GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
INDEX
Contents Page
- -------- ----
Report of Independent Accountants 1 and 2
Combined and Consolidated Balance Sheets 3
Combined and Consolidated Statements of Income 4
Combined and Consolidated Statements of Changes in Stockholders' Equity 5
Combined and Consolidated Statements of Cash Flows 6
Notes to the Combined and Consolidated Financial Statements 7 to 33
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 28, 2003
To the Board of Directors and Stockholders of
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V.
We have audited the accompanying combined and consolidated balance sheets of
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. and subsidiaries as of
December 31, 2002 and 2001, and the related combined and consolidated statements
of income, of changes in stockholders' equity and of cash flows for each of the
three years in the period ended December 31, 2002, all expressed in US dollars.
These combined and consolidated financial statements are the responsibility of
the Company's Management. Our responsibility is to express an opinion on these
combined and consolidated financial statements based on our audits.
We conducted our audits in accordance with International Auditing Standards and
Auditing Standards Generally Accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and that they were prepared in accordance with International
Accounting Standards. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by Management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the aforementioned combined and consolidated financial
statements present fairly, in all material respects, the combined and
consolidated financial position of Grupo Transportacion Ferroviaria Mexicana, S.
A. de C. V. and subsidiaries as of December 31, 2002 and 2001, and the combined
and consolidated results of their operations, the changes in stockholders'
equity and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with International Accounting Standards.
International Accounting Standards differ in certain material respects from
Accounting Principles Generally Accepted in the United States of America. The
application of the latter would have affected the determination of the combined
and consolidated net income for each of the three years in the period ended
December 31, 2002, and the determination of combined and consolidated
stockholders' equity and combined and consolidated financial position as of
December 31, 2002 and 2001, to the extent summarized in Note 11 to the
consolidated financial statements.
PricewaterhouseCoopers
/s/ Alberto Del Castillo V. V.
Alberto Del Castillo V. Vilchis
Audit Partner
(2)
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Note 1)
(amounts in thousands of US dollars)
December 31,
------------
Assets 2001 2002
---- ----
Current assets:
Cash and cash equivalents $ 53,110 $ 30,249
Accounts receivable net of allowance for
doubtful accounts of $3,568 in 2001
and $3,913 in 2002 103,562 90,596
Amounts due from related parties (Note 7) 22,728 5,316
Other accounts receivable - Net 78,042 106,628
Materials and supplies 23,329 20,261
Other current assets 10,030 12,200
----------- -----------
Total current assets 290,801 265,250
Due from Mexican Government (Note 3) 81,892
Long-term account receivable 1,388
Concession rights and related assets - Net (Note 3) 1,257,591 1,215,487
Property, machinery and equipment - Net (Note 4) 568,755 609,367
Investment held for operating purposes (Note 2i.) 6,166 7,435
Deferred financing costs 11,647 34,281
Other assets 454 365
Deferred income taxes (Note 9) 131,206 100,972
----------- -----------
Total assets $ 2,348,512 $ 2,234,545
=========== ===========
Liabilities and stockholders' equity
Short-term liabilities:
Commercial paper (Note 5) $ 264,638
Current portion of long-term debt (Note 5) $ 18,286
Current portion of capital lease obligations (Note 10) 298 267
Amounts owed to related parties (Note 7) 10,767 9,175
Accounts payable and accrued expenses 105,756 119,567
----------- -----------
Total short-term liabilities 381,459 147,295
----------- -----------
Long-term portion of capital lease obligations (Note 10) 2,137 1,875
Long-term debt (Note 5) 570,938 1,002,677
Other long-term liabilities 21,554 40,735
----------- -----------
Total long-term liabilities 594,629 1,045,287
----------- -----------
Total liabilities 976,088 1,192,582
----------- -----------
Minority interest (Note 2o.) 395,992 329,619
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Common stock, 10,063,570 shares authorized, issued and
outstanding without par value 807,008 807,008
Treasury shares (204,904)
Effect on purchase of subsidiary shares 17,912 (33,562)
Retained earnings 151,512 143,802
----------- -----------
Total stockholders' equity 976,432 712,344
----------- -----------
Total liabilities and stockholders' equity $ 2,348,512 $ 2,234,545
=========== ===========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
(3)
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
(Notes 1 and 7)
(amounts in thousands of US dollars, except per share amounts)
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 695,425 $ 720,627 $ 712,140
--------- --------- ---------
Operating expenses:
Salaries, wages and employee benefits 111,790 128,845 124,413
Purchased services 138,453 147,015 163,835
Fuel, material and supplies 74,203 68,717 58,594
Other costs 129,497 147,578 129,428
Depreciation and amortization 77,777 79,496 82,552
--------- --------- ---------
Total operating expenses 531,720 571,651 558,822
--------- --------- ---------
Operating income 163,705 148,976 153,318
--------- --------- ---------
Other (expenses) income - Net (21,574) 35,572 (19,255)
--------- --------- ---------
Interest income 2,238 4,510 4,974
Interest expense (109,739) (87,009) (101,722)
Exchange (loss) gain - Net (1,424) 2,783 (17,411)
--------- --------- ---------
Net comprehensive financing cost (108,925) (79,716) (114,159)
--------- --------- ---------
Income before provision for deferred income
taxes and minority interest 33,206 104,832 19,904
Deferred income tax benefit (expense) (Note 9) 18,268 (2,652) (30,233)
--------- --------- ---------
Income (loss) before minority interest 51,474 102,180 (10,329)
Minority interest (10,163) (20,431) 2,341
--------- --------- ---------
Net income (loss) for the year $ 41,311 $ 81,749 ($ 7,988)
========= ========= =========
Net income (loss) for the year per share (Note 2p.) $ 4.10 $ 8.12 ($ .886)
========= ========= =========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
(4)
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2000, 2001 AND 2002
(Notes 1 and 8)
(amounts in thousands of US dollars)
Effect on
purchase of
Common subsidiary Treasury Retained
stock shares shares earnings Total
----- ------ ------ -------- -----
Balance at December 31, 1999 $ 807,008 $ 17,912 $ 28,452 $ 853,372
Net income for the year 41,311 41,311
---------- -------- -------- ---------
Balance at December 31, 2000 807,008 17,912 69,763 894,683
Net income for the year 81,749 81,749
---------- -------- -------- ---------
Balance at December 31, 2001 807,008 17,912 151,512 976,432
Effect on purchase of subsidiary shares (51,474) 278 (51,196)
Treasury shares ($ 204,904) (204,904)
Net loss for the year (7,988) (7,988)
---------- -------- --------- -------- ---------
Balance at December 31, 2002 $ 807,008 ($ 33,562) ($ 204,904) $143,802 $ 712,344
========== ======== ========= ======== =========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
(5)
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
(amounts in thousands of US dollars)
Year ended December 31,
-----------------------
Cash flows from operating activities: 2000 2001 2002
- ------------------------------------ ---- ---- ----
Net income (loss) for the year $ 41,311 $ 81,749 ($ 7,988)
--------- --------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 77,777 79,496 82,552
Amortization of discount on senior secured debentures
and commercial paper 45,665 49,408 23,158
Deferred income tax (benefit) expense (18,268) 2,652 30,233
Provision for doubtful accounts 1,852 (247) 345
Amortization of deferred financing costs 14,307 3,498 5,140
Minority interest 10,163 20,431 (2,341)
Loss on sale of property, machinery and equipment - Net 23,203 7,585 6,897
Gain on transfer of concession rights - Net (60,744)
Changes in other assets and liabilities:
Accounts receivable (34,277) (17,450) 12,621
Other accounts receivable (4,132) (24,595) (36,915)
Materials and supplies (3,030) 1,269 3,068
Other current assets 248 (1,084) (2,170)
Amounts due to related parties 15 (21,289) (4,180)
Accounts payable and accrued expenses 21,935 11,912 13,811
Other non-current assets and long-term liabilities (62) (44) (11,485)
--------- --------- --------
Total adjustments 135,396 50,798 120,739
--------- --------- --------
Net cash provided by operating activities 176,707 132,547 112,746
--------- --------- --------
Cash flows from investing activities:
Investment in Mexrail Inc. (44,000)
Sale of property, machinery and equipment 7,153 2,012 642
Acquisition of property, machinery and equipment (66,918) (85,245) (89,355)
Acquisition of treasury shares (162,575)
--------- --------- --------
Net cash used in investing activities (59,765) (83,233) (295,288)
--------- --------- --------
Cash flows from financing activities:
- ------------------------------------
Payments under commercial paper (25,156) (340,000)
Repayments for debt (15,074)
Proceeds from commercial paper 280,662 196,738
Proceeds from senior notes 175,241
Proceeds from term loan facility 128,000
Principal payment of senior secured credit facility (269,769)
Proceeds from revolving credit facility 15,102
Principal payments under capital lease obligations (10,248) (4,227) (298)
Payments under revolving credit facility (100,100)
--------- --------- ---------
Net cash (used in) provided by financing activities (99,427) (29,383) 159,681
--------- --------- --------
Increase (decrease) in cash and cash equivalents 17,515 19,931 (22,861)
Cash and cash equivalents:
Beginning of the year 15,664 33,179 53,110
--------- --------- --------
End of the year $ 33,179 $ 53,110 $ 30,249
========= ========= ========
Supplemental information:
- ------------------------
Cash paid during the year for interest $ 53,564 $ 28,779 $ 58,525
========= ========= ========
Non cash transactions:
- ----------------------
Due from Mexican Government $ 81,892 $ 93,555
========= ========
Due from related parties $ 20,000
========
Assets acquired through capital lease obligation $ 2,448
=========
The accompanying notes are an integral part of these combined and consolidated
financial statements.
(6)
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(amounts in thousands of US dollars, except number of shares)
NOTE 1 - THE COMPANY:
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. ("Grupo TFM") was
incorporated on July 12, 1996. In December 1996, Grupo TFM was awarded the right
to acquire (the "Acquisition") an 80% interest in TFM, S. A. de C. V. ("TFM" or
the "Company"), formerly Ferrocarril del Noreste, S. A. de C. V. pursuant to a
stock purchase agreement.
Grupo TFM is a non-operating holding company with no material assets or
operations other than its investment in the Company, which in turn is the
holding company of Mexrail, Inc. ("Mexrail") and Arrendadora TFM, S. A. de C. V.
("Arrendadora TFM"). The stockholders of Grupo TFM are TMM Multimodal, S. A. de
C. V. ("TMM Multimodal"), an indirect subsidiary of Grupo TMM, S. A. de C. V.
("Grupo TMM"), Nafta Rail, S. A. de C. V. ("Nafta"), an indirectly wholly owned
subsidiary of Kansas City Southern, Inc. ("KCS") and TFM. See Note 8.
TFM lines are comprised of approximately 2,641 (excluding the 20 miles of the
Griega-Mariscala stretch, see Note 3) miles of track, which form a strategically
important rail link within Mexico and to the North American Free Trade Agreement
corridor. TFM lines directly link Mexico City and Monterrey (as well as
Guadalajara through trackage rights) with the ports of Lazaro Cardenas, Veracruz
and Tampico and the Mexican/United States border crossings of Nuevo
Laredo-Laredo, Texas and Matamoros-Brownsville, Texas.
Approximately 70% of the Company's employees are covered under a collective
bargaining agreement dated July 1, 2001. Under this labor agreement, the
compensation terms of the collective bargaining agreement are subject to
renegotiation on an annual basis, whereas all other terms are to be renegotiated
every two years.
On February 27,2002, Grupo TMM and KCS announced that they had agreed to sell
Mexrail (a US company), and its wholly owned subsidiary, the Tex-Mex Railway, to
TFM for an aggregate price of $64 million ($32.6 million to Grupo TMM and $31.4
million to KCS). The sale was completed on March 27, 2002 and the purchase price
was paid by crediting and account
(7)
receivable amounting to $20,000 due from Grupo TMM, and the remaining balance of
$44,000 was paid in cash. As a result, Mexrail, Inc., with its wholly owned
subsidiary, the Tex-Mex Railway, became wholly owned subsidiaries of TFM. TFM
now controls the operation and dispatching of the entire international rail
bridge.
The purchase of Mexrail by TFM was accounted for at historical cost in a manner
similar to a pooling of interests because it is considered a business
reorganization among companies within the same control group. As a result, all
the assets and liabilities acquired by TFM were recorded at their historical
cost. The transaction resulted in a reduction of stockholders' equity, at TFM
level amounting to $41,952 representing the difference between the historical
carrying value of the assets and liabilities acquired and the purchase price of
$64,000. Thus, the transaction in Grupo TFM was accounted as a reduction of
stockholders' equity amounting to $33,562 and to minority interest amounting to
$8,390.
Since the above sale of Mexrail to TFM was a transaction between entities under
common control, the transaction, for financial reporting purposes, has been
retroactively restructured for all the previous periods on a historical cost
basis in a manner similar to a pooling of interest.
Arrendadora TFM was incorporated on September 27, 2002 under the Mexican Law
regulations and its only operation is the leasing to TFM of the locomotives
acquired through the privatization previously transferred by TFM. Arrendadora
TFM is a subsidiary of TFM.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Grupo TFM and subsidiaries prepare their financial statements in accordance with
International Accounting Standards ("IAS") expressed in U.S. dollars, which
differ in certain material respects from those under United States of America
Generally Accepted Accounting Principles ("U.S. GAAP"). See Note 11. The most
significant accounting policies are described below.
a. Consolidation
The consolidated financial statements include the accounts of Grupo TFM and its
subsidiaries. All intercompany balances and transactions have been eliminated.
b. Translation
Although Grupo TFM and subsidiaries are required to maintain for tax purposes
their books and records in Mexican pesos ("Ps"), except Mexrail, Grupo TFM and
subsidiaries keep records and use the US dollar as their functional and
reporting currency.
Monetary assets and liabilities denominated in Mexican pesos are translated into
US dollars using current exchange rates. The difference between the exchange
rate on the date of the transaction and the exchange rate on the settlement
date, or balance sheet date if not settled, is included in the income statement
as a foreign exchange gain/loss. Non monetary assets or
(8)
liabilities originally denominated in Mexican pesos are translated into US
dollars using the historical exchange rate at the date of the transaction.
Capital stock and minority interest are translated at historical rates. Results
of operations are mainly translated at the monthly average exchange rates.
Depreciation and amortization of non-monetary assets are translated at the
historical exchange rate.
c. Cash and cash equivalents
Cash and cash equivalents represent highly liquid interest-bearing deposits and
investments with an original maturity of less than three months.
d. Materials and supplies
Materials and supplies, consisting mainly of fuel and items for maintenance of
property and equipment, are valued at the lower of the average cost or market.
e. Concession rights and related assets
Costs incurred by the Company to acquire the concession rights and related
assets were capitalized and are amortized on a straight-line basis over the
estimated useful lives of the related assets and rights acquired (see Notes 3
and 4). The purchase price to acquire the concession rights and related assets
was allocated to the identifiable assets acquired and liabilities assumed in
connection with the privatization process (see Note 3) based on their estimated
fair value.
The assets acquired and liabilities assumed include:
(i) The tangible assets acquired pursuant to the asset purchase agreement,
consisting of locomotives, rail cars and materials and supplies;
(ii) The rights to utilize the right of way, track structure, buildings and
related maintenance facilities of the TFM lines;
(iii) The 25% equity interest in the company established to operate the Mexico
City rail terminal facilities; and
(iv) Capital lease obligations assumed.
f. Property, machinery and equipment
Machinery and equipment acquired through the asset purchase agreement were
initially recorded at their estimated fair value. Subsequent acquisitions are
stated at cost. Depreciation is calculated by the straight-line method based on
the estimated useful lives of the respective fixed assets (see Note 4).
(9)
Recurring maintenance and repair expenditures are charged to operating expenses
as incurred. The cost of locomotives rebuilt is capitalized and is amortized
over the period in which benefits are expected to be received (eight years).
g. Foreign currency position
At December 31, 2002 Grupo TFM had monetary assets and liabilities denominated
in Mexican pesos of Ps1,292 million and Ps414 million (Ps1,718 million and Ps334
million, at December 31, 2001), respectively. At December 31, 2001 and 2002 the
exchange rate was Ps9.18 and Ps10.45 per US dollar, respectively. At February
28, 2003, date of issuance of these consolidated financial statements, the
exchange rate was Ps10.86 per US dollar.
h. Derivative financial instruments
The Company enters into financial and commodity derivative instruments as a part
of its risk management program including currency exchange contracts, interest
rate arrangements and U.S. based fuel futures. These contracts are mark to
market and accordingly gains and losses related to such transactions are
recognized in results of operations on a monthly basis. See Note 6.
i. Investment held for operating purposes
TFM's 25% interest in the Mexico City rail terminal is accounted for using the
equity method of accounting. For the years ended December 31, 2000, 2001 and
2002, the equity in the loss (income) of Mexico City rail terminal amounted $19,
$915 and ($1,269), respectively and is included in other (expenses) income-net
in the statements of income.
j. Deferred financing costs
Includes fees and other related expenses paid by the Company to obtain long-term
debt (see Note 5). These deferred financing costs are amortized by the effective
interest method during the outstanding period of such long-term debt.
k. Deferred income tax
Deferred income tax is determined following interperiod allocation procedures
under the liability method.
Under this method the Company is required to establish a provision for deferred
income taxes on the tax indexation of certain non-current assets and, in
relation to an acquisition, on the difference between the acquisition cost of
the net assets acquired and their tax base.
(10)
l. Seniority premiums
Seniority premiums to which employees are entitled upon termination of
employment after 15 years of service are expensed in the years in which the
services are rendered. Starting in 2002, the Company recognized the seniority
premiums based on actuarial computations. At December 31, 2001 and 2002, the
Company had a provision of $1,478 and $778, respectively.
Other compensations based on length of service to which employees may be
entitled in the event of dismissal or death, in accordance with the Mexican
Federal Law, are charged to the statement of income in the year in which they
become payable.
m. Revenue recognition
Revenue is recognized proportionally as a shipment moves from origin to
destination.
n. Intangible assets and long-lived assets
The carrying value of intangible assets and long-lived assets are periodically
reviewed by the Company and impairments are recognized when the expected future
operating cash flows, undiscounted and without interest charges, derived from
such intangible assets and long-lived assets are less than their carrying value.
o. Minority interest
The minority interest reflects the 20% share of the Company held by the
Government.
p. Net income per share
Net income per share is calculated based on the weighted average number of
shares outstanding during the year. The weighted average number of shares
outstanding for the years ended December 31, 2000, 2001 and 2002 was 10,063,570,
10,063,570 and 9,011,069, respectively.
q. Concentration of risk
Over 23% of the Company's transportation revenues are generated by the
automotive industry, which is made up of a relatively small number of customers.
In addition, the Company's largest customer accounted for approximately 10% of
transportation revenues. The Company performs ongoing credit valuations of its
customers' financial conditions and maintains an allowance for doubtful
accounts.
r. Use of estimates
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that could affect the reported amounts of assets
and liabilities at the date of the financial statements. Actual results could
differ from these estimates.
(11)
NOTE 3 - CONCESSION RIGHTS AND RELATED ASSETS:
In December 1996, the Government granted TFM the Concession (the "Concession")
to operate the northeast rail lines for an initial period of fifty years,
exclusive for thirty years, renewable, subject to certain conditions, for a
second period of equal length. Under the terms of the Concession, the Company
has the right to use and the obligation to maintain the right of way, track
structure, buildings and related maintenance facilities. Ownership of such
property and fixtures, however, has been retained by the Government.
Concession rights and related assets are summarized below:
December 31, Estimated
------------
useful
2001 2002 lives (years)
---- ---- -------------
Land $ 132,878 $ 132,878 50
Buildings 33,113 33,113 27-30
Bridges 75,350 75,350 41
Tunnels 94,043 94,043 40
Rail 317,268 317,268 29
Concrete and wood ties 137,351 137,351 27
Yards 106,174 106,174 35
Ballast 107,189 107,189 27
Grading 391,808 391,808 50
Culverts 14,942 14,942 21
Signals 1,418 1,418 26
Other 61,792 61,792 5-50
---------- ----------
1,473,326 1,473,326
Accumulated amortization (215,735) (257,839)
---------- ----------
Concession rights and related assets - Net $1,257,591 $1,215,487
========== ==========
Amortization of concession rights was $40.5 million, $40.0 million, and $40.2
for the years ended December 31, 2000, 2001 and 2002, respectively.
On February 9, 2001 the Ministry of Communications and Transport ("SCT") issued
statement 4.123. Under this statement, the SCT and TFM agreed to transfer a line
of the two-way Griega-Mariscala stretch to the Government in order to be
included in the North Pacific concession. In return for this stretch, TFM
recorded a receivable from the Government in the amount of $85,226, which was
applied against the purchase price of the 24.63% Grupo TFM's capital stock owned
indirectly by the Government through Ferrocarriles Nacionales de Mexico ("FNM")
and Nacional Financiera, S. N. C. ("Nafin") the amount of $85,226 (see Note 8).
During 2001, the Company recognized a net gain related with this transaction of
approximately $60,744, which was credited to other (expenses) income-net in the
statement of income.
Government payment was restated in accordance with an appraisal performed by the
"Comision de Avaluos de Bienes Nacionales", until the payment date.
(12)
On February 12, 2001, the SCT modified the Concession title granted to TFM (i)
to transfer the Griega-Mariscala stretch described above, and (ii) authorized
the dismantling of the catenary running over the route between Huehuetoca, State
of Mexico and the City of Queretaro.
NOTE 4 - PROPERTY, MACHINERY AND EQUIPMENT:
Pursuant to the asset purchase agreement, the Company obtained the right to
acquire locomotives and rail cars and various materials and supplies, formerly
owned by FNM. The Company also agreed to assume the outstanding indebtedness, as
of the commencement of operations, relating to certain locomotives originally
acquired by FNM under capital lease arrangements (see Note 10). Legal title to
the purchased assets was transferred to TFM at that time.
December 31, Estimated
------------
useful
2001 2002 lives (years)
---- ---- -------------
Locomotives $ 176,647 $ 176,456 14
Freight cars 105,921 98,622 12-16
Machinery of workshop 17,111 17,515 8
Machinery of road 28,233 30,906 14
Furniture and equipment 268,198 318,677 1-15
Buildings 6,697 7,168 20
Other 67,081 77,192 8
----------- -----------
669,888 726,536
Less accumulated depreciation
and amortization (159,430) (199,246)
----------- -----------
510,458 527,290
Land 37,538 37,607
Construction in progress 20,759 44,470
----------- -----------
$ 568,755 $ 609,367
=========== ===========
Depreciation of property, machinery and equipment was $37.2 million in 2000,
$39.4 million in 2001 and $42.8 in 2002.
NOTE 5 - FINANCING:
Financing is summarized as follows:
December 31,
------------
Short-term debt: 2001 2002
- --------------- ---- ----
Commercial paper (1) $ 265,000
Less-discount on commercial paper (362)
----------- -----------
$ 264,638 $ -
=========== ===========
Current portion of long-term debt:
- ----------------------------------
Term loan facility (6) $ 18,286
===========
(13)
December 31,
------------
Long-term debt: 2001 2002
- -------------- ---- ----
Senior notes due 2007 (2) $ 150,000 $ 150,000
Senior discount debentures (3) 443,501 443,501
Senior notes due 2012 (4) 180,000
Commercial paper (5) 122,000
Term loan facility (6) 109,714
----------- -------------
593,501 1,005,215
Less-discount on senior discount debentures, senior
notes and commercial paper (22,563) (2,538)
----------- -------------
$ 570,938 $ 1,002,677
=========== =============
(1) Commercial paper
On September 17, 2002, the total amount of the commercial paper was due and the
Company entered into two new bank facilities provided by a consortium of banks
for an aggregate amount of $250 million in order to refinance the commercial
paper program. The Company repaid the remaining $60 million of indebtedness
outstanding under the former commercial program. See (5) below.
(2) Senior notes due 2007
In June 1997 the Company issued US dollar denominated securities bearing
interest semiannually at a fixed rate of 10.25% and maturing on June 15, 2007.
Interest expense related with the senior notes amounted $16,167, for each one of
the years ended December 31, 2000, 2001 and 2002.
(3) Senior discount debentures ("SDD")
The US dollar denominated SDD were sold in June 1997, at a substantial discount
from their principal amount of $443,501, and no interest will be payable thereon
prior to June 15, 2002. The SDD will mature on June 15, 2009. The price of the
SDD represents a yield to maturity of 11.75% fixed rate, computed on the basis
of semiannual compounding and maturing on June 15, 2002. Interest on the SDD is
payable semiannually at a fixed rate of 11.75%, commencing on December 15, 2002.
The SDD are redeemable at the option of the Company, in whole or in part, at any
time on or after June 15, 2002, at the redemption prices shown in the next page
(expressed in percentages of principal amount at maturity), plus accrued and
unpaid interest, if any. The unamortized discount at December 31, 2001 amounted
to $22,563.
(14)
Senior discount debenture
Year redemption price
---- ----------------
2002 105.8750%
2003 102.9375%
2004 and thereafter 100.0000%
Interest expense related with the SDD amounted $42,608, $47,763 and $53,406
during 2000, 2001 and 2002, respectively.
(4) Senior notes due 2012
TFM completed a solicitation of consents of holders of 10.25% Senior Notes due
2007 and 11.75% SDD due 2009 senior notes and its debentures to an amendment
providing for certain changes to the "Limitation on Restricted Payments",
"Limitation on Indebtedness", and "Limitation on Liens" covenants in each of the
indentures pursuant to which the securities were issued. TFM obtained the
requisite consents and paid a fee of $16,972 to allow it to issue additional
$180,000 in new debt and to purchase the call option shares in Grupo TFM held by
the Government (see Note 8).
In June 2002, TFM issued senior notes for an aggregate principal amount of
$180,000. The senior notes are denominated in dollars, bear interest
semi-annually at a fixed rate of 12.50% and mature on June 15, 2012. The senior
notes are redeemable at TFM's option on or after June 15, 2007 and, subject to
certain limitations, at any time in the event of certain changes in Mexican tax
law. The senior notes were issued at a discount of $2.5 million, which is being
amortized based on the interest method over its term. The unamortized discount
at December 31, 2002 amounted to $2,376.
The Company incurred and capitalized $25.1 million in consent and professional
services fees in connection with the issuance of these notes and is being
amortized based on the interest method over the term of the senior notes.
Interest expense related with the senior notes due 2012 amounted to $12,944, for
the year ended December 31, 2002.
According to the refinancing of the commercial paper program due in September
2002, the Company entered into two new bank facilities as follows:
(5) Commercial paper
The commercial paper program consists of a two-year facility in the amount of
$122,000, which is supported by a letter of credit issued under the bank
facility. The new commercial paper facility allows the Company to draw-down
advances from time to time, subject to certain terms
(15)
and conditions. The obligations of the commercial paper facility rank at least
pari passu with the other senior unsecured indebtedness. The unamortized
discount at December 31, 2002 amounted to $162.
(6) Term loan facility
The term loan facility is a four-year term loan in the amount of $128,000. The
term loan is payable in semi-annual installments beginning in September 2003 and
ending in September 2006 and bearing interest at Libor plus applicable margin.
The obligations of the term loan facility rank at least pari passu with the
other senior unsecured indebtedness.
Covenants
The agreements related to the above-mentioned loans include certain affirmative
and negative covenants and maintenance of certain financial conditions,
including, among other things, dividend and other payment restrictions affecting
restricted subsidiaries, limitation on affiliate transactions and restrictions
and asset sales, with which Grupo TFM and subsidiaries were in compliance at
December 31, 2002.
NOTE 6 - FINANCIAL INSTRUMENTS:
Fuel contracts
The Company may seek to assure itself of more predictable fuel expenses through
U.S. fuel swap contracts. TFM's fuel hedging program covered approximately
25% of estimated fuel purchases. Hedge positions are also closely monitored to
ensure that they will not exceed actual fuel requirements in any period.
As of December 31, 2002, the Company had ten swap contracts outstanding for
5,000,083 gallons of fuel which expired in January and February 2003. The
realized gain was $1,548 and the Company has only recorded at December 31, 2002
a benefit of $1,009.
Foreign exchange contracts
The purpose of the Company's foreign exchange contracts is to limit the risks
arising from its peso-denominated monetary assets and liabilities.
The nature and quantity of any hedging transactions will be determined by
Management of the Company based upon net assets exposure and market conditions.
As of December 31, 2001, the Company had eight Mexican peso call options
outstanding in the notional amount of $10 million each one, based on the
exchange rate of Ps9.973 per dollar. These options expired during 2002.
(16)
As of December 31, 2002, the Company had one Mexican peso call option
outstanding in the notional amount of $1.7 million, based on the average
exchange rate of Ps11.0 per dollar. This option will expire in May 29, 2003.
Additionally, as of December 31, 2002, the Company had one forward contract
outstanding in the notional amount of $10 million, based on the exchange rate of
Ps9.769 per dollar. This forward expired on February 13, 2002.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable approximate carrying values because of the short
maturity of these financial instruments.
The related fair value based on the quoted market prices for the Senior notes
due 2007 and SDD or similar issues at December 31, 2001 was $138,000 and
$385,845, and at December 31, 2002 was $140,625 and $427,334, respectively. The
related fair value of the senior notes due 2012 at December 31, 2002 was
$179,325. The carrying amount of commercial paper and term loan facility
approximates fair value due to their variable rates.
NOTE 7 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
December 31,
------------
2001 2002
---- ----
Accounts receivable:
- -------------------
TMM Multimodal $ 20,000
Other Grupo TMM's subsidiaries 2,728 $ 5,316
---------- ---------
$ 22,728 $ 5,316
========== =========
December 31,
------------
2001 2002
---- ----
Accounts payable:
- ----------------
KCS $ 3,284 $ 1,222
Terminal Ferroviaria del Valle del Mexico, S. A. de C. V. 2,308 3,479
Other Grupo TMM's subsidiaries 5,175 4,474
---------- ---------
$ 10,767 $ 9,175
========== =========
(17)
The most important transactions with related parties are summarized as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 3,410 $ 3,434 $ 7,645
========= ========== ==========
Management services ($ 2,500) ($ 2,500) ($ 2,500)
========= ========== ==========
Other expenses ($ 5,262) ($ 9,501) ($ 11,634)
========= ========== ==========
Grupo TMM management services agreement
The Company and Grupo TMM entered into a management services agreement pursuant
to which Grupo TMM provides certain consulting and management services to the
Company commencing May 1997 for a term of 12 months and which may be renewed for
additional one-year periods by agreement of the parties. Under the terms of the
agreement, Grupo TMM is to be reimbursed for its costs and expenses incurred in
the performance of such services.
KCS Transportation Company ("KCSTC") management services agreement
The Company and KCSTC, a wholly owned subsidiary of KCS, entered into a
management services agreement pursuant to which KCSTC makes available to the
Company certain railroad consulting and management services commencing May 1997
for a term of 12 months and which may be renewed for additional one-year periods
by agreement of the parties. Under the terms of the agreement, KCSTC is to be
reimbursed for its costs and expenses incurred in the performance of such
services.
On April 30, 2002, TFM and KCS, as successor in interest through merger with
KCSTC, as well as TFM and Grupo TMM, entered into amendments to the management
services agreements that provides for automatic renewal of the agreements and
compensates KCS and Grupo TMM for their services under the agreements. The
amendments state that KCS and Grupo TMM are entitled to receive (1) $2,500,000
paid in nine equal monthly installments beginning in April 2002, as compensation
for services rendered between January 1, 1999 and December 31, 2000; (2) and
additional $2,500,000 in a lump sum payment on or before January 2, 2003 as
compensation for services rendered from January 1, 2001 through December 31,
2002; and (3) quarterly service payments, payable in arrears, for the period
beginning January 1, 2003 at an annual rate of $1,250,000. The management
services agreements are terminable by either party upon 60 days written notice.
(18)
NOTE 8 - STOCKHOLDERS' EQUITY:
Grupo TFM's capital stock is variable with a fixed minimum of Ps50,000 and an
unlimited maximum. The capital stock of Grupo TFM is divided into series without
par value, whose principal differences relate to: a) Series "A" shares with
voting rights, which can be held only by persons or companies of Mexican
nationality and represent up to 51% of the capital stock of Grupo TFM; b) Series
"B" shares with voting rights, which can be held by persons or companies of
non-Mexican nationality and represent up to 49% of the capital stock of Grupo
TFM, unless authorized by the National Commission of Foreign Investments, in
which case the percentage can be higher, and c) Series "L" shares with
restricted voting rights, which are not entitled to a dividend preference.
In connection with the original formation of Grupo TFM, the Government purchased
a 24.63% non-voting interest in Grupo TFM for $198.8 million. The Government
also granted the original shareholders of Grupo TFM an option (the "call
option") to purchase the Government's equity interest in Grupo TFM. TFM has been
appointed as the purchaser and, on July 29, 2002, purchased all of the call
option shares for an aggregate purchase price of $256.1 million. The purchase
price for the call option shares was financed through (1) a portion ($162,575)
of the proceeds of the issuance of $180,000 of debt securities by TFM (see Note
5) and approximately $93,555 was applied against note receivables from the
Government.
At December 31, 2002 the capital stock of Grupo TFM is represented by 10,063,570
shares as follows:
Number of shares Number of shares
Stockholders (fixed portion of capital stock) (variable portion of capital stock)
- ------------ -------------------------------- -----------------------------------
Series "A" Series "A"
---------- ----------
TMM Multimodal 25,500 3,842,901
Series "B" Sub-series "B"
---------- --------------
Nafta 24,500 3,692,199
Sub-series "L"
--------------
TFM (treasury shares) 2,478,470
------ ----------
Total 50,000 10,013,570
====== ==========
(19)
Pursuant to the new shares sub-series "L-2" granted to TFM, the voting rights
attached to these shares are limited to the following matters: (i) extension of
the duration of the Company; (ii) premature dissolution of the Company; (iii)
change in the object of the Company; (iv) change of nationality of the Company;
(v) transformation of the Company; (vi) merger with another company; (vii) the
split-up of the Company and (viii) the cancellation of the registration of the
shares with the Mexican Stock Exchange or any foreign stock exchange of the
shares which might be registered. Except as described above, holders of
Sub-series "L-2" shares have no voting rights. Grupo TFM Sub-series "L-2" shares
do not confer upon the holders thereof any right to preference dividends.
The sub-series "L-1" shares that were previously held the by Government were
cancelled as the call option was appointed by TFM.
At the General Ordinary Stockholders' Meeting held on December 21, 2001, the
stockholders of Grupo TFM agreed to pay dividends of $33,819, equivalent to
$3.3605 per share.
At the Unanimous Resolutions Meeting held on December 21, 2001, the stockholders
of TFM agreed to pay dividends of $33,165, equivalent to $0.0002396 per share.
On March 26, 2002, the Company received the ruling from Mexican Court annulling
the Ordinary Stockholders' Meeting mentioned above. As a consequence the
Unanimous Resolutions Meeting mentioned above, was also annulled, thus the
dividends, agreed in both Meetings, were cancelled in the consolidated financial
statements as of December 31, 2001, giving retroactive effect to said annulment.
Thus, the amounts paid in this regard were applied against the acquisition of
Mexrail and the purchase price of the 24.63%. (See Note 1).
The Government has retained a 20% interest in TFM's shares and has reserved the
right to sell such shares by October 31, 2003 in a public offering. In the event
that such public offering does not occur by October 31, 2003, Grupo TFM may
purchase the Government's equity interest in TFM at a purchase price equal to
the per share price initially paid by Grupo TFM, indexed based on Mexican
inflation. If Grupo TFM does not purchase the Government's TFM interest, the
Government may require Grupo TMM and KCS to purchase the TFM shares at the price
discussed above. See Note 3.
Dividends paid are not subject to income tax if paid from the Net Tax Profit
Account. Any excess over this account is subject to a tax equivalent to 51.52%,
49.25% or 47.06% depending on whether paid in 2003, 2004 or 2005, respectively.
The tax is payable by the Company and may be credited against its income tax in
the same year or the following two years. Dividends paid are not subject to tax
withholding.
In the event of a capital reduction, any excess of stockholders' equity over
capital contributions, the latter restated in accordance with the provisions of
the Income Tax Law, is accorded the same treatment as dividends.
(20)
NOTE 9 - INCOME TAX, EMPLOYEES' STATUTORY PROFIT SHARING, ASSET TAX AND TAX LOSS
CARRYFORWARDS:
Income tax
Grupo TFM and its subsidiaries compute income tax on an individual basis.
Grupo TFM and its subsidiaries had combined losses for tax purposes of $135,816,
$51,680 and $401,415 for the years ended December 31, 2000, 2001 and 2002,
respectively. The difference between tax losses and book income (loss) is due
principally to the inflation gain or loss recognized for tax purposes, the
difference between book and tax depreciation and amortization, non-deductible
expenses and temporary differences for certain items that are reported in
different periods for financial reporting and income tax purposes.
The (benefit) expense for income tax (credited) charged to income was as
follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Current income tax $ - $ 79 $ -
Deferred income tax
(benefit) expense (18,268) 2,573 30,233
---------- --------- ----------
Net income tax (benefit) expense ($ 18,268) $ 2,652 $ 30,233
========== ========= ==========
Reconciliation of the income tax expense based on the statutory income tax rate
to recorded income tax (benefit) expense was as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Income before income tax $ 33,206 $ 104,832 $ 19,904
========= =========== ===========
Income tax at 35% $ 11,622 $ 36,691 $ 6,967
(Decrease) increase resulting from:
Effects of inflationary components (2,603) (10,969) 4,867
Effects of inflation on tax loss carryforwards (28,599) (26,202) 14,281
Non-deductible expenses 672 911 2,128
Change in tax rate from 35% to 32% (1,837)
Other - Net 640 2,142 3,827
--------- ----------- -----------
Net deferred income tax (benefit) expense ($ 18,268) $ 2,573 $ 30,233
========= =========== ===========
(21)
According to the amendments to the Mexican Income Tax Law in 2002, the income
tax rate will decrease one percent per year from 35% starting in 2003 up to 32%
in 2005.
The components of deferred tax assets and (liabilities) are comprised of the
following:
December 31,
------------
2001 2002
---- ----
Tax-loss carryforwards $ 287,045 $ 381,954
Inventories and provisions - Net 47,011 31,255
Machinery and equipment (5,284) (42,951)
Concession rights (198,922) (264,046)
Other 1,356 (5,240)
---------- ----------
Net deferred income tax asset $ 131,206 $ 100,972
========== ==========
Employees' statutory profit sharing
Employees' statutory profit sharing is determined by the Company at the rate of
10% on taxable income, adjusted as prescribed by the Mexican Income Tax Law. For
the years ended December 31, 2000, 2001 and 2002, there was no basis for
employees' statutory profit sharing.
Asset tax
The Asset Tax Law establishes a tax of 1.8% on the average of assets, less
certain liabilities, which is payable when it exceeds the income tax due. There
was no basis for asset tax in 2001 and 2002.
Tax loss carryforwards
At December 31, 2002 Grupo TFM and its subsidiaries had combined tax loss
carryforwards, which under the Mexican Income Tax Law are inflation-indexed
through the date of utilization as shown in the next page.
(22)
Inflation-indexed
Year in which amounts as of Year of
loss arose December 31, 2002 expiration
---------- ----------------- ----------
1996 $ 14,690 2046
1997 232,418 2046
1998 292,030 2046
1999 7,152 2046
2000 160,993 2046
2001 70,842 2046
2002 412,168 2012
-----------
$ 1,190,293
===========
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
A) Commitments:
Concession duty
Under the Concession, the Government has the right to receive a payment from the
Company equivalent to 0.5% of the gross revenue during the first 15 years of the
Concession period and 1.25% during the remaining years of the Concession period.
For the years ended December 31, 2000, 2001 and 2002 the concession duty expense
amounted to $3,334, $3,391 and $3,267, respectively, which was recorded as
operating expense.
Capital lease obligations
At December 31, 2001 and 2002, the outstanding indebtedness corresponds to two
land capital leases for a period of ten years, in which TFM has the option to
purchase them at the end of the agreement term.
Locomotives operating leases
In May 1998 and September 1999, the Company entered into operating lease
agreements for 75 locomotives each, which expire over the next 18 and 19 years,
respectively. At the end of the contracts the locomotives will be returned to
the lessor. As of December 31, 2002, the Company had received 150 locomotives.
Rents under these agreements amounted $22.8 million in 2000, $34.1 million in
2001 and $32.5 million in 2002.
(23)
Future minimum payments, by year and in the aggregate, under the aforementioned
leases are as follows:
Year ending December 31,
- ------------------------
2003 $ 28,720
2004 28,720
2005 28,720
2006 28,720
2007 28,720
2008 and thereafter 321,851
--------
$465,451
========
Railcars operating leases
The Company leases certain railcars under agreements, which are classified as
operating leases. The term of the contracts fluctuate between 3 and 15 years.
Future minimum rental payments, under these agreements are shown as follows:
Year ended December 31,
- -----------------------
2003 $ 32,830
2004 18,064
2005 12,504
2006 10,012
2007 9,084
2008 and thereafter 51,143
--------
$133,637
========
Locomotives maintenance agreements
The Company has entered into two locomotives maintenance agreements, which
expire in 2004 and 2018 with third-party contractors. Under current
arrangements, the contractors provide both routine maintenance and major
overhauls at an established rate in a range from four to five hundred dollars
per locomotive per day.
Track maintenance and rehabilitation agreement
In May 2000, the Company entered into a track maintenance and rehabilitation
agreement, which expires in 2012. Under this contract, the contractor provides
both routine maintenance and major rehabilitation to the Celaya - Lazaro
Cardenas stretch, which is comprised of approximately 350
(24)
miles. Maintenance and rehabilitation expense amounted to $30.2 million in 2001
and $35.6 million in 2002. Under this agreement, the Company will pay
approximately $33 million in the following 10 years.
Fuel purchase agreement
On December 19, 1997, the Company entered into a fuel purchase agreement with
PEMEX Refinacion, under which the Company has the obligation to purchase at
market price a minimum of 15,000 cubic meters and a maximum of 20,000 cubic
meters per month of PEMEX diesel. The term of the agreement is indefinite but
can be terminated for justified cause by each party with a written notification
upon three months notice.
Fuel freight service agreement
On October 30, 2002, the Company entered into a freight service agreement with
PEMEX Refinacion, which will expire until 2006. Under this agreement the Company
has the obligation to provide services amounting in pesos by year as shown
below:
Minimum Maximum
------- -------
2003 Ps 126,264 Ps 315,659
2004 98,769 246,922
2005 98,769 246,922
2006 65,756 164,390
---------- ----------
Ps 389,558 Ps 973,893
========== ==========
B) Contingencies:
- - Grupo TFM and its subsidiaries are parties to various legal actions and other
claims in the ordinary course of their business, mainly related with labor and
social security obligations. Management does not believe that any pending
litigation against Grupo TFM and subsidiaries will, individually or in the
aggregate, have a material adverse effect on their results of operations or
financial condition.
- - The Company has filed a claim for the refund of approximately $262 million (Ps
2,111 million) of value added tax paid in connection with the Acquisition (see
Note 1). However, a full valuation allowance has been provided in the
accompanying consolidated financial statements.
On September 25, 2002 the Mexican Magistrates Court of the First District (the
"Federal Court"), issued its judgment in favor of TFM on the VAT claim which
has been pending in the Mexican Courts since 1997. By a unanimous decision, a
three-judge panel of the Federal Court vacated a prior judgment of the Mexican
Fiscal Court (Tribunal Federal de Justicia Fiscal y
(25)
Administrativa) and remanded the case to the Mexican Fiscal Court with
specific instructions to enter a new decision consistent with the guidance
provided by the Federal Court's ruling. The Federal Court's ruling requires
the fiscal authorities to issue the VAT credit certificate only in the name of
TFM. On December 6, 2002 the upper chamber of the Mexican Fiscal Court has
issued a ruling denying TFM's right to receive a value added tax refund from
the Mexican Federal Government. On January 8, 2003, TFM was officially
notified of the new judgment of the Fiscal Court and on January 29, 2003,
filed the appropriate appeal. TFM is considering filing an additional
complaint against the fiscal courts new judgment, and in both instances
believes that it will prevail. In the event TFM prevail, a third party who can
establish that its rights have been adversely and improperly affected by the
new ruling may seek to bring a claim, in a different proceeding, against TFM.
However, TFM does not believe that any third party's rights would be
improperly affected and believes that it would prevail in any such action.
- - In September 2001, Ferrocarril Mexicano, S. A. de C. V. ("Ferromex") filed a
legal claim against the Company relating to payments that both parties are
required to make to each other for interline services and trackage and haulage
rights pursuant to each of their respective concessions. At the date of
issuance of these consolidated financial statements, the Company and Ferromex
have not been able to agree upon the rates that each is required to pay to the
other for such services and rights. Accordingly, in 2001 the Company has
initiated an administrative proceeding pursuant to the Mexican Railroad
Services Law and Regulations requesting a determination of such rates by the
SCT to determine the conditions and rates under which such services and rights
are to be rendered. On September 25, 2002 the third civil court of Mexico City
rendered its judgment in favor of TFM. Ferromex has appealed the judgment and
it cannot be predicted whether TFM will ultimately prevail.
On March 14, 2002, the Company received the ruling from SCT solving the
procedures and conditions for the trackage rights for 2002. The Ministry of
Transportation was silent with respect to rates for interline services and
stated that rates for haulage services should be privately negotiated because
these services are not established under any railroad concession. The trackage
rights rates established by the Ministry of Transportation under the ruling
are to become effective immediately, and the Company and Ferromex are directed
to settle the amounts each one owes to the other for interline services and
trackage and haulage rights within a period of 45 day after TFM commence
operating under long-distance trackage rights. Although the Ministry of
Transportation's ruling establishes rates using the criteria set forth in the
Mexican railroad services law and regulations, TFM is appealing the ruling on
the grounds that it fails to establish rates for interline services and
because the Company disagree with the methodology applied to the criteria in
calculating the trackage rights rates. The Company is also requesting a
suspension of the effectiveness of the ruling pending resolution of this
appeal.
(26)
In connection with the Ferromex claim, Ferromex temporarily prevented TFM from
using certain short trackage rights, which TFM has over a portion of its route
running from Celaya to Silao, which is the site of a General Motors plant from
where TFM transport finished vehicles to the border crossing at Nuevo Laredo.
Ferromex was subsequently ordered by the court to resume giving TFM access,
and in October 2002, TFM filed a counterclaim against Ferromex relating to
these actions.
Management cannot predict whether TFM will ultimately prevail in this
proceeding and whether the rates TFM is ultimately allowed to charge will be
adequate to compensate the Company. Management believes that, even if the
rates established in the ruling go into effect and TFM and Ferromex begin
using the long-distance trackage rights over each other's rail line, this will
not have a material adverse effect on the results of operations. However,
Management cannot guarantee that the competitors' usage of TFM's rail lines
will not result in losing business or that losses will be offset by revenues
generated from the payments for the rights to use TFM's tracks.
The Company believes that the payments for interline services and haulage owed
by Ferromex exceed the amount of payments that Ferromex claims the Company
owes to Ferromex for such services and rights. Accordingly, the Company
believes that the outcome of this legal claim will not have a material adverse
effect on the financial condition of TFM.
NOTE 11 - RECONCILIATION OF DIFFERENCES BETWEEN IAS AND U.S. GAAP:
The Company's combined and consolidated financial statements are prepared in
accordance with IAS which differ in certain material respects from U.S. GAAP.
The main differences between IAS and U.S. GAAP, as they relate to the Company,
are summarized in the following pages. An explanation is provided when
considered necessary of the effects on the consolidated net income and on
stockholders' equity.
a. Reconciliation of net income
Year ended December 31,
-----------------------
Reference to
subnote d. 2000 2001 2002
---------- ---- ---- ----
Net income (loss) under IAS $ 41,311 $ 81,749 ($ 7,988)
Deferred income tax i (1,822) (6,679) 121,738
Deferred employees' statutory profit
sharing i 4,573 (2,623) 25,792
Deferred charges ii (933) 702
Depreciation iii (459)
Effect of U.S. GAAP adjustments on
minority interest (550) 2,047 (29,601)
---------- ---------- -----------
Net income under U.S. GAAP $ 43,512 $ 73,561 $ 110,184
========== ========== ===========
(27)
b. Reconciliation of stockholders' equity
December 31,
------------
Reference to
subnote d. 2001 2002
---------- ---- ----
Stockholders' equity under IAS $ 976,432 $ 712,344
Deferred income tax i (88,332) 33,406
Deferred employees' statutory profit sharing i 12,901 38,693
Deferred charges ii (933) (231)
Depreciation iii (459)
Effect on purchase of subsidiary shares iii 16,447
Effect of U.S. GAAP adjustments on minority interest 15,273 (14,328)
----------- -----------
Stockholders' equity under U.S. GAAP $ 915,341 $ 785,872
=========== ===========
c. Analysis of changes in stockholders' equity under U.S. GAAP:
December 31,
------------
Reference to
subnote d. 2001 2002
---------- ---- ----
Balance at beginning of the year $ 841,780 $ 915,341
Effect on purchase of subsidiary shares iii (34,749)
Treasury shares (204,904)
Net income 73,561 110,184
----------- -----------
Balance at end of the year $ 915,341 $ 785,872
=========== ===========
d. Significant differences between IAS and U.S. GAAP:
i. Deferred income tax and employees' statutory profit sharing
The deferred income tax included in the consolidated financial statements was
calculated in accordance with the IAS-12 (revised) which requires the recording
of deferred taxes for fixed assets and concession, including the effects of
indexing for tax purposes.
U.S. GAAP prohibits recognition of deferred tax assets or liabilities for
differences related to assets and liabilities that are remeasured from the local
currency into the functional currency using historical exchange rates and that
result from changes in exchange rates or the indexation for tax purposes.
(28)
In Mexico, companies are obligated to pay their employees a portion of the net
income as defined by specific regulations. For U.S. GAAP purposes, deferred
profit sharing liabilities or assets would be recorded for temporary differences
that may arise in the determination of the current liability based on the
statutory rate of 10%. These temporary differences are similar to those that
exist for deferred income tax purposes. IAS do not require the establishment of
assets or liabilities for these differences.
The differences in the net deferred income tax and employees' statutory profit
sharing assets determined under U.S. GAAP and IAS at December 31, 2001 and 2002
are summarized below:
Deferred income Deferred profit
tax assets sharing assets
---------- --------------
2001 2002 2001 2002
---- ---- ---- ----
Amounts recorded under IAS $ 131,206 $ 100,972 $ - $ -
Amount determined under U.S.
GAAP 42,874 134,378 12,901 38,693
---------- --------- --------- ---------
Net difference $ 88,332 ($ 33,406) $ 12,901 $ 38,693
========== ========= ========= =========
Under U.S. GAAP, employee profit sharing would be considered as operating
expense.
ii. Deferred charges
During 2001, the Company incurred in certain financing costs paid to third
parties which were capitalized under IAS amounting to $933. Under U.S. GAAP, it
is required that these costs are expensed as incurred.
Additionally during 2002, the Company incurred in certain expenses related with
the 180,000 senior notes as mentioned in Note 5. Under U.S.GAAP the legal fees
for the exchange of such senior notes amounting to $231 should be expensed as
incurred. Nevertheless, under IAS these expenses should be capitalized and
amortized over the period of the senior notes.
iii. Mexrail transaction
As more fully described in Note 1, on March 27,2002, Grupo TMM and KCS sold
their respective interests in Mexrail to TFM for an aggregate purchase price of
$64 million. Under U.S. GAAP, TFM has recorded this transaction pursuant to SFAS
No. 141 "Business Combinations" with partial fair value step-up (49%), for KCS's
investment, being recognized for the assets and liabilities being acquired.
Thus, the amount recorded was $20,557 and the corresponding deferred income tax
(45%) for $9,249, both allocated in fixed assets. During the year ended December
31, 2002 the depreciation of this transaction was $459. The portion sold
(29)
by Grupo TMM to TFM (51%) amounting to $21.4 million would be accounted for on a
historical carryover basis since both Mexrail and TFM are under the common
control of Grupo TMM. Thus, the effect of the latter affected stockholders'
equity by $16.4 million (80%) and minority interest by $4.1 million.
iv. Earnings per share
The weighted average number of shares outstanding for the years ended December
31, 2000, 2001 and 2002 was 10,063,570, 10,063,570 and 9,011,069, respectively.
The net income per share (basic and diluted) under U.S. GAAP was $4.32 in 2000,
$7.31 in 2001 and $12.23 in 2002.
v. Sales and disposals of fixed assets
In accordance with SAB 101, the gains or losses on sales and disposals of fixed
assets should be included in other operating expenses. Under IAS, these expenses
are included in other (expenses) income - net. For the years ended December 31,
2000, 2001 and 2002 the (losses) or gains on sales and disposals of fixed assets
amounted to ($23,203), $53,159 and ($6,897), respectively.
vi. Extraordinary item
Under IAS, the deferred financing costs expensed for the pre-payment of the
Senior credit facilities for an amount of $9,227 were included in interest
expense, while under U.S. GAAP, it would be included in the income statement as
extraordinary item, net of taxes ($5,075).
vii. Effect of recently issued accounting standards as they relate to the
company
On August 15, 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("FAS 143") "Accounting for Asset Retirement Obligations". This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to all entities. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. As
used in this Statement, a legal obligation is an obligation that a party is
required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppel. This Statement also requires that the
fair value of a liability for and asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Earlier application is encouraged.
(30)
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002." SFAS
No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." As a result, gains and losses from extinguishment of debt will no
longer be classified as extraordinary items unless they meet the criteria of
unusual or infrequent as described in APB Opinion No. 30, "Reporting the Results
of Operations -Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In
addition, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002.
In July of 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting for
Cost Associated with Exit or Disposal Activities". This Statement addresses
financial accounting and reporting costs associated with exit or disposal
activities and nullifies Emmerging Issues Task Force No. 94-3 ("EITF 94-3"),
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exist an Activity (Including Certain Costs Incurred in a Restructuring)". The
principal difference between SFAS 146 and EITF 94-3 is that FAS 146 requires
that a liability for a cost associated with a exit or disposal activity be
recognized when the liability is incurred rather than at the date of an entity's
commitment to an exit plan. This Statement also revises the definition of exit
costs and established that fair value is the objective for initial measurement
of the liability.
Management is currently evaluating the impact that the adoption of the
above-mentioned statements will have on the consolidated financial statements.
e. Condensed combined and consolidated balance sheets and income statements
The following condensed combined and consolidated balance sheets and income
statements reflect the effects of the principal differences between IAS and U.S.
GAAP:
(31)
Condensed combined
and consolidated
Balance Sheets
--------------
December 31,
------------
2001 2002
---- ----
Total current assets $ 290,801 $ 265,250
Due from Mexican Government 81,892
Long-term account receivable 1,388
Concession rights and related assets - Net 1,257,591 1,215,487
Property, machinery and equipment - Net 568,755 638,716
Deferred income taxes and employees' statutory
profit sharing 55,775 163,822
Other non-current assets 17,334 41,850
------------- --------------
Total assets $ 2,272,148 $ 2,326,513
============= ==============
Total short-term liabilities $ 381,459 $ 147,295
Total long-term liabilities 594,629 1,045,287
------------- --------------
Total liabilities 976,088 1,192,582
------------- --------------
Minority interest 380,719 348,059
------------- --------------
Capital stock 807,008 807,008
Treasury Shares (204,904)
Effect on purchase of subsidiary shares 17,912 (17,115)
Retained earnings 90,421 200,883
------------- --------------
Total stockholders' equity 915,341 785,872
------------- --------------
Total liabilities and stockholders' equity $ 2,272,148 $ 2,326,513
============= ==============
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Condensed combined
and consolidated
Statements of Income
--------------------
Years ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 695,425 $ 720,627 $ 712,140
Total operating expenses 550,350 521,115 540,617
----------- ----------- -----------
Operating income 145,075 199,512 171,523
Other income (expenses) - net 1,629 (17,587) (12,358)
Comprehensive financing cost (103,850) (80,649) (113,226)
----------- ----------- -----------
Income before provision for
deferred income taxes, minority
interest and extraordinary item 42,854 101,276 45,939
Current income tax (79)
Deferred income tax benefit (expense) 16,446 (9,252) 91,505
Minority interest (10,713) (18,384) (27,260)
----------- ----------- -----------
Income before extraordinary item 48,587 73,561 110,184
Extraordinary item, net of taxes (5,075)
----------- ----------- -----------
Net income for the year $ 43,512 $ 73,561 $ 110,184
=========== =========== ===========
(33)