to the sections of the Indenture relating to
mergers and consolidation or that constitutes a Permitted Investment; and
(g) any disposition of property or equipment that is obsolete, damaged or
no longer used or, in the reasonable opinion of AHMSA (which, in the case of
each disposition the gross proceeds of which exceed US$ 2 million, shall be
evidenced by a written resolution of the Board of Directors filed with the
Trustee), no longer useful in the business of AHMSA or any of its
Consolidated Subsidiaries.
"Attributable Debt" with respect to a Sale and Leaseback Transaction means
as of the date of determination the greater of
(a) the fair market value of the property subject to such Sale and
Leaseback Transaction; and
(b) the present value (discounted at the interest rate implicit in the
terms of the lease, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included
in such Sale and Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" with respect to Indebtedness or Redeemable Stock means, as of
the date of the determination, the quotient, expressed as a number of years, of
(a) the sum of the products obtained by multiplying
(i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof by
(ii) the number of years (calculated to the nearest one-twelfth) then
remaining until the date of each such payment, divided by
(b) the total principal amount or liquidation preference, as the case may
be, of such Indebtedness or Redeemable Stock then outstanding.
"Capital Expenditure Indebtedness" means Indebtedness of AHMSA or any of its
Consolidated Subsidiaries incurred to finance the purchase or construction,
after the date of issuance of the Old Senior Notes, of any property of AHMSA or
any of its Consolidated Subsidiaries used or to be used in the business of
AHMSA or any of its Consolidated Subsidiaries (to the extent that the purchase
price or construction cost does not exceed the fair market value (such
determination to be evidenced by a certificate of an officer of AHMSA) of the
property acquired or constructed, plus applicable duties and construction
period interest at customary rates), provided that
(i) the cost of such property is or should be included in "addition to
property, plant and equipment" in accordance with Mexican GAAP;
(ii) the acquisition or construction of such property is not part of any
acquisition of any person or all or substantially all of another business
entity; and
(iii) such indebtedness is incurred not more than 180 days after the
acquisition or completion of construction of such property.
"Capitalized Lease" of any person means any lease of any property (whether
real, personal or mixed) of which the discounted present value of the rental
obligations of such person as lessee, in conformity with Mexican
I-27
GAAP, is required to be capitalized on the balance sheet of such person; and
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under such lease, determined in accordance with Mexican GAAP.
"Capital Stock" of any person means any and all shares, interests,
participation or other equivalents (however designated) of capital stock of
such person and warrants, options and similar rights to acquire such capital
stock.
"Cash Equivalents" means
(a) any evidence of indebtedness, maturing not more than one year after
the date of purchase, issued or fully guaranteed or insured by the United
Mexican States or the United States of America, or an instrumentality or
agency thereof;
(b) any certificate of deposit, Eurodollar time deposit, overnight bank
deposit or bankers' acceptance maturing not more than one year after the
date of purchase, issued by, or time deposit or demand deposit of, a
commercial banking institution which is organized under the laws of the
United States of America or any state thereof or any country recognized by
the United States of America, which has combined capital and surplus and
undivided profits of not less than US$ 100 million and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least
one internationally recognized statistical rating organization;
(c) commercial paper, maturing not more than 180 days after the date of
purchase, issued by a corporation (other than an Affiliate of AHMSA) or
organized and existing under the laws of the United Mexican States or the
United States of America which is rated, at the time as of which any
investment therein is made, "P-1" (or higher) by Moody's Investors Service,
Inc. or "A1" (or higher) by Standard and Poor's Rating Group;
(d) money market funds sponsored by a registered broker dealer;
(e) demand deposits not otherwise permitted under clause (b) or (f) of
this definition, in an aggregate amount not to exceed US$ 15 million at any
one time outstanding;
(f) demand deposits, certificates of deposit, bank promissory notes and
bankers' acceptances denominated in pesos maturing not more than 180 days
after the acquisition thereof and issued or guaranteed by any one of the
five largest banks (based on assets as of the immediately preceding
December 31) organized under the laws of Mexico (and up to US$ 20 million of
certificates of deposit, bank promissory notes and bankers' acceptances of
one or more other banks organized under the laws of Mexico) and which are
not under intervention or controlled by the Fondo Bancario de Proteccion al
Ahorro; or
(g) repurchase agreements and reverse repurchase agreements in respect of
marketable obligations directly or indirectly issued or unconditionally
guaranteed by the United States of America or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition, provided, however,
that the terms of such agreements comply with the guidelines set forth in
the Federal Financial Agreements of Depository Institutions with Securities
Dealers and Others, as adopted by the Comptroller of the Currency.
"Commodity Price Agreements" means any commodity price protection, hedge,
future or option agreement or contract or other similar arrangement.
"Common Stock" of any person means Capital Stock of such person (other than
Redeemable Stock) that does not rank prior, as to the payment of dividends or
as to the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such person, to shares of Capital Stock of any
other class of such person.
I-28
"Common Stock Offering" means a primary sale of Common Stock of AHMSA for
cash to persons other than Affiliates of AHMSA yielding gross cash proceeds to
AHMSA of at least US$ 50 million from
(a) a public offering registered for sale in the United States under the
Securities Act or in Mexico with the CNBV; or
(b) an offering pursuant to Rule 144A or Regulation S to 100 or more
beneficial holders.
"Consolidated Amortization Expense" of any person means, for any period, the
amortization expense of such person and its Subsidiaries, determined on a
consolidated basis for such period in accordance with Mexican GAAP.
"Consolidated Cash Flow Available for Interest Expense" of any person for
any period means the sum (without duplication) of the amounts for such period of
(a) Consolidated Net Income, plus
(b) Consolidated Interest Expense (to the extent such amount was deducted
in calculating Consolidated Net Income), plus
(c) Consolidated Income Tax Expense (to the extent such amount was
deducted in calculating Consolidated Net income), plus
(d) Consolidated Amortization Expense (to the extent such amount was
deducted in calculating Consolidated Net Income), plus
(e) Consolidated Depreciation Expense (to the extent such amount was
deducted in calculating Consolidated Net Income), plus
(f) other non-cash charges of such person which reduced Consolidated Net
Income and, minus
(g) non-cash items (including any non-cash interest income) of such
person which increased Consolidated Net Income, all as determined on a
consolidated basis for such person and its Subsidiaries for such period in
accordance with Mexican GAAP.
"Consolidated Debt Service Coverage Ratio" of any person means the ratio of
(a) the aggregate amount of Consolidated Cash Flow Available for Interest
Expense of such person for the four full fiscal quarters, taken as one
period, for which financial information in respect thereof is available
immediately prior to the date of the transaction (for the purposes of this
definition, "Transaction Date") giving rise to the need to calculate the
Consolidated Debt Service Coverage Ratio (such period for the purposes of
this definition, the "Reference Period") to
(b) the aggregate Consolidated Interest Expense of such person for the
Reference Period, provided that in determining the Consolidated Interest
Expense for purposes of this clause (b) interest on any Indebtedness
(whether existing or being incurred) bearing a floating interest rate shall
be computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period (unless such Indebtedness is covered
by an Interest Rate Agreement, in which case the interest rate on such
Indebtedness for purposes of computing Consolidated Interest Expense shall
be deemed to be the effective interest rate with respect to such
Indebtedness after taking into account such Interest Rate Agreement).
For purposes of this definition, Consolidated Cash Flow Available for Interest
Expense and Consolidated Interest Expense shall be calculated after giving
effect on a pro forma basis for the full period of such calculation to
(a) the incurrence of any Indebtedness of such person or any Subsidiary
of such person during the Reference Period and from the end of the Reference
Period to the Transaction Date, in each case as if such Indebtedness had
been incurred on the first day of the Reference Period (except that in
making such computation the amount of interest attributable to Indebtedness
under any revolving credit facility shall be computed based on the average
daily balance of such Indebtedness during the Reference Period);
I-29
(b) the repayment, repurchase, defeasance, retirement or other discharge
of any Indebtedness of such person or a Subsidiary of such person during the
Reference Period and from the end of the Reference Period to the Transaction
Date with the proceeds of any Indebtedness referred to in the immediately
preceding clause (a) or the proceeds from the sale or other disposition of
assets referred to in clause (d) below, in each case as if such Indebtedness
had been repaid, repurchased, defeased, retired or otherwise discharged on
the first day of the Reference Period;
(c) the acquisition by such person or any Subsidiary of such person
during the Reference Period and from the end of the Reference Period to the
Transaction Date of any other person which, as a result of such acquisition,
becomes a Consolidated Subsidiary of such person or the acquisition of
assets during the Reference Period and from the end of the Reference Period
to the Transaction Date from any person which constitute all or
substantially all of an operating unit or business of such person, in each
case as if such acquisition had been consummated on the first day of such
Reference Period; and
(d) any sale or other disposition of assets or properties outside the
ordinary course of business by such person occurring during the Reference
Period and from the end of the Reference Period to the Transaction Date, as
if such sale or disposition occurred on the first day of the Reference
Period.
"Consolidated Depreciation Expense" of any person means, for any period, the
depreciation and depletion expense of such person and its Subsidiaries,
determined on a consolidated basis for such period in accordance with Mexican
GAAP.
"Consolidated Income Tax Expense" of any person means, for any period, the
aggregate of the income tax expense of such person and its Subsidiaries,
determined on a consolidated basis for such period in accordance with Mexican
GAAP.
"Consolidated Interest Expense" of any person means for any period, without
duplication, the aggregate of
(a) the interest expense (without deduction of interest income) of such
person and its Subsidiaries for such period, including without limitation
(i) amortization of debt issuance costs;
(ii) amortization of original issue discounts on any Indebtedness;
(iii) amortization of any increase in the principal amount of any
peso-denominated Indebtedness pursuant to an agreement whereby such
principal amount periodically is increased as a result of and in
proportion to the devaluation of the peso against the U.S. dollar or the
rate of inflation in Mexico;
(iv) the interest portion of any deferred payment obligation in
accordance with the effective interest manner of accounting;
(v) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financings; and
(vi) the net cost associated with Interest Rate Agreements and
Currency Agreements (to the extent the net cost of such Currency
Agreements constitutes interest expense), to the extent attributable to
such period;
(b) the interest expense in respect of any Indebtedness which benefits
from a Guarantee of such person or which is secured by the assets of such
person or its Consolidated Subsidiaries;
(c) the interest component of any Capitalized Lease Obligations paid,
accrued, or scheduled to be paid or accrued by such person or its
Consolidated Subsidiaries during such period; and
I-30
(d) cash and non-cash dividends due (whether or not declared) on
Redeemable Stock by such person or any its Consolidated Subsidiaries to any
person other than such person or its Wholly Owned Subsidiary, in each of
cases (a) through (d) as determined on a consolidated basis for such period
in accordance with Mexican GAAP.
"Consolidated Net Income" of any person means, for any period, the aggregate
of net income (or loss) of such person and its Subsidiaries for such period
determined on a consolidated basis in accordance with Mexican GAAP; provided
that
(a) the net income (or loss) of any person (other than a Subsidiary of
such person) accounted for by the equity method of accounting shall be
excluded except to the extent of the amount of cash dividends or
distributions paid to such person or its Consolidated Subsidiaries by such
other person in such period;
(b) the net income of any Subsidiary that is subject to any restriction
or limitation on the payment of dividends or the making of other
distributions (including distributions in the form of loans or advances) by
operation of the terms of its charter or by any applicable agreement,
instrument, judgment, decree, order or government regulation shall be
excluded to the extent of such restriction or limitation in such period;
(c) the net income of any person acquired in a pooling-of-interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(d) any net after-tax extraordinary gains or losses shall be excluded;
(e) any net after-tax gains or losses attributable to any disposition of
assets other than in the ordinary course of business shall be excluded;
(f) the net income (or loss) from discontinued operations shall be
excluded; and
(g) minority interests in the income (or loss) of such person's
Consolidated Subsidiaries shall be excluded.
"Consolidated Subsidiary" of any person means a Subsidiary of that person
which for financial reporting purposes is, or in accordance with Mexican GAAP
should be, accounted for by such person as a consolidated subsidiary.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Fair Market Value" with respect to any asset or property means the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy, as determined by AHMSA's Board of Directors
in good faith and evidenced in a resolution of the Board of Directors provided
to the Old Senior Note Trustee.
"Guarantee," as applied to any obligation, means
(i) a guarantee (other than by endorsement for collection or deposit in
the ordinary course of business), direct or indirect, in any manner, of all
or any part or all of such obligation; or
(ii) an agreement, direct or indirect, contingent or otherwise, providing
assurance of the payment or performance (or payment of damages in the event
of non-performance) of any part or all of such obligation, including,
without limitation, the payment of amounts drawn down under letters of
credit (all such obligations are collectively referred to as "Guaranteed
Indebtedness").
Notwithstanding the foregoing, a guarantee shall not include any agreement
solely because such agreement creates a Lien on the assets of any person or
because such agreement provides for indemnification. The amount of a Guarantee
shall be deemed to be the maximum amount of the obligation guaranteed for which
the guarantor could be held liable under such Guarantee.
I-31
"Indebtedness" of any person means (without duplication) any liability,
whether or not contingent and whether or not recourse is to the whole of the
assets of such person or only to a portion thereof,
(a) in respect of borrowed money or evidenced by bonds (other than surety
or appeal bonds), notes, debentures or similar instruments;
(b) representing the balance deferred and unpaid of the purchase price of
any property, conditional sales obligations and obligations under any title
retention agreement (but excluding trade account payables and other accrued
current liabilities arising in the ordinary course of business);
(c) that is a Capitalized Lease Obligation;
(d) to pay the maximum fixed repurchase price of any Redeemable Stock of
such person;
(e) of others secured by a Lien to which any property or asset, including
leasehold interest under Capitalized Lease Obligations and other tangible or
intangible property rights, owned or held by such person, is subject,
whether or not the obligation secured thereby shall have been assumed by
such person (provided that if the obligations have not been assumed, such
obligations shall be deemed to be in an amount equal to the fair market
value of the property or asset, as the case may be, to which the Lien
relates, provided, however, that this clause (e) shall be deemed not to
apply to the Indebtedness of Mission Energy Company secured by the pledge of
MICARE shares described under "Related Party Transaction Pledge of MICARE
Shares" above;
(f) any reimbursement obligation in respect of letters of credit; and
(g) any Guarantee with respect to any of the items described in clauses
(a) through (f) above (regardless of whether such Guarantee would appear as
a liability on a balance sheet of such person prepared on a consolidated
basis in accordance with Mexican GAAP).
For the purpose of determining the amount of Indebtedness of such person
outstanding at any time, each of the items described in clauses (a) through (g)
above will be excluded from Indebtedness to the extent such items would be
eliminated as intercompany items on the consolidated balance sheet of such
person prepared in accordance with Mexican GAAP. As defined in the Indenture,
"Indebtedness" does not include
(a) customer advance payments and customer deposits received by AHMSA or
any of its Consolidated Subsidiaries in the ordinary course of business;
(b) any liability for endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business; or
(c) any indebtedness that has been defeased or satisfied in accordance
with the terms governing such indebtedness.
In addition, if such person enters into an agreement with respect to
peso-denominated indebtedness whereby the nominal principal amount of such
indebtedness is periodically increased as a result of and in proportion to the
devaluation of the peso against the U.S. dollar or the rate of inflation in
Mexico during such period, such increase shall be deemed not to be "incurred"
for purposes of the first paragraph under "--Limitation on Incurrence of
Indebtedness."
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Inventory" of any person means the total inventories of finished products
of steel and steam coal of such person calculated on a consolidated basis in
accordance with Mexican GAAP.
"Investment" means any direct or indirect advance, loan or other extension
of credit or capital contribution to (by means of any transfer of cash or other
property (other than Capital Stock of AHMSA which is not
I-32
Redeemable Stock) to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities issued by any other person, but
shall not include advances to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet.
"Lien" means any lien, mortgage, pledge, assignment (including any
assignment of rights to receive payments of money), security interest, charge
or encumbrance of any kind (including any conditional sale or other title
retention agreement or any lease in the nature thereof), and any agreement to
give a lien, mortgage, hedge, assignment (including any assignment of rights to
receive payments of money), security interest, charge or encumbrance of any
kind.
"Material Subsidiary" means any Subsidiary which (a) owns, directly or
indirectly, any part of either of the Steelmaking Facility or the Steam Coal
Facility having an aggregate book value in excess of 20% of the total aggregate
book value of the Steelmaking Facility or the Steam Coal Facility, as the case
may be, or (b) contributes in excess of 20% of the total consolidated revenues
of AHMSA.
"Mexican GAAP" means generally accepted accounting principles in Mexico and
the accounting principles and policies of AHMSA and its Consolidated
Subsidiaries, in each case as in effect as of the date of the Indenture,
provided, however, that for the purpose of complying with the terms of
"Maintenance of Books and Records" above, "Mexican GAAP" means generally
accepted accounting principles in Mexico as in effect from time to time. All
ratios and computations shall be computed in conformity with Mexican GAAP
applied on a consistent basis and using constant peso calculations.
"Net Cash Proceeds" means
(a) with respect to any Asset Disposition, cash payments in U.S. dollars
or freely convertible into U.S. dollars received (including any cash
payments received by way of deferred payment of principal, pursuant to a
note or installment receivable or otherwise, or amounts eliminated from any
reserve referred to in clause (v) below, but only as and when received or
eliminated) therefrom by AHMSA or any of its Consolidated Subsidiaries
(after repayment of any Indebtedness due by reason of such Asset
Disposition) after the date of issue of the Notes, in each case net of the
amount of
(i) brokers' and advisors' fees and commissions payable in connection
with such Asset Disposition;
(ii) all foreign, Federal, state and local taxes payable as a direct
consequence of such Asset Disposition, including all such taxes payable
in connection with the payment of a dividend or the making of a
distribution by a Consolidated Subsidiary of AHMSA of such cash payments
to AHMSA or any Consolidated Subsidiary of AHMSA (including without
limitation taxes withheld in connection with repatriation of such
proceeds), net of any tax benefits derived in respect of such dividend
or distribution;
(iii) the fees and expenses attributable to such Asset Disposition to
the extent not included in clause (i), except to the extent payable to
any Affiliate of AHMSA;
(iv) any amount required to be paid to any person (other than AHMSA
or any of its Consolidated Subsidiaries) owning a beneficial interest in
the property or assets sold; and
(v) deduction of appropriate amounts to be provided by AHMSA or its
Consolidated Subsidiaries as a reserve, in accordance with Mexican GAAP
against any liabilities retained by AHMSA or any Consolidated Subsidiary
of AHMSA associated with such assets after such Asset Disposition,
including, without limitation, any indemnification or purchase price
adjustment associated with such Asset Disposition; and
I-33
(b) in respect of any Common Stock Offering or other issuance or sale of
Capital Stock, the cash proceeds of such Common Stock Offering or other
issuance or sale of Capital Stock, as the case may be, net of
(i) attorneys', accountants', underwriters' and placement agents'
fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such Common Stock Offering or other
issuance or sale of Capital Stock, as the case may be; and
(ii) all foreign, Federal, state and local taxes paid or payable by
AHMSA or a Consolidated Subsidiary as a direct result thereof.
For purposes of clause (a) of the foregoing, Net Cash Proceeds shall be deemed
to include awards of compensation for any asset or property taken by
condemnation or eminent domain and insurance proceeds for the loss of or damage
to any asset or property if such awards or proceeds equal or exceed US$ 1
million (per occurrence) and within 180 days after the receipt thereof such
asset or property has not been replaced or repair or construction has not
commenced, provided that if at any time such repair or construction is
commenced but then abandoned or otherwise discontinued prior to completion or
is not diligently pursued, such awards or proceeds, as the case may be, which
have not yet been used for such repair or construction shall constitute Net
Cash Proceeds at such time; provided, further, that no such disposition
described in this paragraph shall be required to meet the criteria set forth in
the first paragraph under "--Limitation on Certain Asset Dispositions."
"Permitted Holders" means GAN, any Wholly Owned Subsidiary of GAN and any
member of the Autrey or Ancira family.
"Permitted Investment" means
(i) any Investment by AHMSA or any of its Consolidated Subsidiaries in
AHMSA or any of its Consolidated Subsidiaries or that results in any person
becoming a Consolidated Subsidiary of AHMSA, whether through the transfer of
all or substantially all of the assets of such person or otherwise, provided
that such person's primary business is related, ancillary or complementary
to the business of AHMSA and its Consolidated Subsidiaries on the date of
such Investment;
(ii) an Investment in any Cash Equivalent;
(iii) payroll, fringe benefit, holiday, travel, relocation and similar
advances that are expected to be repaid or are in respect of matters that
are expected at the time of such advances ultimately to be treated as
expenses in accordance with Mexican GAAP;
(iv) loans or advances to employees (other than Affiliates) made in the
ordinary course of business and consistent with past practice of AHMSA and
its Consolidated Subsidiaries, provided that any such loan or advance in
excess of US$ 250,000 shall be evidenced by an unsubordinated promissory
note that is payable within six months of the date of such loan or advance;
(v) loans or advances to vendors or contractors of AHMSA or any of its
Consolidated Subsidiaries (other than Affiliates of AHMSA) in the ordinary
course of business;
(vi) Investments received in full or partial satisfaction (by judgment or
by good faith settlement) of any claim against trade creditors that are
bankrupt or insolvent, provided that the events or transactions giving rise
to such claim occurred in the ordinary course of the business of AHMSA or
any of its Consolidated Subsidiaries;
(vii) consideration other than cash or Cash Equivalents received in
connection with an Asset Disposition permitted under "--Limitation on
Certain Asset Dispositions;"
(viii) Investment in prepaid expenses, negotiable instruments held for
collection and lease, performance deposits and other similar deposits, in
each case entered into in the ordinary course of business of AHMSA or its
Consolidated Subsidiaries;
I-34
(ix) Investments in partnerships or joint ventures engaged in a business
substantially related, ancillary or complementary to the business engaged in
by AHMSA and its Consolidated Subsidiaries on the date of the Indenture up
to US$ 15 million per annum (plus any portion of such amounts permitted
hereunder but not applied in prior years); and
(x) Investments made on or before December 31, 1998 in the Apasco Joint
Venture or the Ryerson Joint Venture in an aggregate amount not to exceed
US$ 5.0 million at any one time outstanding.
"Permitted Working Capital Facility" means a borrowing facility or
facilities, now existing or hereinafter established, established exclusively
for the purposes of funding working capital and providing for
(i) the issuance of letters of credit and/or the creating of bankers'
acceptances for the benefit of trade creditors in the ordinary course of
business; or
(ii) the making of loans on a revolving basis.
"Preferred Stock" of any person means Capital Stock of such person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such person, to shares of Capital
Stock of any other class of such person.
"Redeemable Stock" of any person means any equity security of such person
that by its terms or otherwise is required to be redeemed prior to the final
maturity of the Notes or is redeemable at the option of the holder thereof at
any time prior to such final maturity or is convertible into or exchangeable
for debt securities at any time prior to such final maturity; provided that
Redeemable Stock will not include any shares representing variable Capital
Stock (capital variable, as defined under Chapter VIII of the Mexican General
Law of Commercial Companies) and having redemption features substantially
similar to those of AHMSA's variable Capital Stock outstanding on the date on
which the Notes are issued.
"Related Person" of any person means any other person directly or indirectly
owning (a) 5% or more of the Outstanding Common Stock of such person (or, in
the case of a person that is not a corporation, 5% or more of the equity
interest in such person) or (b) 5% or more of the combined voting power of the
Voting Stock of such person.
"Ryerson Joint Venture" means the joint venture formed in July 1994 between
AHMSA and Inland, a subsidiary of Inland Steel Industries, Inc., in which AHMSA
has a 50% equity interest, which provides steel products and management
services to small- and medium-sized customers.
"Sale and Leaseback Transaction" of any person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such person of any property or asset of such person which has
been or is being sold or transferred by such person to such lender or investor
or to any person to whom funds have been or are to be advanced by such lender
or investor on the security of such property or asset.
"Steam Coal Facility" means all facilities (whether or not in operation) and
property of AHMSA and its Subsidiaries, including MICARE, used in the business
of the exploration, development, mining and processing of steam coal, and any
business ancillary thereto or supportive thereof, including, without
limitation, the production, processing or treatment of by-products and process
wastes resulting from the production of steam coal.
"Steelmaking Facility" means all facilities whether or not in operation and
property located in Monclova or Mexico City used in AHMSA's business of the
manufacture and processing of steel, and any business ancillary thereto or
supportive thereof, including, without limitation, the production or processing
of raw materials (including iron ore and metallurgical coal) and the treatment
and processing of water and process wastes resulting from the manufacture of
steel.
I-35
"Subsidiary" of any person means
(i) a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
person or by one or more other Subsidiaries of such person or by such person
and one or more Subsidiaries thereof; or
(ii) any other person (other than a corporation) in which such person, or
one or more other Subsidiaries of such person or such person and one or more
other Subsidiaries thereof, directly or indirectly, has at least a majority
ownership and power to direct the policies, management and affairs thereof.
"Trade Accounts Receivable" of any person means trade accounts receivable
arising in the ordinary course of business from the sale of products to third
parties by such person or the provision of services to third parties by such
person calculated on a consolidated basis in accordance with Mexican GAAP.
"Voting Stock" of any person means Capital Stock of such person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" of any person means a Subsidiary of such person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares or shares held by an affiliate of such
person to satisfy legal requirements in the country of such Subsidiary's
incorporation) shall at the time be owned by such person or by one or more
Wholly Owned Subsidiaries of such person (or by such person and one or more
Wholly Owned Subsidiaries).
I-36
ANNEX II--DESCRIPTION OF OLD DISCOUNT CONVERTIBLE NOTES
General
The Old Discount Convertible Notes were issued under an Indenture, dated as
of December 16, 1996 (the "Old Discount Convertible Note Indenture"), between
AHMSA and The Chase Manhattan Bank, as Trustee (the "Old Discount Convertible
Note Trustee").
The following statements relating to the Old Discount Convertible Notes and
the Old Discount Convertible Note Indenture are summaries and are subject to
the detailed provisions of the Old Discount Convertible Note Indenture, to
which reference is hereby made for a complete statement of those provisions.
Because this section is a summary, it does not describe every aspect of the
Old Discount Convertible Notes. The summary is subject to and qualified in its
entirety by reference to the Trust Indenture Act of 1939 and to all the
provisions of the Old Discount Convertible Note, including definitions of some
terms used in the Old Discount Convertible Note Indenture. For example, in this
summary, capitalized words signify defined terms that have been given special
meaning in the Old Discount Convertible Note Indenture. The meanings for only
the more important terms are described under "Certain Defined Terms."
Principal Maturity and Interest
The Old Discount Convertible Notes will mature on December 15, 2001 ("Stated
Maturity"). The maximum aggregate principal amount at Stated Maturity of Old
Discount Convertible Notes that may be issued under the Old Discount
Convertible Note Indenture is limited to $85,000,000 ($97,750,000 aggregate
principal amount at Stated Maturity if the Underwriters' overallotment option
is exercised in full). The Old Discount Convertible Notes are senior, unsecured
obligations of AHMSA.
The Old Discount Convertible Notes were issued at an Original Issue Discount
(the excess of the principal amount at Stated Maturity over the Issue Price of
the Old Discount Convertible Notes) of 13.847% from their principal amount at
Stated Maturity. Current Interest equal to approximately 51/2% per annum on the
principal amount at Stated Maturity is payable in cash semi-annually on each
June 15 and December 15, commencing June 15, 1997, to the person in whose name
the Old Discount Convertible Note (or any predecessor Note) is registered at
the close of business on the preceding June 1 or December 1, as the case may
be. Current Interest on the Old Discount Convertible Notes is computed on the
basis of a 360-day year composed of twelve 30-day months. Unless other
arrangements are made, Current Interest is paid by check mailed to record
Holders. The balance of the interest on the Old Discount Convertible Notes will
consists of accrual of Original Issue Discount in the period during which the
Old Discount Convertible Notes remain outstanding, commencing on December 16,
1996, such that the rate of Current Interest on the Old Discount Convertible
Notes and accrual of such Original Issue Discount represent a yield to
maturity, compounded semi-annually, of 9% per annum, computed on a semi-annual
bond equivalent basis, using a 360-day year composed of twelve 30-day months.
There are no periodic payments of accrued Original Issue Discount. The
principal amount at Stated Maturity of an Old Discount Convertible Note
represents the Issue Price plus accrued Original Issue Discount through
December 15, 2001. For federal income tax purposes, a registered Holder of an
Old Discount Convertible Note is required to include the Original Issue
Discount accrual in income (on a constant yield basis) ratably over the term of
the Old Discount Convertible Note. Principal is payable, and the Old Discount
Convertible Notes may be presented for registration of transfer and exchange,
at the office or agency of AHMSA maintained for that purpose in the Borough of
Manhattan, the City and State of New York. Until otherwise designated by AHMSA,
such office or agency is the corporate trust office of the Trustee, which acts
as Paying Agent and Registrar.
The Old Discount Convertible Notes are issued only in fully registered form,
without coupons, in denominations of $1,000 and any integral multiple thereof.
No service charge is made for any registration of transfer or exchange of Old
Discount Convertible Notes, but AHMSA may require payment by a Holder of an
II-1
Old Discount Convertible Note of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
The Old Discount Convertible Notes do not have the benefit of any sinking
fund.
Ranking of the Old Discount Convertible Notes
The Old Discount Convertible Notes rank pari passu in the right of payment
with all other unsecured and unsubordinated indebtedness for money borrowed of
AHMSA.
Conversion Rights
A Holder may convert its Old Discount Convertible Notes or any portion
thereof that is a principal amount at Stated Maturity in an integral multiple
of $1,000 at any time prior to the close of business on December 15, 2001,
unless previously redeemed or repurchased, into ADSs representing the right to
receive five shares of Common Stock, at a conversion rate of 71,794 ADSs per
each U.S. $1,000 principal amount at Stated Maturity of Old Discount
Convertible Notes (the "Conversion Rate"), subject to adjustment as described
below. If any Old Discount Convertible Note is called by AHMSA for redemption,
see "Redemption at the Option of AHMSA," the Holder may convert its Old
Discount Convertible Note at any time before 12:00 noon (New York City time) on
the Redemption Date. AHMSA is not required to issue fractional ADSs but will
pay a cash adjustment in lieu thereof. If the Deposit Agreement is terminated
for any reason (and no successor deposit agreement is established), Holders of
the Old Discount Convertible Notes will thereafter receive such number of
shares of Common Stock per ADS as was represented by an ADS at the date of such
termination.
Current Interest accrued from the preceding Interest Payment Date shall not
be paid on Old Discount Convertible Notes converted. If any Old Discount
Convertible Note is converted between a regular record date for the payment of
Current Interest and the next succeeding Interest Payment Date, the Old
Discount Convertible Note upon surrender must be accompanied by funds equal to
the Current Interest payable on that Interest Payment Date on the Old Discount
Convertible Note so converted (unless the Old Discount Convertible Note shall
have been called for redemption prior to such Interest Payment Date, in which
case no such payment shall be required).
On conversion of an Old Discount Convertible Note, a Holder does not receive
any cash payment representing accrued Original Issue Discount. AHMSA's delivery
to the Holder of the fixed number of ADSs (or a cash adjustment, as provided in
the Indenture) into which the Old Discount Convertible Note is convertible is
deemed to satisfy AHMSA's obligation to pay the amount of accrued Original
Issue Discount on the Old Discount Convertible Note attributable to the period
from the Issue date to the date of conversion and AHMSA's obligation to repay
the Issue Price. Thus, the accrued Original Issue Discount is deemed to be paid
in full rather than cancelled, extinguished or forfeited. The Conversion Rate
will not be adjusted at any time during the term of the Old Discount
Convertible Notes for such accrued Original Issue Discount.
The Conversion Rate is subject to adjustment (or securities or other
property other than ADSs representing the right to receive shares of Common
Stock may become issuable) in certain events, including
(i) the subdivision, combination or reclassification of the outstanding
Common Stock of AHMSA;
(ii) the issuance by AHMSA of Common Stock as a dividend or distribution
on the Common Stock;
(iii) the issuance of rights, warrants or options (expiring within 45
days after the record date for the determination of stockholders entitled to
receive such rights, warrants or options) to all holders of Common Stock
entitling them to purchase shares of Common Stock or securities convertible
into or exchangeable for Common Stock at a price per share (or having a
conversion or exercise price per share) less than the current market price
(as defined in the Indenture) of the Common Stock on the record date;
II-2
(iv) the distribution by AHMSA to all holders of Common Stock of debt or
other securities or assets (excluding distributions paid exclusively in
cash) or rights, warrants or options to purchase assets or securities of
AHMSA (other than the rights and warrants referred to in clause (iii));
(v) distributions (other than regular or quarterly cash dividends)
consisting exclusively of cash (excluding any cash or any cash portion of
distributions referred to in (iv) above) to all holders of shares of Common
Stock in an aggregate amount that, together with:
(A) all other cash distributions (other than regular or quarterly
cash dividends) made within the preceding 12 months in respect of which
no adjustment has been made; and
(B) any cash and the fair market value of other consideration payable
in respect of any tender offer by AHMSA or any of its subsidiaries for
all or any portion of AHMSA's shares of Common Stock concluded within
the preceding 12 months in respect of which no adjustment has been made,
exceeds 7.5% of AHMSA's market capitalization (being the product of the
current market price per share of Common Stock (as determined pursuant
to the Indenture) times the number of shares of Common Stock then
outstanding) on the date fixed for determination of shareholders
entitled to receive such distribution; and
(vi) the successful completion of a tender offer made by AHMSA or any of
its subsidiaries for all or any portion of AHMSA's shares of Common Stock
involving an aggregate consideration that, together with:
(A) any cash and the fair market value of any other consideration
payable in respect of any tender offer by AHMSA or any of its
subsidiaries for AHMSA's shares of Common Stock consummated within the
12 months preceding the expiration of such tender offer in respect of
which no adjustment has been made; and
(B) the aggregate amount of any all-cash distributions (other than
regular or quarterly cash dividends) to all holders of AHMSA's shares of
Common Stock within the 12 months preceding the expiration of such
tender offer in respect of which no adjustment has been made, exceeds
7.5% of AHMSA's market capitalization on the expiration of such tender
offer.
Under the Old Discount Convertible Note Indenture "current market price" is
defined as the average of the last reported sale price of the Common Stock on
the Mexican Stock Exchange for 30 consecutive trading days commencing 45
trading days before the date in question.
AHMSA is not required to make any adjustment in the Conversion Rate of less
than 1%, but instead such adjustment will be carried forward and taken into
account in the computation of any subsequent adjustment. In addition to the
foregoing adjustments, AHMSA will be permitted to make such adjustments in the
Conversion Rate as it considers to be advisable in order that any event treated
for income tax purposes as a dividend of stock or stock rights will not be
taxable to the holders of the ADSs or the shares of Common Stock.
The adjustments described herein assume that each ADS delivered on
conversion of the Notes will continue to represent five shares of Common Stock.
If the number of shares of Common Stock represented by an ADS should change,
whether in conjunction with one of the foregoing adjustment events or
otherwise, the Conversion Rate per ADS (as so changed) shall be adjusted
proportionately.
A Holder delivering an Old Discount Convertible Note for conversion will not
be required to pay any taxes or duties in respect of the issue or delivery of
ADSs or shares of Common Stock represented thereby, or any fees of the
Depositary relating to the deposit of such shares of Common Stock, on
conversion. A Holder will be required to pay any tax or duty which may be
payable in respect of any transfer involved in the issue or delivery of the
ADSs in the name other than that of the Holder of the Old Discount Convertible
Note. Certificates representing ADSs will not be issued or delivered unless all
taxes and duties, if any, payable by the Holder have been paid.
II-3
If at any time AHMSA makes a distribution of property to its stockholders
which would be taxable to such stockholders as a dividend for United States
income tax purposes (e.g., distributions of evidences of indebtedness or assets
of AHMSA, but generally not stock dividends on Common Stock or rights to
subscribe for Common Stock) and, pursuant to the anti-dilution provisions of
the Old Discount Convertible Note Indenture, the number of ADSs into which Old
Discount Convertible Notes are convertible is increased, such increase may be
deemed for federal income tax purposes to be the payment of a taxable dividend
to Holders of Notes.
In case of any consolidation or merger of AHMSA with or into another person
or any merger of another person into AHMSA (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of the
Common Stock), or in case of any sale or conveyance by AHMSA of all or
substantially all of the assets of AHMSA, the Holder of each Old Discount
Convertible Note then outstanding shall have the right to convert such Old
Discount Convertible Note only into the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer by
a Holder of the number of shares of Common Stock (in the form of ADSs) into
which such Old Discount Convertible Note was convertible immediately prior
thereto (assuming such Holder of ADSs (and the Common Stock represented
thereby) failed to exercise any rights of election).
The right of conversion attaching to any Old Discount Convertible Note may
be exercised by the Holder by delivering the Old Discount Convertible Note at
the specified office of the conversion agent (which will be the Trustee),
accompanied by a duly signed and completed notice of conversion, a copy of
which may be obtained from the Trustee. The conversion date will be the date on
which the Old Discount Convertible Note and the duly signed and completed
notice of conversion are so delivered. As promptly as practicable on or after
the conversion date, AHMSA will issue and deliver the number of shares of
Common Stock then issuable upon conversion. AHMSA will, on behalf of the
Holder, deposit such shares of Common Stock with the Custodian for the
Depositary, as described under "Description of American Depositary
Receipts--Deposit, Transfer and Withdrawal" (unless the Deposit Agreement has
been terminated and no successor deposit agreement is established). Upon such
deposit, the Depositary will issue ADSs representing the shares of Common Stock
so deposited and will deliver such ADSs to the Trustee, together with payment
in U.S. dollars in lieu of any fraction of an ADS; such certificate will be
sent by the Trustee to the conversion agent (if other than the Trustee) for
delivery to the Holder. Such ADSs issuable by the Depositary upon conversion of
the Old Discount Convertible Notes, in accordance with the provisions of the
Indenture, will be validly issued and the shares of Common Stock represented
thereby will be validly issued, fully paid and nonassessable.
Redemption at the Option of AHMSA
Optional Redemption
The Old Discount Convertible Notes may not be redeemed at the option of
AHMSA except in the event of certain changes in Mexican tax law (as described
below under "--Redemption for Tax Reasons").
Redemption for Tax Reasons
If, as result of any amendment to, or change in, the laws (or any regulation
or rulings thereunder) of Mexico or any political subdivision or taxing
authority thereof or therein affecting taxation or any amendment to or change
in an official interpretation, administration or application of such laws,
regulations or rulings (including a holding by a court of competent
jurisdiction), which amendment or change of such laws, regulations or rulings
becomes effective on or after the date on which the Old Discount Convertible
Notes are originally issued, AHMSA would be obligated, after making any and all
reasonable endeavors to avoid such requirement, to pay Additional Amounts (as
defined below) in excess of the Additional Amounts that AHMSA would be
obligated to pay if payments made on the Old Discount Convertible Notes were
subject to withholding or deduction of Mexican Taxes at the rate of 15 percent,
then, at AHMSA's option, the Old Discount Convertible Notes may be redeemed in
whole, but not in part, at any time, on giving not less than 30 nor more than
60 days' notice mailed
II-4
to each Holder of Old Discount Convertible Notes at his address appearing in
the Old Discount Convertible Note Register, at a cash price equal to the sum of
(i) the Issue Price of the Old Discount Convertible Notes being redeemed;
(ii) the accrued Original Issue Discount thereon to the date fixed for
redemption;
(iii) the accrued and unpaid Current Interest thereon to the date fixed
for redemption; and
(iv) any Additional Amounts which would otherwise by payable (the
"Redemption Price").
provided, however, that
(i) no such notice of redemption may be given earlier than 90 days prior
to the earliest date on which AHMSA would be obligated to pay such
Additional Amounts were a payment on the Old Discount Convertible Notes then
due; and
(ii) at the time such notice of redemption is given, such obligation to
pay such Additional Amounts remains in effect.
Prior to the publication of any notice of redemption pursuant to this
provision, AHMSA shall deliver to the Trustee
(i) a certificate signed by a duly authorized officer of AHMSA stating
that AHMSA is entitled to effect such redemption and setting forth a
statement of facts showing that the conditions precedent of the right of
AHMSA so to redeem have occurred; and
(ii) an opinion of independent Mexican legal counsel of recognized
standing to the effect that AHMSA has or will become obligated to pay such
Additional Amounts as a result of such change or amendment. Such notice,
once delivered by AHMSA to the Trustee, will be irrevocable.
Repurchase at the Option of Holders
In the event of any Change in Control (as defined below) or in the event the
ADSs (or other equity securities into which the Old Discount Convertible Notes
are then convertible) are delisted from the New York Stock Exchange, in each
case occurring prior to the Stated Maturity of the Old Discount Convertible
Notes, each Holder of Old Discount Convertible Notes shall have the right, at
the Holder's option, to require AHMSA to repurchase all or any part (provided
that the principal amount at Stated Maturity is $1,000 or an integral multiple
thereof) of the Holder's Old Discount Convertible Notes on the date that is 60
days after the date of the occurrence of the Change in Control or the delisting
of the ADSs (or such other equity securities), as the case may be (the "Holder
Repurchase Date"), at a cash price equal to the sum of
(i) the Issue Price of the Old Discount Convertible Notes being
repurchased;
(ii) the accrued Original Issue Discount thereon to the Holder Repurchase
Date;
(iii) accrued and unpaid Current Interest thereon to the Holder
Repurchase Date; and
(iv) any Additional Amounts (as defined below) which would otherwise be
payable (the "Repurchase Price").
Within seven business days after the occurrence of a Change in Control or
the delisting of the ADSs (or such other equity securities), as the case may
be, AHMSA is obligated to mail to the Trustee and to all Holders of Old
Discount Convertible Notes at their addresses shown in the register of the
registrar (and to beneficial owners as required by applicable law) a notice
regarding the Change in Control or the delisting, as the case may be, stating,
among other things,
(i) the last date on which the repurchase right may be exercised;
(ii) the applicable Repurchase Price;
II-5
(iii) the Holder Repurchase Date;
(iv) the name and address of the Trustee and of any other office or
agency maintained for the purpose of the surrender of Old Discount
Convertible Notes for redemption; and
(v) the procedures that Holders of Old Discount Convertible Notes must
follow to exercise these rights.
To exercise this right, the Holder must deliver written notice (a "Holder
Repurchase Notice") to the Trustee or to any other office or agency maintained
for that purpose of the exercise of the redemption right prior to the close of
business on the Holder Repurchase Date. The Holder Repurchase Notice must state
(i) the portion of the principal amount at Stated Maturity of Old
Discount Convertible Notes to be repurchased, which portion must be $1,000
or an integral multiple thereof; and
(ii) that such Old Discount Convertible Notes are to be repurchased by
AHMSA on the Holder Repurchase Date pursuant to the applicable provisions of
the Old Discount Convertible Notes.
Any Holder Repurchase Notice may be withdrawn by the Holder by a written
notice of withdrawal delivered to the Trustee or to any other office or agency
maintained for that purpose on or prior to the Holder Repurchase Date. The
notice of withdrawal shall state the principal amount at Stated Maturity as to
which the withdrawal notice relates and the principal amount at Stated
Maturity, if any, that remains subject to the original Holder Repurchase Notice.
Payment of the Repurchase Price for an Old Discount Convertible Note for
which a Holder Repurchase Notice has been delivered and not withdrawn is
conditioned upon deliver of the Old Discount Convertible Note to the Trustee or
to any other office or agency maintained for that purpose, at any time (whether
prior to, on or after the Holder Repurchase Date) after delivery of the Holder
Repurchase Notice. Payment of the Repurchase Price for the Old Discount
Convertible Note will be made promptly following the later of the Holder
Repurchase Date or the time of delivery of the Note. If the Trustee holds, in
accordance with the Indenture, money sufficient to pay the Repurchase Price of
the Note on the Holder Repurchase Date, then, on and after the Holder
Repurchase Date, the Old Discount Convertible Note shall cease to be
outstanding and interest thereon will cease to accrue, whether or not the Old
Discount Convertible Note is delivered to the Trustee or to any other office or
agency maintained for that purpose, and all other rights of the Holder shall
terminate (other than the right to receive the Repurchase Price upon delivery
of the Old Discount Convertible Note).
A Change in Control shall be deemed to have occurred if at such time after
the date of the Indenture:
(i) any person (including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Securities Exchange Act of 1934), together
with any Affiliates or Related Persons thereof, shall beneficially own
(determined in accordance with Rule 13d-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as in effect
on the date of original execution of the Old Discount Convertible Note
Indenture), directly or indirectly, shares of capital stock of AHMSA
entitling such person to exercise 50% or more of the total voting power of
all shares of capital stock of AHMSA entitled to vote generally in elections
of directors; or
(ii) any person, together with any Affiliates or Related Persons thereof,
shall succeed in having a sufficient number of its nominees elected to the
Board of Directors of AHMSA such that such nominees, when added to any
existing directors remaining on the Board of Directors of AHMSA after such
election who is an Affiliate or Related Person of such person, or an
officer, director or employee of such person, Affiliate or Related Person,
will constitute a majority of the Board of Directors of AHMSA;
provided, however, that a Change in Control shall not be deemed to have
occurred if such person, together with such Affiliates or Related Persons, is
comprised of any of GAN, any wholly owned subsidiary thereof or members of the
Autrey and Ancira families.
II-6
As used herein, "Affiliate" of any person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such person, and "Related Person" of any person means any other
person directly or indirectly owning
(a) 10% or more of the outstanding common stock of such person (or, in
the case of a person that is not a corporation, 10% or more of the equity
interest in such person) or
(b) 10% or more of the combined voting power of the voting stock of such
person.
Additional Amounts
All payments made by AHMSA under or with respect to the Old Discount
Convertible Notes will be made after withholding or deduction for or on account
of any present or future taxes, duties, assessments or governmental charges of
whatever nature imposed, levied, collected, withheld or assessed by or on
behalf of Mexico, any subdivision thereof or any authority therein or thereof
having power to tax ("Mexican Taxes"). AHMSA will pay such additional amounts
("Additional Amounts") in respect of Mexican Taxes as will result in receipt by
the Holders of such amounts as would have been received by them had no such
withholding or deduction been required, except that no such Additional Amounts
shall be payable for or on account of:
(1) any Mexican Taxes, to the extent that such Mexican Taxes would not
have been imposed but for the fact that such Holder or beneficial owner
(A) was a resident or citizen of Mexico, or maintained a permanent
establishment or fixed base in Mexico or any of its respective
territories or any political subdivision thereof to which the income in
respect of such Note was attributable or otherwise had some connection
with Mexico other than the mere ownership of, or receipt of any payment
in respect of such Old Discount Convertible Note; or
(B) presented such Old Discount Convertible Note more than 30 days
after the date on which the payment in respect of such Old Discount
Convertible Note first became due and payable or provided for, whichever
is later;
(2) any estate, inheritance, gift, sales, transfer, personal property or
similar tax, duty, assessment or other governmental charge;
(3) any tax, duty, assessment or other governmental charge which is only
payable otherwise than by withholding or deduction from payments in respect
of the Old Discount Convertible Notes;
(4) any Mexican Taxes that would not have been imposed but for the
failure of the Holder or beneficial owner of:
(i) such Old Discount Convertible Note to comply with any
certification, identification, information, documentation or other
reporting requirement if such compliance is required by law, regulation,
administrative practice or an applicable treaty as a precondition to
exemption from, or reduction in the rate of, deduction or withholding
of, Mexican Taxes; and
(ii) at least 60 days prior to the first Interest Payment Date with
respect to which AHMSA shall apply this clause (4), AHMSA shall have
notified the Holders of the Old Discount Convertible Notes that such
Holders or beneficial owners of the Old Discount Convertible Notes will
be required to comply with such requirement;
(5) any Mexican Taxes imposed at a rate in excess of the 4.9% Reduced
Rate in effect on the date hereof and uniformly applicable in respect of
payments made by AHMSA to all Holders or beneficial owners eligible for the
benefits of a treaty for the avoidance of double taxation to which Mexico is
a party without regard to the particular circumstances of such Holders or
beneficial owners (provided that, upon any subsequent increase in the rate
of Mexican Taxes that would be applicable to payments to all such Holders or
beneficial owners without regard to their particular circumstances, such
increased rate shall be substituted for the 4.9% rate for purposes of this
clause (5)), but only to the extent that:
II-7
(i) such Holder or beneficial owner has failed to provide on a timely
basis, at the reasonable request of AHMSA (subject to the conditions set
forth below), information, documentation or other evidence (not
described in paragraph (4) above) concerning whether such Holder or
beneficial owner is eligible for benefits under a treaty for the
avoidance of double taxation to which Mexico is a party if necessary to
determine the appropriate rate of deduction or withholding of Mexican
Taxes under such treaty or under any law; and
(ii) at least 60 days prior to the first payment date with respect to
which AHMSA shall make such reasonable request, AHMSA shall have
notified the Holders of the Old Discount Convertible Notes, in writing,
that such Holders or beneficial owners of the Old Discount Convertible
Notes will be required to provide such information, documentation or
other evidence; or
(6) any combination of items (1), (2), (3), (4) and (5);
nor shall Additional Amounts be paid with respect to any payment in respect of
the Old Discount Convertible Notes to any Holder who is a fiduciary or
partnership or other than the sole beneficial owner of such payment to the
extent such payment would be required by the laws of Mexico (or any political
subdivision or taxing authority thereof or therein) to be included in the
income for tax purposes of a beneficiary or settlor with respect to such
fiduciary or partner in such partnership or a beneficial owner who would not
have been entitled to such Additional Amounts had it been the Holder of the Old
Discount Convertible Note.
Notwithstanding the foregoing, the limitations on AHMSA's obligation to pay
Additional Amounts set forth in clauses (4) and (5) above shall not apply if
(a) the provision of information, documentation or other evidence described in
such clauses (4) and (5) would be materially more onerous, in form, in
procedure or in the substance of information disclosed, to a Holder or
beneficial owner of an Old Discount Convertible Note (taking into account any
relevant differences between U.S. and Mexican law, regulation or administrative
practice) than comparable information or other reporting requirements imposed
under U.S. tax law, regulation and administrative practice (such as IRS Forms
1001, W-8 and W-9) or (b) Rule 252 issued by the Secretaria de Hacienda y
Credito Publico (Ministry of Finance and Public Credit) on March 29, 1996 or a
substantially similar successor of such rule is in effect, unless the provision
of the information, documentation or other evidence described in clauses (4)
and (5) is expressly required by statute, regulation, ruling or administrative
practice in order to apply Rule 252 (or a substantially similar successor of
such rule), AHMSA cannot obtain such information, documentation or other
evidence on its own through reasonable diligence and AHMSA otherwise would meet
the requirements for application of Rule 252 (or such successor of such rule).
In addition, such clauses (4) and (5) shall not be construed to require that a
non-Mexican pension or retirement fund or a non-Mexican financial institution
or any other Holder register with the Ministry of Finance and Public Credit for
the purpose of establishing eligibility for an exemption from or reduction of
Mexican withholding tax. Furthermore, compliance with any such requirements
under clause (4) or requests under clause (5) shall not require the disclosure
to AHMSA, any Paying Agent or any governmental authority of the nationality,
residence or identity of the beneficial owner of an Old Discount Convertible
Note that is not eligible for any exemption from withholding or deduction of
all or any part of such Mexican Taxes (other than such compliance than can be
satisfied by a custodian, nominee or other agent of such beneficial owner
certifying to the effect that such beneficial owner is not eligible for any
exception from withholding or deduction of all or any part of such Mexican
Taxes, provided that payment by such custodian, nominee or agent to such
beneficial owner is not otherwise subject to any such requirement).
AHMSA will provide the Trustee with documentation satisfactory to the
Trustee evidencing the payment of Mexican Taxes in respect of which AHMSA has
paid any Additional Amounts. Copies of such documentation will be made
available to any Holder of an Old Discount Convertible Note and any relevant
Paying Agent upon request therefor.
Any reference herein, in the Indenture or in the Old Discount Convertible
Notes to principal, Initial Price premium, Current Interest, accrued Original
Issue Discount, Redemption Price, Repurchase Price or any other
II-8
amount payable under or with respect to the Old Discount Convertible Notes
shall be deemed also to refer to any Additional Amounts which may be payable
under the undertakings referred to in this provision.
In the event that Additional Amounts actually paid with respect to the Old
Discount Convertible Notes are based on rates of deduction or withholding of
taxes, duties, assessments or governmental charges in excess of the appropriate
rate applicable to the Holder or beneficial owner of a Old Discount Convertible
Note, and, as a result thereof, such Holder or beneficial owner is entitled to
make a claim for a refund or credit of such excess, then such Holder or
beneficial owner shall, by accepting the Old Discount Convertible Notes, be
deemed to have assigned and transferred all right, title and interest to any
such claim for a refund or credit of such excess to AHMSA. By making such
assignment, however, the Holder or beneficial owner makes no representation or
warranty that AHMSA will be entitled to receive such claim for a refund or
credit and such Holder or beneficial owner incurs no other obligation with
respect thereto, including, without limitation, no obligation to execute any
other instrument of transfer or to incur any expense in connection with such
transfer.
Covenants
The Old Discount Convertible Note Indenture contains, among others, the
following covenants:
Listing of Old Discount Convertible Notes and ADSs
AHMSA will, at its own cost and expense, cause the Old Discount Convertible
Notes and the ADSs (or other equity securities into which the Notes are from
time to time convertible) into which the Old Discount Convertible Notes are
convertible to be approved for listing on the New York Stock Exchange and will
maintain such listing for the Old Discount Convertible Notes and the ADSs (or
any successor depositary shares issued pursuant to a successor deposit
agreement).
Existence
Subject to the provisions described under "Mergers, Consolidations and
Certain Sales and Purchases of Assets" below, AHMSA will, and will cause each
Material Subsidiary of AHMSA to, do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights (charter and
statutory) and franchises; provided, however, that AHMSA shall not be required
to preserve the existence of any Material Subsidiary, and AHMSA or any Material
Subsidiary shall not be required to preserve any such right or franchise if in
the judgment of AHMSA the preservation thereof is no longer desirable in the
conduct of the business of AHMSA or such Material Subsidiary, as the case may
be, and the loss thereof is not disadvantageous in any material respect to the
Holders.
Maintenance of Properties
AHMSA will cause all properties used or useful in the conduct of its
business or the business of any subsidiary of AHMSA to be maintained and kept
in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
AHMSA may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; provided, however,
that nothing in this provision shall prevent AHMSA from discontinuing the
operation or maintenance of any of such properties if such discontinuance is,
in the judgment of AHMSA, desirable in the conduct of its business or the
business of any subsidiary and not disadvantageous in any material respect to
the Holders.
Payment of Taxes and Other Claims
AHMSA will pay or discharge or cause to be paid or discharged:
(a) before the same shall become delinquent, all taxes, assessments or
governmental charges levied or imposed upon AHMSA or any of its subsidiaries
or upon the income, profits or property of AHMSA or any
II-9
of its subsidiaries (other than taxes, assessments or governmental charges
the nonpayment of which would not have a material adverse effect on the
conduct of the business, financial position or results of operations of
AHMSA or any of its Material Subsidiaries and which, if unpaid, would not
result in a lien upon the property of AHMSA or any of its Material
Subsidiaries); and
(b) all lawful claims for labor, materials and supplies, which are for at
least $1,000,000 and remain unpaid for at least 60 days after the due date
therefor and which, if unpaid, might by law become a lien upon the property
of AHMSA or any of its subsidiaries; provided, however, that AHMSA shall not
be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings and if such
reserves or other appropriate provision, if any, as shall be required by
Mexican generally accepted accounting principles ("Mexican GAAP") shall have
been made therefor.
Maintenance of Insurance
AHMSA shall, and shall cause each of its Material Subsidiaries to, keep at
all times all of their properties relating to the Steelmaking Facility or the
Steam Coal Facility which are of an insurable nature insured against loss or
damage with insurers believed by AHMSA to be responsible to the extent that
property of similar character is usually so insured by Mexican corporations
similarly situated and owning like properties in accordance with good business
practice. AHMSA shall, and shall cause its Material Subsidiaries to, use the
proceeds from any such insurance policy to repair, replace or otherwise restore
the property to which such proceeds relate, except to the extent that AHMSA
shall determine that the repair, replacement or restoration of such property is
not desirable in the conduct of its business or the business of any Material
Subsidiary and that such failure to repair, replace or restore is not
disadvantageous in any material respect to the Holders.
Further Assurances
AHMSA will, at its own cost and expense, execute and deliver to the Trustee
all such other documents, instruments and agreements and do all such other acts
and things as may be reasonably required to enable the Trustee to exercise and
enforce its rights under the Old Discount Convertible Note Indenture and under
the documents, instruments and agreements required under the Indenture and to
carry out the intent of the Old Discount Convertible Note Indenture.
Certain Defined Terms
As used herein, "Material Subsidiary" means any subsidiary which
(i) owns, directly or indirectly, any part of either of the Steelmaking
Facility or the Steam Coal Facility having an aggregate book value in excess
of 20% of the total aggregate book value of the Steelmaking Facility or the
Steam Coal Facility, as the case may be; or
(ii) contributes in excess of 20% of the total consolidated revenues of
AHMSA; "Steam Coal Facility" means all facilities (whether or not in
operation) and property of AHMSA and its subsidiaries, including Minera
Carbonifera Rio Escondido S.A. de C.V., used in the business of the
exploration, development, mining and processing of steam coal, and any
business ancillary thereto or supportive thereof, including, without
limitation, the production, processing or treatment of by-products and
process wastes resulting from the production of steam coal; and "Steelmaking
Facility" means all facilities whether or not in operation and property
located in Monclova or Mexico City used in AHMSA's business of the
manufacture and processing of steel, and any business ancillary thereto or
supportive thereof, including, without limitation, the production or
processing of raw materials (including iron ore and metallurgical coal) and
the treatment and processing of water and process wastes resulting from the
manufacture of steel.
Provision of Financial Information
AHMSA shall
(a) transmit, or cause the Trustee to transmit, by mail to all Holders,
as their names and addresses appear in the Old Discount Convertible Note
Register, without cost to such Holders; and
II-10
(b) file with the Trustee, copies of the annual reports, interim reports
and other documents which AHMSA files with or furnished to the Securities
and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, or any successor provision thereto, or would have been
required to file with or furnish to the Securities and Exchange Commission
pursuant to such Section 13(a) or 15(d) or any successor provisions thereto
if AHMSA were required to be subject to such Sections, within 15 days of the
respective dates on which AHMSA is required to (or would have been required
to) file such documents with the Securities and Exchange Commission.
Mergers, Consolidations and Certain Sales and Purchases of Assets
AHMSA may not, in a single transaction or a series of related transactions,
(i) consolidate with or merge into any other person or permit any other
person to consolidate with or merge into AHMSA; or
(ii) directly or indirectly, transfer, convey, sell, lease or otherwise
dispose of all or substantially all of its properties and assets as an
entirety;
unless in any such transaction:
(1) in a transaction in which AHMSA does not survive or in which AHMSA
sells, leases or otherwise disposes of all or substantially all of its
assets, the successor entity to AHMSA is organized under the laws of the
United States of America or any State thereof or the District of Columbia or
the United Mexican States or any State thereof and shall expressly assume,
by a supplemental indenture executed and delivered to the Trustee in form
reasonably satisfactory to the Trustee, all of AHMSA's obligations under the
Old Discount Convertible Notes and the Indenture and the performance of the
covenants contained in the Old Discount Convertible Note Indenture, and
shall expressly provide for the conversion rights described herein and in
the Old Discount Convertible Note Indenture;
(2) immediately before and after giving effect to such transaction, no
Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default shall have occurred
and be continuing;
(3) AHMSA or the successor entity to AHMSA shall expressly agree to
indemnify each Holder of an Old Discount Convertible Note (or Holder of a
beneficial interest therein) against any tax, levy, assessment or
governmental charge payable by withholding or deduction thereafter imposed
on such Holder solely as a consequence of such transaction with respect to
payments in respect of the Old Discount Convertible Notes or any purchase
thereof by AHMSA; and
(4) AHMSA shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer, or lease and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture, complies
with the provisions of the Old Discount Convertible Note Indenture and that
all of the conditions precedent provided in the Old Discount Convertible
Note Indenture relating to such transaction have been satisfied.
Events of Default
An Event of Default is defined in the Old Discount Convertible Note
Indenture as being: default in payment of principal (including any Additional
Amounts) at Stated Maturity or otherwise; or a default in the payment of the
Redemption Price or Repurchase Price when due upon redemption or repurchase of
the Old Discount Convertible Notes; or default for 30 days in payment of any
Current Interest (including any Additional Amounts); or the failure of AHMSA to
observe or perform any other covenant in the Old Discount Convertible Note
Indenture or Old Discount Convertible Note for a period of 30 days after
receipt of written notice of such failure from the Trustee (or Holders of at
least 25% aggregate principal amount at Stated Maturity of the Old Discount
Convertible Notes then outstanding); or certain events of bankruptcy,
insolvency, receivership or
II-11
reorganization; or a default by AHMSA or any subsidiary on any other mortgage,
indenture or instrument under which there may be issued, secured or evidenced
any indebtedness for borrowed money of AHMSA or any subsidiary in an amount
exceeding $10,000,000 (or the equivalent thereof in other currency or currency
units) which default constitutes the failure to pay the principal (or any
premium relating thereto) of, or interest or additional amounts on, such
indebtedness when due (after the expiration of any applicable grace period); or
a default under the terms of any other mortgage, indenture or instrument under
which here may be issued, secured or evidenced any indebtedness for money
borrowed of AHMSA or any subsidiary, which default results in any such
indebtedness of AHMSA or any subsidiary having an outstanding principal amount
in excess of $10,000,000 (or the equivalent thereof in other currency or
currency units) becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable; or the rendering of a
final judgment or judgments (not subject to appeal by a court or courts of
competent jurisdiction) against AHMSA or any subsidiary in an amount in excess
of $10,000,000 (or the equivalent thereof in other currency or currency units)
which remains undischarged or unstayed for a period of 60 days after the date
on which the right appeal has expired; or all or a substantial part of the
property and assets or shares of AHMSA and its subsidiaries taken as a whole,
or of any Material Subsidiary and its subsidiaries taken as a whole, are
nationalized or expropriated by any governmental authority, or any license,
permit or other authorization material to the conduct of the business of AHMSA
and its subsidiaries taken as a whole is revoked, and such revocation has not
been stayed, vacated or suspended within a period of 60 days (or, if stayed or
suspended, thereafter ceases to be stayed or suspended), or it has become
unlawful for AHMSA to perform or comply with its obligations under the Old
Discount Convertible Note Indenture or the Old Discount Convertible Notes; or
the failure of AHMSA to convert any Old Discount Convertible Notes then
outstanding as provided under "Conversion" upon the exercise by any Holder of
such Old Discount Convertible Notes of its conversion right and upon
satisfaction of all conditions to such conversion and the continuation of such
failure for seven business days.
The Old Discount Convertible Note Indenture provides that if an Event of
Default (other than an Event of Default arising from certain events of
bankruptcy, insolvency, receivership or reorganization) shall occur and be
continuing, either the Trustee or the Holders of at least 25% in principal
amount at Stated Maturity of the Old Discount Convertible Notes then
outstanding may declare to be due and payable immediately the sum of
(i) the Issue Price of the Old Discount Convertible Notes;
(ii) the accrued Original Issue Discount thereon to the date of
declaration;
(iii) accrued and unpaid Current Interest thereon to the date of
declaration; and
(iv) any Additional Amounts which would otherwise be payable.
Upon certain conditions such declaration may be annulled and past defaults
(except, unless theretofore cured, non-payment of principal or interest on the
Old Discount Convertible Notes) may be waived as provided in the Old Discount
Convertible Note Indenture. For information as to waiver of defaults, see
"Modification and Waiver." If any Event of Default arising from certain events
of bankruptcy, insolvency, receivership or reorganization occurs, the Old
Discount Convertible Notes then outstanding will ipso facto become immediately
due and payable without any declaration or other act on the part of the Trustee
or any Holder.
The Old Discount Convertible Note Indenture requires AHMSA to furnish to the
Trustee quarterly a statement as to the performance by AHMSA of certain of its
obligations under the Old Discount Convertible Note Indenture and to deliver to
the Trustee notice of any default in the performance of any covenant, agreement
or condition contained in the Old Discount Convertible Note Indenture forthwith
upon becoming aware of such default. The Old Discount Convertible Note
Indenture provides that the Trustee shall, within 90 days after the occurrence
of a default, give to the Holders of the Old Discount Convertible Notes notice
of all uncured defaults known to it; provided that, except in the case of
default in the payment of principal or interest on any of the Old Discount
Convertible Notes, the Trustee shall be protected in withholding such notice if
and so long as the Trustee in good faith determines that the withholding of
such notice is in the interest of the Holders of the Old Discount Convertible
Notes, The term "default" for the purpose of this provision only shall mean the
happening of any of the Events of Default specified above excluding any grace
periods.
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The Old Discount Convertible Note Indenture contains a provision entitling
the Trustee, subject to the duty of the Trustee during default to act with the
required standard of care, to be indemnified by the Holders of the Old Discount
Convertible Notes before proceeding to exercise any right or power under the
Old Discount Convertible Note Indenture at the request of the Holders. The Old
Discount Convertible Note Indenture provides that the Holders of a majority in
principal amount at maturity of the Old Discount Convertible Notes then
outstanding may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee, provided that the Trustee may decline to act if the
Trustee being advised by counsel determines such direction is contrary to law
or if the Trustee determines in good faith that the proceeding so directed
would be illegal or would involve it in personal liability or would be unjustly
prejudicial to the Holders of the Old Discount Convertible Notes not consenting.
Governing Law and Submission to Jurisdiction
The Old Discount Convertible Note Indenture and the Old Discount Convertible
Notes are governed by the laws of the State of New York. Each of the parties to
the Old Discount Convertible Note Indenture submits to the jurisdiction of
Federal and State courts located in the Borough of Manhattan, City and State of
New York and each party submits to the jurisdiction of the courts of its own
corporate domicile (domicilio social), for purposes of all legal actions and
proceedings instituted in connection with the Old Discount Convertible Notes
and the Old Discount Convertible Note Indenture. AHMSA has appointed GANAHMSA
as its authorized agent upon which process may be served in any such action.
Currency Indemnity
U.S. Dollars are the sole currency of account and payment for all sums
payable by AHMSA under or in connection with the Old Discount Convertible
Notes, including damages, and AHMSA is not entitled to make any payments with
respect to the Old Discount Convertible Notes in any currency other than U.S.
Dollars. Any amount received or recovered in a currency other than Dollars
(whether as a result of, or of the enforcement of, a judgment or order of a
court of any jurisdiction, in the winding-up or dissolution of AHMSA or
otherwise) by any Holder of an Old Discount Convertible Note in respect of any
sum expressed to be due to it from AHMSA shall only constitute a discharge to
AHMSA the extent of the Dollar amount which the recipient is able to purchase
with the amount so received or recovered in that other currency on the date of
that receipt or recovey (or, if it is not practicable to make the purchase on
that date, on the first date on which it is practicable to do so). If that
Dollar amount is less than the Dollar amount expressed to be due to the
recipient under any Old Discount Convertible Note, AHMSA shall indemnify it
against any loss sustained by it as a result. In any event, AHMSA shall
indemnify the recipient against the cost of making any such purchase. For the
purposes of this paragraph, it will be sufficient for the Holder of an Old
Discount Convertible Note to certify in a satisfactory manner (indicating the
sources of information used) that it would have suffered a loss had an actual
purchase of Dollars been made with the amount so received in that other
currency on the date of receipt or recovery (or, if a purchase of Dollars on
such date had not been practicable, on the first date on which it would have
been practicable, it being required that the need for a change of date be
certified in the manner mentioned above). These indemnities constitute a
separate and independent obligation from AHMSA's other obligations, shall give
rise, to the extent permitted by applicable law, to a separate and independent
cause of action, shall apply irrespective of any indulgence granted by any
Holder of an Old Discount Convertible Note and shall continue in full force and
effect despite any other judgment, order, claim or proof for a liquidated
amount in respect of any sum due under any Old Discount Convertible Note.
Modification of Old Discount Convertible Note Indenture
The Old Discount Convertible Note Indenture may be amended by the Trustee
and AHMSA for the purpose of curing any ambiguity, or of curing, correcting or
supplementing any defective provision contained therein, or in any other manner
in which the parties may mutually deem necessary or desirable and which AHMSA
and the Trustee determine shall not adversely affect the interests of the
Holders of the Old Discount Convertible Notes.
II-13
With the consent of the Holders of at least a majority in aggregate
principal amount of the Old Discount Convertible Notes then outstanding, the
Trustee and AHMSA may execute a supplemental indenture to add provisions to, or
change in any manner or eliminate any provisions of, the Old Discount
Convertible Note Indenture or modify in any manner the rights of the Holders;
provided, however, that, without the consent of the Holder of each Old Discount
Convertible Note, no such supplemental indenture shall
(i) extend the Stated Maturity of any Old Discount Convertible Note, or
reduce the rate or extend the time of payment of interest thereon, change
the rate of accrual of extend the time for payment in connection with the
Original Issue Discount or reduce the principal amount thereof or the amount
payable thereon in the event of acceleration or the amount thereof payable
in bankruptcy; or
(ii) reduce the aforesaid percentage of Old Discount Convertible Notes
the Holders of which are required to consent to any such supplemental
indenture; or
(iii) make any change that adversely affects the right to convert or the
Conversion Rate for any Old Discount Convertible Note.
Concerning the Trustee
The Chase Manhattan Bank is the Trustee under the Old Discount Convertible
Note Indenture. AHMSA and its subsidiaries may maintain deposit accounts and
conduct other banking transactions with the Trustee in the ordinary course of
business.
Book-Entry
The Old Discount Convertible Notes are issued in the form of a global note
or notes (together, the "Global Note") deposited with, on or behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co. as
DTC's nominee. Owners of beneficial interests in the Notes represented by the
Global Note will hold such interests pursuant to the procedures and practices
of DTC and must exercise any rights in respect of their interests (including
any right to convert or require redemption of their interests) in accordance
with those procedures and practices. Such beneficial owners will not be
Holders, and will not be entitled to any rights under the Global Note or the
Old Discount Convertible Note Indenture, with respect to the Global Note and
AHMSA and the Trustee, and any of their respective agents, may treat DTC as the
sole Holder and owner of the Global Note.
DTC has advised AHMSA as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934. DTC holds securities that its
participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers (including Merrill Lynch & Co.), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities brokers
and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Commission.
Unless and until they are exchanged in whole or in part for certificated Old
Discount Convertible Notes in definitive form as set forth below, the Global
Note may not be transferred except as a whole by DTC to a nominee of DTC, or by
a nominee of DTC to DTC or another nominee of DTC.
II-14
The Old Discount Convertible Notes represented by the Global Note will not
be exchangeable for certificated Old Discount Convertible Notes, provided that
if DTC is at any time unwilling, unable or ineligible to continue as depositary
and a successor depositary is not appointed by AHMSA within 90 days, AHMSA will
issue individual Old Discount Convertible Notes in definitive form in exchange
for the Global Note. In addition, AHMSA may at any time and in its sole
discretion determine not to have a Global Note, and, in such event, will issue
individual Old Discount Convertible Notes in definitive form in exchange for
the Global Note previously representing all such Old Discount Convertible
Notes. In either instance, an owner of a beneficial interest in a Global Note
will be entitled to physical delivery of Old Discount Convertible Notes in
definitive form equal in principal amount to such beneficial interest and to
have such Old Discount Convertible Notes registered in its name. Individual Old
Discount Convertible Notes so issued in definitive form will be issued in
denominations of $1,000 and any larger amount that is an integral multiple of
$1,000 and will be issued in registered form only, without coupons.
Payments of principal of and interest on the Old Discount Convertible Notes
will be made by AHMSA through the Trustee to DTC or its nominee, as the case
may be, as the registered owner of the Global Note. Neither AHMSA nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
the Global Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. AHMSA expects that DTC, upon
receipt of any payment of principal or interest in respect of the Global Note,
will credit the accounts of the related participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global Note as shown on the records of DTC. AHMSA also expects
that payments by participants to owners of beneficial interests in the Global
Note will be governed by standing customer instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
So long as the Old Discount Convertible Notes are represented by a Global
Note, DTC or its nominee will be the only entity that can exercise a right of
redemption pursuant to the Holder's option to elect redemption of its Old
Discount Convertible Notes or the right of conversion of the Old Discount
Convertible Notes. Notice by participants or by owners of beneficial interests
in a Global Note held through such participants of the exercise of the option
to elect redemption, or the right of conversion, of beneficial interests in Old
Discount Convertible Notes represented by the Global Note must be transmitted
to DTC in accordance with its procedures on a form required by DTC and provided
to participants. In order to ensure that DTC's nominee will timely exercise a
right of redemption, or the right of conversion, with respect to a particular
Old Discount Convertible Note, the beneficial owner of such Old Discount
Convertible Notes must instruct the broker or other participant through which
it holds an interest in such Old Discount Convertible Notes to notify DTC of
its desire to exercise a right of redemption, or the right of conversion.
Different firms have different cut-off times for accepting instructions from
their customers and, accordingly, each beneficial owner should consult the
broker or other participant through which it holds an interest in an Old
Discount Convertible Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to DTC.
AHMSA will not be liable for any delay in delivery of such notice to DTC.
II-15
ANNEX III--FORM OF SUPPLEMENTAL INDENTURE
FOR OLD SENIOR NOTES
SECOND SUPPLEMENTAL INDENTURE
THIS SECOND SUPPLEMENTAL INDENTURE (the "Second Supplemental Indenture"),
dated as of , 2001, by and between Altos Hornos de Mexico (the "Company"), a
stock corporation with variable capital (sociadad anonima de capital variable)
duly organized and existing under the laws of the United Mexican States, and
Wells Fargo Bank Minnesota, N.A., as Trustee (the "Trustee").
WHEREAS, the Company and the Trustee executed an indenture, dated as of May
6, 1997 (the "Indenture"), relating to $200,000,000 of the Company's 11 3/8%
Series A Senior Notes due April 30, 2002 (the "Series A Notes") $225,000,000 of
the Company's 11 7/8% Series B Senior Notes due April 30, 2004 (the "Series B
Notes" and, together with the Series A Notes, the "Securities"); and
WHEREAS, Section 9.02 of the Indenture provides that the Company and the
Trustee may execute and deliver one or more supplemental indentures, with the
consent of the Holders (as defined in the Indenture) of at least a majority in
principal amount of the outstanding Securities of each Series to, among other
things, change or eliminate certain provisions of the Indenture; and
WHEREAS, the Company and the Trustee desire to amend the Indenture for the
purpose of changing and eliminating certain of such provisions; and
WHEREAS, the Company has received consents to such modifications from the
Holders of at least a majority in principal amount of the outstanding
Securities of each Series; and
WHEREAS, all conditions precedent provided for in the Indenture relating to
this Second Supplemental Indenture have been complied with;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the Company and the Trustee for the benefit of each other and for
the equal and ratable benefit of the Holders of the Securities agree as follows:
ARTICLE I.
EFFECTIVENESS AND EFFECT
SECTION 1.1. Effectiveness and Effect.
This Second Supplemental Indenture shall take effect and the amendments
provided for in Article Two hereof shall become operative only upon, and
simultaneously with, the date on which the Company's restructuring plan is
consummated as described in the Company's Prospectus and Consent Solicitation,
dated , 2001. Subject to the foregoing, the provisions set forth in
this Second Supplemental Indenture shall be deemed to be, and shall be
construed as part of, the Indenture. All references to the Indenture in the
Indenture or in any other agreement, document or instrument delivered in
connection therewith or pursuant thereto shall be deemed to refer to the
Indenture as amended by this Second Supplemental Indenture. Except as amended
hereby, the Indenture shall remain in full force and effect.
III-1
ARTICLE II.
AMENDMENT OF THE INDENTURE
SECTION 2.1. Deletion of Certain Provisions.
Each of the following provisions of the Indenture is hereby deleted and
eliminated in its entirety, without any redesignation of any other provision of
the Indenture:
(S) 1004 Compliance Certificate
(S) 1005 Existence
(S) 1006 Maintenance of Properties
(S) 1007 Payment of Taxes and Other Claims
(S) 1008 Maintenance of Insurance
(S) 1010 Provision of Financial Statements and Records
(S) 1011 Currency Indemnity
(S) 1012 Limitation on Incurrence of Indebtedness
(S) 1013 Limitation on Issuance of Capital Stock of Subsidiaries
(S) 1014 Limitation on Restricted Payments
(S) 1015 Limitation on Liens
(S) 1016 Limitation of Sale and Leaseback Transactions
(S) 1018 Limitation Concerning Distributions and Transfers by Subsidiaries
(S) 1019 Limitation on Issuances of Guarantees by Subsidiaries
(S) 1020 Limitation on Transactions with Affiliates
All references in the Indenture, as amended by this Section 2.1, to any of
the provisions deleted and eliminated as provided above shall also be deemed
deleted and eliminated.
SECTION 2.2. Amendment of Section 1017.
Section 1017 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"SECTION 1017. Limitation on Certain Asset Dispositions.
(a) The Company shall not, and shall not permit any Consolidated
Subsidiary to, in any transaction or series of related transactions, make
any Asset Disposition unless the consideration received by the Company or
such Consolidated Subsidiary from such Asset Disposition is equal to or
greater than the Fair Market Value of the assets or Capital Stock subject to
such Asset Disposition.
(b) If the Company or any Consolidated Subsidiary engages in an Asset
Disposition, the Company may apply, or cause one or more of its Consolidated
Subsidiaries to apply, within 270 days of such Asset Disposition, all or any
portion of the Net Cash Proceeds of such Asset Disposition to (A) the
permanent repayment or repurchase of any Indebtedness of the Company or any
of its Consolidated Subsidiaries which ranks pari passu to the Securities or
(B) the purchase of assets or businesses substantially related, ancillary or
complementary to the business of the Company and its Consolidated
Subsidiaries as of the date of this Indenture. The aggregate amount of Net
Cash Proceeds of all Asset Dispositions not used as set forth in clause (A)
or (B) of this Section 1017(b) are herein called "Excess Proceeds". Excess
Proceeds shall be segregated from the other assets of the Company and its
Consolidated Subsidiaries and invested only in Cash Equivalents until such
time as such Excess Proceeds are applied as specified in Section 1017(c).
(c) When the aggregate amount of Excess Proceeds exceeds US$10 million,
the Company shall, within 30 days, make an offer to purchase (herein called
an "Excess Proceeds Offer"), pursuant to procedures set forth in this
Indenture, from all Holders of Securities and from all holders of any other
Indebtedness of the Company that ranks pari passu with the Securities and
contains a substantially similar purchase requirement, the maximum principal
amount of Securities and such pari passu Indebtedness that may be
III-2
purchased from all Excess Proceeds at a purchase price in cash equal to 100%
of the principal amount of such Securities and such pari passu Indebtedness,
plus accrued interest up to but excluding the date fixed for purchase and
Additional Amounts which would otherwise be payable with respect thereto. To
the extent that the aggregate amount of securities and such pari passu
Indebtedness tendered and not withdrawn pursuant to such Excess Proceeds
Offer is less than the amount of Excess Proceeds, the Company may use such
portion of the Excess Proceeds that is not used to purchase Securities and
such pari passu Indebtedness so tendered for general corporate purposes. If
the aggregate amount of Securities and pari passu Indebtedness validly
tendered and not withdrawn exceeds the Excess Proceeds, the Securities and
any such other pari passu Indebtedness to be purchased shall be selected on
a pro rata basis. Upon completion of an Excess Proceeds Offer pursuant to
this Section 1017(c), the amount of Excess Proceeds shall be reset to zero.
SECTION 2.3. Amendment of Section 5.01.
Section 5.01 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"SECTION 5.01. Events of Default.
"Event of Default", wherever used herein with respect to Securities of
any series, means any one of the following events (whatever the reason for
such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):
(1) default in the payment of or any premium on any interest upon any
Security of that series when it becomes due and payable, and continuance
of such default for a period of 30 days;
(2) default in the payment of the principal of or any premium on any
Security of that series at Stated Maturity or otherwise;
(3) default in the payment of the Redemption Price or Repurchase
Price of any Security of that series when it becomes due and payable
upon redemption or repurchase of the Securities of that series;
(4) Intentionally omitted;
(5) Intentionally omitted;
(6) Intentionally omitted;
(7) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Mexican bankruptcy, insolvency,
receivership, reorganization or other similar law or (B) a decree or
order adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under any
applicable Mexican law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company
or of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days;
(8) the commencement by the Company of a voluntary case or proceeding
under any applicable Mexican bankruptcy, insolvency, receivership,
reorganization or other similar law or of any other case or proceeding
to be adjudicated a bankrupt or insolvent, or the consent by it to the
entry of a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Mexican bankruptcy,
insolvency, reorganization or other similar law or to the commencement
of any bankruptcy or insolvency case or proceeding against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under any applicable Mexican law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by
a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or of any substantial part of its
III-3
property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due, or the taking of official corporate
action by the Company in furtherance of any such action (evidenced by
the adoption of a corporate resolution in favor of any of such actions
or an action of any of the Company's officers which similarly binds the
Company);
(9) Intentionally omitted;
(10) Intentionally omitted;
(11) Intentionally omitted;
(12) Intentionally omitted."
SECTION 2.4. Amendment to Section 6.01.
Section 801 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not, in a single transaction or a series of related
transactions, (A) consolidate with or merge into any other Person or permit
any other Person to consolidate with or merge into the Company, or (B)
directly or indirectly, dispose of all or substantially all of its
properties and assets as an entirety, unless, in case the Company shall
consolidate with or merge into another Person or transfer, convey, sell,
lease or otherwise dispose of all or substantially all of its properties and
assets to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, all or substantially all of the properties and
assets of the Company shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of the United States of
America, any State thereof or the District of Columbia or the United Mexican
States or any State thereof and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, the due and punctual payment of the
principal of and any premium and interest on all the Securities and the
performance or observance of every covenant of this Indenture, the
Securities and the Registration Rights Agreement on the part of the Company
to be performed or observed."
ARTICLE III.
MISCELLANEOUS
SECTION 3.1. Counterparts.
This Second Supplemental Indenture may be executed in counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
SECTION 3.2. Severability.
In the event that any provision in this Second Supplemental Indenture shall
be held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 3.3. Headings.
The article and section headings herein are for convenience only and shall
not effect the construction hereof.
III-4
SECTION 3.4. Successors and Assigns.
Any covenants and agreements in this Second Supplemental Indenture by the
Company and the Trustee shall bind their successors and assigns, whether so
expressed or not.
SECTION 3.5. GOVERNING LAW.
THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 3.6. Effect of Second Supplemental Indenture.
Except as amended by this Second Supplemental Indenture, the terms and
provisions of the Indenture shall remain in full force and effect.
SECTION 3.7. Trustee.
The Trustee accepts the modifications of the Trust effected by this Second
Supplemental Indenture, but only upon the terms and conditions set forth in the
Indenture. Without limiting the generality of the foregoing, the Trustee
assumes no responsibility for the correctness of the recitals herein contained,
which shall be taken as the statements of the Company, and the Trustee shall
not be responsible or accountable in any way whatsoever for or with respect to
the validity or execution or sufficiency of this Second Supplemental Indenture,
and the Trustee makes no representation with respect thereto.
SECTION 3.8. Definitions.
Capitalized terms used but not defined herein shall have the respective
meanings ascribed to them in the Indenture.
[The remaining portion of this page is intentionally left blank.]
III-5
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be executed by their duly authorized representative as of the date
hereof.
ALTOS HORNOS DE MEXICO,
S.A. DE C.V.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
WELLS FARGO BANK MINNESOTA,
N.A., as Trustee
By:
-----------------------------------
Name:
Title:
III-6
ANNEX IV--FORM OF SUPPLEMENTAL INDENTURE
FOR OLD DISCOUNT CONVERTIBLE NOTES
SECOND SUPPLEMENTAL INDENTURE
THIS SECOND SUPPLEMENTAL INDENTURE (the "Second Supplemental Indenture"),
dated as of , 2001, by and between Altos Hornos de Mexico (the
"Company"), a stock corporation with variable capital (sociadad anonima de
capital variable) duly organized and existing under the laws of the United
Mexican States, and Wells Fargo Bank Minnesota, N.A., as Trustee (the
"Trustee").
WHEREAS, the Company and the Trustee executed an indenture, dated as of
December , 1996 (the "Indenture"), relating to $85,000,000 of the Company's
51/2% Senior Discount Convertible Notes due April 30, 2002 (the "Securities");
and
WHEREAS, Section 9.02 of the Indenture provides that the Company and the
Trustee may execute and deliver one or more supplemental indentures, with the
consent of the Holders (as defined in the Indenture) of at least a majority in
principal amount of the outstanding Securities of each Series to, among other
things, change or eliminate certain provisions of the Indenture; and
WHEREAS, the Company and the Trustee desire to amend the Indenture for the
purpose of changing and eliminating certain of such provisions; and
WHEREAS, the Company has received consents to such modifications from the
Holders of at least a majority in principal amount of the outstanding
Securities of each Series; and
WHEREAS, all conditions precedent provided for in the Indenture relating to
this Second Supplemental Indenture have been complied with;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the Company and the Trustee for the benefit of each other and for
the equal and ratable benefit of the Holders of the Securities agree as follows:
ARTICLE I.
EFFECTIVENESS AND EFFECT
SECTION 1.1. Effectiveness and Effect.
This Second Supplemental Indenture shall take effect and the amendments
provided for in Article Two hereof shall become operative only upon, and
simultaneously with, the date on which the Company's restructuring plan is
consummated as described in the Company's Prospectus and Consent Solicitation,
dated , 2001. Subject to the foregoing, the provisions set forth in
this Second Supplemental Indenture shall be deemed to be, and shall be
construed as part of, the Indenture. All references to the Indenture in the
Indenture or in any other agreement, document or instrument delivered in
connection therewith or pursuant thereto shall be deemed to refer to the
Indenture as amended by this Second Supplemental Indenture. Except as amended
hereby, the Indenture shall remain in full force and effect.
IV-1
ARTICLE II.
AMENDMENT OF THE INDENTURE
SECTION 2.1. Deletion of Certain Provisions.
Each of the following provisions of the Indenture is hereby deleted and
eliminated in its entirety, without any redesignation of any other provision of
the Indenture:
(S) 1004 Compliance Certificate
(S) 1005 Existence
(S) 1006 Maintenance of Properties
(S) 1007 Payment of Taxes and Other Claims
(S) 1008 Listing of Securities and ADSs
(S) 1009 Maintenance of Insurance
(S) 1010 Currency Indemnity
All references in the Indenture, as amended by this Section 2.1, to any of
the provisions deleted and eliminated as provided above shall also be deemed
deleted and eliminated.
SECTION 2.2. Amendment of Section 5.01.
Section 5.01 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"SECTION 5.01. Events of Default.
"Event of Default", wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) default in the payment of any Current Interest upon any Security
when it becomes due and payable, and continuance of such default for a
period of 30 days;
(2) default in the payment of the principal of any Security at Stated
Maturity or otherwise;
(3) default in the payment of the Redemption Price or Repurchase
Price when due and payable upon redemption or repurchase of the
Securities;
(4) Intentionally omitted;
(5) Intentionally omitted;
(6) Intentionally omitted;
(7) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Mexican bankruptcy, insolvency,
receivership, reorganization or other similar law or (B) a decree or
order adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under any
applicable Mexican law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company
or of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in
effect for a period of 60 consecutive days;
(8) the commencement by the Company of a voluntary case or proceeding
under any applicable Mexican bankruptcy, insolvency, receivership,
reorganization or other similar law or of any other case
IV-2
or proceeding to be adjudicated a bankrupt or insolvent, or the consent
by it to the entry of a decree or order for relief in respect of the
Company in an involuntary case or proceeding under any applicable
Mexican bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable Mexican law, or
the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any
substantial part of its property, or the making by it of an assignment
for the benefit of creditors, or the admission by it in writing of its
inability to pay its debts generally as they become due, or the taking
of official corporate action by the Company in furtherance of any such
action;
(9) Intentionally omitted;
(10) Intentionally omitted;
(11) Intentionally omitted;
(12) Intentionally omitted;
(13) Intentionally omitted."
SECTION 2.3. Amendment to Section 6.01.
Section 801 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not, in a single transaction or a series of related
transactions, (a) consolidate with or merge into any other Person or permit
any other Person to consolidate with or merge into the Company, or (b)
directly or indirectly, dispose of all or substantially all of its
properties and assets as an entirety, unless, in case the Company shall
consolidate with or merge into another Person or transfer, convey, sell,
lease or otherwise dispose of all or substantially all of its properties and
assets to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, all or substantially all of the properties and
assets of the Company shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of the United States of
America, any State thereof or the District of Columbia or the United Mexican
States or any State thereof and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, the due and punctual payment of the
principal of and Current Interest on all the Securities and the performance
or observance of every covenant of this Indenture on the part of the Company
to be performed or observed and shall have provided for conversion rights in
accordance with Article Twelve."
ARTICLE III.
MISCELLANEOUS
SECTION 3.1. Counterparts.
This Second Supplemental Indenture may be executed in counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
SECTION 3.2. Severability.
In the event that any provision in this Second Supplemental Indenture shall
be held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 3.3. Headings.
The article and section headings herein are for convenience only and shall
not effect the construction hereof.
IV-3
SECTION 3.4. Successors and Assigns.
Any covenants and agreements in this Second Supplemental Indenture by the
Company and the Trustee shall bind their successors and assigns, whether so
expressed or not.
SECTION 3.5. GOVERNING LAW.
THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 3.6. Effect of Second Supplemental Indenture.
Except as amended by this Second Supplemental Indenture, the terms and
provisions of the Indenture shall remain in full force and effect.
SECTION 3.7. Trustee.
The Trustee accepts the modifications of the Trust effected by this Second
Supplemental Indenture, but only upon the terms and conditions set forth in the
Indenture. Without limiting the generality of the foregoing, the Trustee
assumes no responsibility for the correctness of the recitals herein contained,
which shall be taken as the statements of the Company, and the Trustee shall
not be responsible or accountable in any way whatsoever for or with respect to
the validity or execution or sufficiency of this Second Supplemental Indenture,
and the Trustee makes no representation with respect thereto.
SECTION 3.8. Definitions.
Capitalized terms used but not defined herein shall have the respective
meanings ascribed to them in the Indenture.
[The remaining portion of this page is intentionally left blank.]
IV-4
IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be executed by their duly authorized representative as of the date
hereof.
ALTOS HORNOS DE MEXICO,
S.A. DE C.V.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
WELLS FARGO BANK MINNESOTA,
N.A., as Trustee
By:
-----------------------------------
Name:
Title:
IV-5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Altos Hornos de Mexico, S.A. de C.V.
Floating Rate Series A Senior Secured Notes due 2009
4% Series B Senior Secured Notes due 2009
Common Stock
The AHMSA Creditor Voting Trust
Voting Interests
[AHMSA Logo]
-----------------
PROSPECTUS AND CONSENT SOLICITATION
-----------------
, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under Mexican law, when an officer or director of a corporation acts within
the scope of his or her authority, the corporation will answer for any
resulting liabilities or expenses. In addition, the shareholders of Altos
Hornos de Mexico, S.A. de C.V. ("AHMSA") have resolved that AHMSA will
indemnify and hold harmless each director and officer of AHMSA against
liabilities incurred in connection with the distribution of the securities
registered under this registration statement.
Item 21. Exhibits and Financial Statement Schedules
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 By-Laws (Estatutos) of AHMSA, together with English translation*
4.1 Indenture dated as of May 6, 1997 between AHMSA and The Chase Manhattan Bank, as
trustee*
4.2 Indenture dated as of December 16, 1996 between AHMSA and The Chase Manhattan
Bank, as trustee*
4.3 Form of Indenture between AHMSA, certain Subsidiary Guarantors, and U.S. Bank, N.A.,
as trustee*
4.4 Form of AHMSA 11 3/8% Series A Senior Note due 2002*
4.5 Form of AHMSA 11 7/8% Series B Senior Note due 2004*
4.6 Form of AHMSA 5 1/2% Senior Discount Convertible Note due 2001*
4.7 Form of AHMSA Floating Rate Series A Senior Secured Note due 2009*
4.8 Form of AHMSA 4% Series B Senior Secured Note due 2009*
4.9 Form of Acknowledgment, Consent, Indemnification and Cooperation Agreement among
AHMSA, Grupo Acerero del Norte, S.A. de C.V. ("GAN"), HSBC Financial Services
(Cayman) Limited, as trustee of the Voting Trust*
4.10 Form of Share Transfer and Voting Agreement among HSBC Financial Services (Cayman)
Limited and certain creditors party thereto*
4.11 Form of Stock Option Agreement among a subsidiary of GAN, AHMSA, HSBC Financial
Services (Cayman) Limited, as trustee of the Voting Trust, and the Certificateholders party
to the Share Transfer and Voting Agreement*
4.12 Form of Registration Rights Agreement by and among AHMSA, HSBC Financial Services
(Cayman) Limited, as trustee of the Voting Trust, each Certificateholder party to the Share
Transfer and Voting Agreement and the Supplemental Shares Trustee.*
5.1 Opinion of Willkie Farr & Gallagher*
5.2 Opinion of Guerra Gonzales y Associados, S.C.*
8.1 Opinion of Willkie Farr & Gallagher*
10.1 Form of Credit Agreement among AHMSA, as Borrower, Certain Financial Institutions, as
Lenders, and , as Administrative Agent*
10.2 Supply Agreement between Commision Federal de Electricidad and Minera Carbonffera
Rio Escondido, S.A. de C.V., together with English translation*
10.3 Cut-Through Agreement between Fianzas Mexico Bital, S.A. Grupo Financiero Bital,
Swiss Reinsurance Company and AHMSA dated December 16, 1996*
10.4 Registration Rights Letter from Grupo Acerero del Norte, S.A. de C.V. and AHMSA to
Swiss Reinsurance Company dated December 16, 1996*
10.5 Loan Agreement dated as of April 11, 1997 among the Company, Morgan Guaranty Trust
Company of New York, as Facility Agent, and the Lenders Listed on the Signature Pages
Thereto*
II-1
11.1 Statement of Computation of Earnings per Share*
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges*
21.1 List of Subsidiaries of AHMSA*
23.1 Consent of Arthur Andersen
23.2 Consent of Willkie Farr & Gallagher (included in 5.1)*
23.3 Consent of Guerra Gonzales y Associados, S.C. (included in 5.2)*
24.1 Powers of Attorney (included on pages II-2 and II-3 of this Registration Statement)*
25.1 Statement of Eligibility of Trustee on Form T-1*
99.1 Form of Consent*
99.2 Form of Master Consent*
99.3 Form of Summary Term Sheet*
- --------
* To be filed by amendment.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of registrants pursuant to the provisions described under Item 6 above,
or otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
ALTOS HORNOS DE MEXICO, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
THE AHMSA CREDITOR VOTING TRUST (a
trust to be formed)
By: ALTOS HORNOS DE MEXICO, S.A. DE
C.V. Promoter
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
certifies that it is the duly authorized United States representative of each
of the entities listed on Exhibit A attached hereto and has duly caused this
registration statement to be signed on behalf of each such entity by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
MEXICAN BLAST FURNACES (USA), INC.
(Authorized U.S. Representative)
By: /S/ ANDRES GONZALES SARAVIA-COSS
-----------------------------------
Name: Andres Gonzales Saravia-Coss
Title: Secretary
II-5
EXHIBIT A
1. Altos Hornos de Mexico, S.A. de C.V.
2. The AHMSA Creditor Voting Trust
3. Grupo Acerero del Norte, S.A. de C.V.
4. Minera Carbonifera Rio Escondido, S.A., de C.V.
5. Cerro de Mercado, S.A. de C.V.
6. Servicios Corporativos AHMSA, S.A. de C.V.
7. Hullera Mexicana, S.A. de C.V.
8. Nacional de Acero, S.A. de C.V.
9. Stack, S.A. de C.V.
10. Gan International Trading, S.A. de C.V.
11. Minera del Norte, S.A. de C.V.
12. La Perla Minas de Fierro y Carbon, S.A., de C.V.
13. Recuperacion y Reciclaje de Productos Industriales, S.A. de
C.V.
14. Hojalata Mexicana, S.A. de C.V.
15. Ediciones Vulcan, S.A. de C.V.
16. Forjacero, S.A. de C.V.
17. Minerales Monclova, S.A. de C.V.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
GRUPO ACERERO DEL NORTE, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on Februry 6, 2002.
MINERA CARBONIFERA RIO ESCONDIDO,
S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on Februry 6, 2002.
CERRO DE MERCADO, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
SERVICIOS CORPORATIVOS AHMSA, S.A. DE
C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
HULLERA MEXICANA, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
NACIONAL DE ACERO, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
STACK, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
GAN INTERNATIONAL TRADING, S.A. DE
C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
MINERA DEL NORTE, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
LA PERLA MINAS DE FIERRO Y CARBON,
S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
RECUPERACION Y RECICLAJE DE PRODUCTOS
INDUSTRIALES, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
HOJALATA MEXICANA, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
EDICIONES VULCANO, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
FORJACERO, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on February 6, 2002.
MINERALES MONCLOVA, S.A. DE C.V.
By: /S/ ALONSO ANCIRA ELIZONDO
__________________________________
Name: Alonso Ancira Elizondo
Title: Chief Executive Officer and
Vice Chairman of the Board
II-21
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 By-Laws (Estatutos) of AHMSA, together with English translation*
4.1 Indenture dated as of May 6, 1997 between AHMSA and The Chase Manhattan Bank, as
trustee*
4.2 Indenture dated as of December 16, 1996 between AHMSA and The Chase Manhattan
Bank, as trustee*
4.3 Form of Indenture between AHMSA, certain Subsidiary Guarantors, and U.S. Bank, N.A.,
as trustee*
4.4 Form of AHMSA 11 3/8% Series A Senior Note due 2002*
4.5 Form of AHMSA 11 7/8% Series B Senior Note due 2004*
4.6 Form of AHMSA 5 1/2% Senior Discount Convertible Note due 2001*
4.7 Form of AHMSA Floating Rate Series A Senior Secured Note due 2009*
4.8 Form of AHMSA 4% Series B Senior Secured Note due 2009*
4.9 Form of Acknowledgment, Consent, Indemnification and Cooperation Agreement among
AHMSA, Grupo Acerero del Norte, S.A. de C.V. ("GAN"), HSBC Financial Services
(Cayman) Limited, as trustee of the Voting Trust*
4.10 Form of Share Transfer and Voting Agreement among HSBC Financial Services (Cayman)
Limited and certain creditors party thereto*
4.11 Form of Stock Option Agreement among a subsidiary of GAN, AHMSA, HSBC Financial
Services (Cayman) Limited, as trustee of the Voting Trust, and the Certificateholders party
to the Share Transfer and Voting Agreement*
4.12 Form of Registration Rights Agreement by and among AHMSA, HSBC Financial Services
(Cayman) Limited, as trustee of the Voting Trust, each Certificateholder party to the Share
Transfer and Voting Agreement and the Supplemental Shares Trustee.*
5.1 Opinion of Willkie Farr & Gallagher*
5.2 Opinion of Guerra Gonzales y Associados, S.C.*
8.1 Opinion of Willkie Farr & Gallagher*
10.1 Form of Credit Agreement among AHMSA, as Borrower, Certain Financial Institutions, as
Lenders, and , as Administrative Agent*
10.2 Supply Agreement between Commision Federal de Electricidad and Minera Carbonffera
Rio Escondido, S.A. de C.V., together with English translation*
10.3 Cut-Through Agreement between Fianzas Mexico Bital, S.A. Grupo Financiero Bital,
Swiss Reinsurance Company and AHMSA dated December 16, 1996*
10.4 Registration Rights Letter from Grupo Acerero del Norte, S.A. de C.V. and AHMSA to
Swiss Reinsurance Company dated December 16, 1996*
10.5 Loan Agreement dated as of April 11, 1997 among the Company, Morgan Guaranty Trust
Company of New York, as Facility Agent, and the Lenders Listed on the Signature Pages
Thereto*
11.1 Statement of Computation of Earnings per Share*
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges*
21.1 List of Subsidiaries of AHMSA*
23.1 Consent of Arthur Andersen
23.2 Consent of Willkie Farr & Gallagher (included in 5.1)*
23.3 Consent of Guerra Gonzales y Associados, S.C. (included in 5.2)*
24.1 Powers of Attorney (included on pages II-2 and II-3 of this Registration Statement)*
25.1 Statement of Eligibility of Trustee on Form T-1*
99.1 Form of Consent*
99.2 Form of Master Consent*
99.3 Form of Summary Term Sheet*
- --------
* To be filed by amendment.