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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission file number: 0-29190
CRESUD SOCIEDAD ANONIMA COMERCIAL INMOBILIARIA FINANCIERA Y AGROPECUARIA
(Exact name of Registrant as specified in its charter)
CRESUD INC.
(Translation of Registrant's name into English)
REPUBLIC OF ARGENTINA
(Jurisdiction of incorporation or organization)
AV. HIPOLITO YRIGOYEN 440, 3RD FLOOR,
(C1086AAF) BUENOS AIRES, ARGENTINA
(Address of principal executive offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
GLOBAL DEPOSITARY SHARES, EACH REPRESENTING NASDAQ NATIONAL MARKET OF THE
TEN SHARES OF COMMON STOCK NASDAQ STOCK MARKET
COMMON STOCK, PAR VALUE ONE PESO PER SHARE NASDAQ NATIONAL MARKET OF THE
NASDAQ STOCK MARKET*
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* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT: NONE
The number of outstanding shares of Common Stock of Cresud Sociedad
Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria as of June 30, 2002
was:
SHARES OF COMMON STOCK...............................................122,745,539
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 X
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INDEX TO REPORT ON FORM 20-F
Page No.
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Disclosure Regarding Forward-Looking Information................................................ 4
Presentation of Financial and Certain Other Information......................................... 5
Certain Definitions and Conventions............................................................. 6
Certain Measurements and Terms.................................................................. 6
PART I
Item 1 Identity of Directors, Senior Management and Advisers.................................. 7
Item 2 Offer Statistics and Expected Timetable................................................ 7
Item 3 Key Information........................................................................ 7
(a) Selected Consolidated Financial Data............................................. 7
(b) Exchange Rates................................................................... 10
(c) Risk Factors..................................................................... 12
PART II
Item 4 Information on the Company............................................................. 31
(a) History and Development of CRESUD................................................ 31
(b) Business Overview................................................................ 32
(c) Regulation and Government Supervision............................................ 41
(d) Organizational Structure......................................................... 43
(e) Property, Plant and Equipment.................................................... 44
Item 5 Operating and Financial Review and Prospects........................................... 48
(a) Consolidated Operating Results................................................... 48
(b) Liquidity and Capital Resources.................................................. 62
(c) Research and Development, Patents and Licenses................................... 82
(d) Trend Information................................................................ 83
Item 6 Directors, Senior Management and Employees............................................. 85
(a) Directors........................................................................ 85
(b) Senior Management................................................................ 87
(c) Supervisory Committee............................................................ 88
(d) Key Employees.................................................................... 89
(e) Compensation..................................................................... 89
(f) Board Practices.................................................................. 90
(g) Employees........................................................................ 90
i
(h) Share Ownership.................................................................. 91
Item 7 Major Shareholders and Related Party Transactions...................................... 92
(a) Major Shareholders............................................................... 92
(b) Related Party Transactions....................................................... 93
(c) Interests of Experts and Counsel................................................. 95
Item 8 Financial Information.................................................................. 95
(a) Consolidated Statements and Other Financial Information.......................... 95
(b) Legal or Arbitration Proceedings................................................. 95
(c) Dividend Policy.................................................................. 96
(d) Significant Changes.............................................................. 96
Item 9 The Offer and Listing Details.......................................................... 97
(a) Information on the Listing of our Stock.......................................... 97
(b) Plan of Distribution............................................................. 99
(c) Markets.......................................................................... 99
(d) Selling Shareholders............................................................. 101
(e) Dilution......................................................................... 101
(f) Expenses of the Issue............................................................ 101
Item 10 Additional Information................................................................. 101
(a) Share Capital.................................................................... 101
(b) Memorandum and Articles of Association........................................... 101
(c) Material Contracts............................................................... 105
(d) Exchange Controls................................................................ 105
(e) Taxation......................................................................... 106
(f) Dividends and Paying Agents...................................................... 112
(g) Statement by Experts............................................................. 112
(h) Documents on Display............................................................. 112
(i) Subsidiary Information........................................................... 112
Item 11 Quantitative and Qualitative Disclosures About Market Risk............................. 113
Item 12 Description of Securities Other than Equity Securities................................. 115
Item 13 Defaults, Dividend Arrearages and Delinquencies........................................ 115
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds........... 117
PART III
Item 15 Reserved............................................................................... 117
Item 16 Reserved............................................................................... 117
PART IV
Item 17 Financial Statements................................................................... 117
Item 18 Financial Statements................................................................... 117
ii
Item 19 Exhibits............................................................................... 117
Signatures...................................................................................... 118
iii
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains or incorporates by reference statements that
constitute "forward-looking statements," in that they include statements
regarding the intent, belief or current expectations of our directors and
officers with respect to our future operating performance. Such statements
include any forecasts, projections and descriptions of anticipated cost savings
or other synergies. Words such as "anticipate," "expect," "intend," "plan,"
"believe," "seek," "estimate," variations of such words, and similar expressions
are intended to identify such forward-looking statements. You should be aware
that any such forward-looking statements are not guarantees of future
performance and may involve risks and uncertainties, and that actual results may
differ from those set forth in the forward-looking statements as a result of
various factors (including, without limitations, the actions of competitors,
future global economic conditions, market conditions, foreign exchange rates,
and operating and financial risks related to managing growth and integrating
acquired businesses), many of which are beyond our control. The occurrence of
any such factors not currently expected by us would significantly alter the
results set forth in these statements.
Factors that could cause actual results to differ materially and
adversely include, but are not limited to:
o changes in general economic, business or political or other
conditions in Argentina or changes in general economic or business
conditions in Latin America;
o changes in capital markets in general that may affect policies or
attitudes toward lending to Argentina or Argentine companies;
o changes in exchange rates or regulations applicable to currency
exchanges or transfers;
o unexpected developments in certain existing litigation;
o increased costs;
o unanticipated increases in financing and other costs or the inability
to obtain additional debt or equity financing on attractive terms;
and
o the factors discussed under "Risk Factors" beginning on page 12.
You should not place undue reliance on such statements, which speak only
as of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we might issue in the future. We do not
undertake any obligation to release publicly any revisions to such
forward-looking statements after filing of this Form to reflect later events or
circumstances or to reflect the occurrence of unanticipated events.
4
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
In this Form 20-F, references to "US$" and "U.S. dollars" are to United
States dollars, and references to "Ps.", "Peso" or "Pesos" are to Argentine
pesos.
We maintain our financial books and records in pesos and prepare our
financial statements in conformity with generally accepted accounting principles
in Argentina ("Argentine GAAP") and the regulations of the Comision Nacional de
Valores.
Attached as part of this Form 20-F are our audited consolidated financial
statements as of June 30, 2002 and 2001 for the years ended June 30, 2002, 2001
and 2000 (the "Financial Statements") which have been audited by
PricewaterhouseCoopers, Buenos Aires, Argentina, independent accountants, whose
report is included herein. Argentine GAAP differs in certain significant
respects from generally accepted accounting principles in the United States of
America ("U.S. GAAP"). Such differences involve methods of measuring the amounts
shown in the consolidated financial statements, as well as additional
disclosures required by U.S. GAAP. See Note 12 to the Financial Statements for a
description of the principal differences between Argentine GAAP and U.S. GAAP as
they relate to us and a reconciliation to U.S. GAAP of net (loss) income and
total shareholders' equity. Certain amounts, which appear in this Form 20-F
(including percentage amounts), may not sum due to rounding.
Also contained elsewhere in this annual report are the consolidated
financial statements of IRSA Inversiones y Representaciones Sociedad Anonima
("IRSA"), an unconsolidated equity investee, as of June 30, 2002 and 2001 and
for the years ended June 30, 2002, 2001 and 2000, which have been audited by
PricewaterhouseCoopers, Buenos Aires, Argentina, independent auditors, whose
report is included elsewhere herein. As mentioned in Note 5.b) to our
consolidated financial statements, we own a 19.85% equity interest in IRSA. On
September 9, 2002 IRSA 's independent accountants issued a report stating
that the company had suffered a negative impact as a result of the continuous
deterioration of the Argentine economy, the Argentine government's adoption of
various economic measures and the devaluation of the Argentine peso as a result
of which there is substantial doubt as to IRSA's ability to continue as a going
concern. The financial statements of IRSA do not include any adjustment that
might result from the outcome of this uncertainty.
IRSA prepares its financial statements in Pesos and in conformity with
Argentine GAAP and the regulations of the Comision Nacional de Valores, which
differ in certain significant respects from U.S. GAAP. Such differences involve
methods of measuring the amounts shown in the consolidated financial statements,
as well as additional disclosures required by U.S. GAAP and Regulation S-X of
the SEC. See Note 19 to IRSA's consolidated financial statements contained
elsewhere in this annual report for a description of the principal differences
between Argentine GAAP and U.S. GAAP, as they relate to IRSA, and a
reconciliation to U.S. GAAP of net (loss) income and shareholders' equity.
On September 9, 2002, IRSA's independent auditors issued a report
stating that it was negatively impacted by the continued deterioration of the
Argentine economy, the Argentine government's adoption of various economic
measures and the devaluation of the Peso which raises substantial doubt as to
its ability to continue as a going concern. You should review the report of
PricewaterhouseCoopers carefully. We cannot assure you that IRSA will be able to
continue as a going concern. IRSA's consolidated financial statements do not
include the effects of eventual adjustments and restatements, if any, if it is
required to sell its assets to pay off its liabilities, including contingent
liabilities, under any circumstance other than in the ordinary course of its
business.
We have included the gain or loss on exposure to inflation (monetary
gain or loss) in our consolidated statements of income within total financing
results.
References to fiscal years 1998, 1999, 2000, 2001 and 2002 are to the
fiscal years ended June 30, 1998, 1999, 2000, 2001 and 2002, respectively.
MARKET DATA
Market data used throughout this annual report were derived from reports
prepared by unaffiliated third-party sources. Such reports generally state that
the information contained therein has been obtained from
5
sources believed by such sources to be reliable. Certain market data which
appear herein (including percentage amounts) may not sum due to rounding.
CERTAIN DEFINITIONS AND CONVENTIONS
As used throughout this Form 20-F, the terms "Cresud", "Company," "we,"
"us," and "our" refer to Cresud Sociedad Anonima Comercial, Inmobiliaria,
Financiera y Agropecuaria, together with our consolidated subsidiaries, except
where we make clear that such terms refer only to the parent company.
CERTAIN MEASUREMENTS AND TERMS
In this Form 20-F, references to "Tons", "tons" or "Tns." are to metric
tons, to "kgs" are to kilograms, to "ltrs" are to liters and "Hct" are to
hectares. A metric ton is equal to 1,000 kilograms. A kilogram is equal to
approximately 2.2 pounds. A metric ton of wheat is equal to approximately 36.74
bushels. A metric ton of corn is equal to approximately 39.37 bushels. A metric
ton of soybean is equal to approximately 36.74 bushels. One gallon is equal to
3.7854 liter. One hectare is equal to approximately 2.47 acres. One kilogram of
live weight beef cattle is equal to approximately 0.5 to 0.6 kilogram of carcass
(meat and bones).
6
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This item is not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
This item is not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data has been derived from
our consolidated financial statements as of the dates and for each of the
periods indicated below. This information should be read in conjunction with and
is qualified in its entirety by reference to our consolidated financial
statements and the discussion in Operating and Financial Review and Prospects
included elsewhere in this annual report. The selected consolidated statement of
income data for the years ended June 30, 2002, 2001 and 2000 and the selected
consolidated balance sheet data as of June 30, 2002 and 2001 have been derived
from our consolidated financial statements included in this annual report which
have been audited by PricewaterhouseCoopers, Buenos Aires, Argentina,
independent auditors. The consolidated statements of income data for the years
ended June 30, 1999 and 1998 and the selected consolidated balance sheet data as
of June 30, 2000, 1999 and 1998 have been derived from our audited consolidated
financial statements that are not included herein.
Our financial statements are presented in Pesos. Our financial statements
are prepared in accordance with Argentine GAAP, which differs in certain
significant respects from U.S. GAAP. Note 12 to our consolidated financial
statements provides a description of the principal differences between Argentine
GAAP and U.S. GAAP affecting our net (loss) income and shareholders' equity and
a reconciliation to U.S. GAAP of net (loss) income reported under Argentine GAAP
for the years ended June 30, 2002, 2001 and 2000, and of shareholders' equity
reported under Argentine GAAP as of June 30, 2002 and 2001. The differences
involve methods of measuring the amounts shown in the financial statements as
well as additional disclosures required by U.S. GAAP and Regulation S-X of the
SEC.
Our consolidated financial statements have been prepared on the basis of
general price-level accounting which reflects changes in the purchasing power of
the Peso in the historical financial statements using changes in the Argentine
wholesale price index, as published by the Instituto Nacional de Estadistica y
Censos, as follows:
o we have adjusted non-monetary items and consolidated statements of
income amounts to reflect the then-current general purchasing power.
o we have not adjusted monetary items, as such items were by their
nature stated in terms of current general purchasing power in our
consolidated financial statements.
o we have recognized monetary gains or losses in our consolidated
statements of income, reflecting the effect of holding monetary items,
and
o we have included the gain or loss on exposure to inflation (monetary
gain or loss) in our consolidated statements of income within total
financing results.
We have used a conversion factor of 1.9554 to restate our financial
statements in constant Argentine Pesos as of June 30, 2002.
7
AS OF AND FOR THE YEAR ENDED JUNE 30, (1)
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2002 (2) 2002 2001 2000 1999 1998
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(US$) (PS.) (PS.) (PS.) (PS.) (PS.)
INCOME STATEMENT DATA
ARGENTINE GAAP
Sales:
Crops ....................... 11,366,733 43,193,585 37,588,101 36,168,042 35,632,612 48,279,890
Beef cattle ................. 6,468,716 24,581,122 26,115,044 26,156,379 40,047,111 45,673,539
Milk ........................ 529,083 2,010,515 2,327,798 3,331,217 7,224,506 7,684,165
Other ....................... 438,460 1,666,149 2,430,875 3,500,991 3,091,131 2,627,870
Gross sales tax ............. (171,198) (650,552) (423,078) (464,043) (727,364) (692,376)
------------ ------------ ------------ ------------ ------------- ------------
Net sales ..................... 18,631,794 70,800,819 68,038,740 68,692,586 85,267,996 103,573,088
============ ============ ============ ============ ============= ============
Cost of sales:
Crops ....................... (3,645,499) (13,852,898) (27,260,838) (26,921,429) (38,521,009) (37,709,531)
Beef cattle ................. (5,336,752) (20,279,656) (21,713,923) (23,306,404) (35,991,690) (26,953,785)
Milk ........................ (834,512) (3,171,145) (2,018,241) (4,980,877) (7,172,088) (6,521,009)
Other ....................... (497,281) (1,889,666) (2,118,981) (2,445,740) (3,086,851) (1,873,506)
------------ ------------ ------------ ------------ ------------- ------------
Total ................. (10,314,044) (39,193,365) (53,111,983) (57,654,450) (84,771,638) (73,057,831)
============ ============ ============ ============ ============= ============
Gross profit .................. 8,317,750 31,607,454 14,926,757 11,038,136 496,358 30,515,257
Selling expenses .............. (2,290,978) (8,705,718) (9,590,017) (9,141,428) (9,335,765) (10,236,494)
Administrative expenses ....... (1,960,679) (7,450,581) (7,511,464) (7,743,491) (8,500,389) (9,259,941)
Net gain on sale of farms ..... 3,883,138 14,755,923 5,101,150 -- 18,433,573 9,368,976
Inventory holdings (loss) gain (4,592,848) (17,452,822) (1,325,916) 140,087 (11,955,649) 14,974,825
Operating (loss) income ....... 3,356,383 12,754,256 1,600,510 (5,706,696) (10,861,872) 35,362,623
Financial results, net ........ (1,986,221) (7,547,641) 11,030,359 8,879,536 11,650,694 5,021,876
Gain on acquisition of minority
interest..................... -- -- -- -- 1,215,050 --
Net (loss) gain from equity
investments.................. (9,905,432) (37,640,641) (336,831) (32,432) 204,510 1,061,217
Total other (expense) income,
net.......................... 38,676 146,968 (302,633) (228,533) 88,172 (312,823)
Management fee ................ -- -- (833,104) (294,285) (226,136) (4,099,893)
(Loss) Income before income tax (8,496,594) (32,287,058) 11,158,301 2,617,590 2,070,418 37,033,000
and minority interest
Income tax .................... (1,994,707) (7,579,886) (4,014,295) (43,746) (35,195) (75,807)
Minority interest ............. 81,741 310,616 353,923 74,711 -- (58,158)
Net (loss) income ............. (10,409,560) (39,556,328) 7,497,929 2,648,555 2,035,223 36,899,035
Earnings per share(3) ......... (0.08) (0.32) 0.06 0.02 0.02 0.30
Earnings per ADS(3) ........... (0.85) (3.22) 0.62 0.22 0.17 2.97
US GAAP
Net sales ..................... 18,631,794 70,800,819 68,038,740 68,692,586 85,267,996 103,573,088
Net (loss) income ............. (29,203,902) (110,974,841) 3,955,941 (3,334,334) 4,195,847 10,906,998
Basic and diluted earnings
per share(3) ................ (0.244) (0.927) 0.03 (0.03) 0.04 0.09
Basic and diluted earnings per
ADS(3) ...................... (2.44) (9.27) 0.33 (0.28) 0.35 0.88
BALANCE SHEET DATA
ARGENTINE GAAP
Current assets:
Cash and banks and Investments 10,409,852 39,557,438 115,288,411 53,750,195 58,096,678 68,040,820
Inventories ................... 8,950,510 34,011,938 26,081,114 32,783,883 44,583,119 61,744,085
Trade and other receivables ... 6,462,962 24,559,257 35,835,496 26,551,884 37,726,422 51,654,368
Non-current assets:
Other receivables.............. 579,499 2,202,097 3,622,185 9,783,583 9,750,915 10,207,874
Inventories ................... 6,891,627 26,188,183 48,737,064 54,381,704 54,801,145 64,993,025
Investments ................... 28,285,160 107,483,607 15,873,859 15,373,264 15,470,788 14,029,188
Property and equipment, net ... 30,043,932 114,166,943 150,902,637 162,724,597 160,619,067 182,201,297
Intangible assets ............. 660,867 2,511,292 3,517,166 3,269,262 -- --
------------ ------------ ------------ ------------ ------------- ------------
Total assets .................. 92,284,409 350,680,755 399,857,932 358,618,372 381,048,134 452,870,657
============ ============ ============ ============ ============= ============
Current liabilities:
Trade accounts payable......... 4,562,116 17,336,042 18,670,889 9,624,160 11,574,920 17,797,666
Short-term debt ............... 1,749,755 6,649,068 26,607,834 -- -- --
Other ......................... 2,257,148 8,577,163 2,725,028 2,499,129 4,253,367 13,904,814
Non-current liabilities ....... 3,414,306 12,974,361 487,694 469,296 376,295 17,493,804
------------ ------------ ------------ ------------ ------------- ------------
Total liabilities ............. 11,983,325 45,536,634 48,491,445 12,592,585 16,204,582 49,196,284
============ ============ ============ ============ ============= ============
Minority interest ............. 100,922 383,503 475,156 116,258 6 3,942,476
Shareholders' equity .......... 80,200,162 304,760,618 350,891,331 345,909,529 364,843,546 399,731,897
US GAAP
Total assets .................. 69,451,541 263,915,855 358,351,756 327,870,660 354,370,129 420,128,370
Shareholders' equity .......... 50,712,418 192,707,189 307,273,364 309,214,097 330,920,238 363,251,422
CASH FLOW DATA
ARGENTINE GAAP
Net cash provided by (used in) 5,332,254 20,262,944 15,412,780 16,781,189 2,384,764 (47,523,719)
operating activities
AS OF AND FOR THE YEAR ENDED JUNE 30, (1)
--------------------------------------------------------------------------------------------
2002 (2) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------- ------------
(US$) (PS.) (PS.) (PS.) (PS.) (PS.)
Net cash provided by (used in)
investing activities......... 9,075,032 34,485,120 (57,198,676) (7,823,942) 18,336,377 (47,826,702)
Net cash (used in) provided by
financing activities......... (5,012,102) (19,038,386) 23,678,545 (23,201,735) (52,639,711) 770,864
U.S. GAAP
Net cash provided by (used in)
operating activities......... 5,332,254 20,262,944 15,412,780 16,781,189 2,384,764 (47,523,719)
Net cash provided by (used in)
investing activities......... 9,075,032 34,485,120 (57,198,676) (7,823,942) 18,336,377 (47,826,702)
Net cash (used in) provided by
financing activities......... (5,012,102) (19,038,386) 23,678,545 (23,201,735) (52,639,711) 770,864
OTHER FINANCIAL DATA
ARGENTINE GAAP
EBITDA(4) ..................... (9,345,365) (35,512,386) 9,298,228 (416,805) 3,797,258 34,507,636
Depreciation and amortization . 930,512 3,535,944 3,300,344 3,304,418 3,014,410 2,714,310
Capital expenditures(5) ....... 216,339 822,088 2,808,280 5,230,156 10,269,367 44,208,518
Ratio of earnings to fixed
charges...................... --(6) --(6) 12.23 16.64 1.5 147.18
U.S. GAAP
Ratio of earnings to fixed .... --(6) --(6) 16.76 --(6) 2.42 69.09
charges
- ------------
(1) In constant Argentine Pesos of June 30, 2002.
(2) Solely for the convenience of the reader, we have translated Argentine Peso
amounts into U.S. dollars at the exchange rate quoted by Banco de la Nacion
Argentina for June 28, 2002 which was Ps. 3.8 per US$1.0. We make no
representation that the Argentine Peso or U.S. dollar amounts actually
represent, could have been or could be converted into dollars at the rates
indicated, at any particular rate or at all. See "Exchange Rates".
(3) Under Argentine GAAP, we are not required to present earnings per share
information. Under US GAAP, we have presented basic and diluted earnings
per share in conformity with SFAS No. 128 "Earnings per Share" and SEC
Staff Accounting Bulletin No. 98 ("SAB No. 98") for all periods.
Basic net (loss) income per share is computed by dividing the net income
available to common shareholders for the period by the weighted average
shares of common stock outstanding during the period. Diluted net (loss)
income per share is computed by dividing the net income for the period by
the weighted average number of common and dilutive potential common shares
then outstanding during the period. Pursuant to the SEC Staff Accounting
Bulletin No. 98, ordinary shares and convertible preferred shares issued or
granted for nominal consideration prior to the anticipated effective date
of an initial public offering must be included in the calculation of basic
and diluted net loss per share as if they had been outstanding for all
periods presented. To date, we have not had any issuance or grants for
nominal consideration. Since we have no dilutive potential common stock
outstanding, there are no dilutive earnings per share amounts as described
in SFAS No. 128. See note 10.II.e to our consolidated financial statements
for an explanation of the determination of the number of shares used in
computing per share amounts.
(4) EBITDA is (loss) income for the year before income tax, depreciation and
amortization, and interest expense.
(5) Includes the purchase of farms and other property and equipment.
(6) The ratios related to these years are not presented as they indicate less
than one-to-one coverage. Consequently, earnings for these years were
inadequate to cover fixed charges. Total earnings of Ps. 31 million would
have been required to attain a ratio of one-to-one under Argentine GAAP and
Ps. 10.9 million would have been required to attain a ratio of one-to-one
under US GAAP for the year ended June 30, 2002 and a total amount of Ps.
2.7 million would have been required to attain a ratio of one-to-one under
US GAAP for the year ended June 30, 2000.
9
B. EXCHANGE RATES
In April 1991, Argentine law established a fixed exchange rate under
which the Argentine Central Bank was legally obligated to sell U.S. dollars to
any person at a fixed rate of one Peso per U.S. dollar.
On January 7, 2002, Congress enacted the Public Emergency Law pursuant
to which the executive branch was granted the power to determine the new
exchange rate between the Peso and foreign currencies and to approve the
corresponding monetary regulations. Subsequently, the executive branch announced
the devaluation of the Peso and established a dual exchange rate system pursuant
to which certain limited transactions occurred at a fixed rate of Ps. 1.4 per
US$ 1.00 and all other transactions were settled at a floating market rate,
depending on supply and demand. See "Risk Factors - Risks Related to Argentina".
The Public Emergency Law amends several provisions of the 1991
Argentine law, the most important of which are:
o the repeal of the Ps. 1.00 to US$ 1.00 fixed exchange rate which
was established in 1991,
o the elimination of the obligation of the Argentine Central Bank
to sell foreign currency for conversion transactions at the rate
Ps. 1.00 = US$ 1.00,
o the elimination of the requirement that the Argentine Central
Bank's reserves in gold and foreign currency shall at all times
be equivalent to not less than 100% of the monetary base.
However, the law only states that the Argentine Central Bank's
reserves in gold and foreign currency will need to be at all
times sufficient to support the monetary base. Accordingly the
monetary base is not necessarily fully backed by foreign
currency-denominated reserves, which would potentially have an
inflationary effect on prices, and
o the continuing prohibition of escalation clauses and other means
of adjustment of monetary obligations in Pesos.
On January 11, 2002, the Argentine Central Bank ended a bank holiday
that it had observed since December 21, 2001. The exchange rate began to float
freely for the first time in eleven years at Ps. 1.40 per US$ 1.00. The shortage
of dollars and the desperation of the people to convert their Pesos caused the
exchange rate to rise 25%, closing at Ps. 1.75 per US$ 1.00. Since then, the
exchange rate has continued to grow, forcing the Argentine Central Bank to
intervene in the market and sell U.S. dollars in order to prevent a significant
depreciation of the Peso.
Since February 11, 2002, there has been a single free exchange market
for all exchange transactions, with the following main features:
o the rate of exchange is determined by free supply and demand,
o exchange transactions may only be carried out by entities
authorized by the Argentine Central Bank to do so,
o transfers abroad by the private non-financial sector, the
financial sector and public companies which do not depend on the
state for their budget for principal servicing of financial loans
or profit or dividend remittances will require prior approval
from the Argentine Central Bank, regardless of their method of
payment. This requirement will not apply to transfers relating to
(i) debt agreements with international agencies, (ii) debt with
banks participating in the financing of investment projects
jointly financed by international agencies, and (iii) debt
agreements with official credit agencies or debt guaranteed by
them.
Before 1991, the Argentine currency had experienced a significant
number of large devaluations and Argentina had adopted and operated under
various exchange control policies. We cannot assure you that the executive
branch will continue its current policies or that further devaluations will not
take place.
10
The following table sets forth, for the periods indicated, the high,
low, average and period-end exchange rates for the purchase of dollars expressed
in nominal Pesos per U.S. dollar. On November 19, 2002, the applicable
Peso/dollar exchange rate was Ps. 3.47 = US$1.00. The Federal Reserve Bank of
New York does not report a noon buying rate for Pesos.
NOMINAL EXCHANGE RATES
EXCHANGE RATE
--------------------------------------------------------------
HIGH(1) LOW(2) AVERAGE(3) PERIOD END
--------- ------- ----------- ----------
Year Ended December 31, 1996........... 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1997........... 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1998........... 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 1999........... 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 2000........... 1.0000 0.9990 0.9995 1.0000
Year Ended December 31, 2001(4)........ 1.0000 0.9990 0.9995 1.0000
Month Ended January 31, 2002........... 2.0700 1.6000 1.9100 2.0500
Month Ended February 28, 2002.......... 2.1500 1.7000 2.0000 2.1500
Month Ended March 31, 2002............. 3.1500 2.0500 2.4400 3.0000
Month Ended April 30, 2002............. 3.1500 2.6800 2.8900 2.9800
Month Ended May 31, 2002............... 3.5500 3.0500 3.3064 3.5500
Month Ended June 30, 2002.............. 3.8600 3.4700 3.6250 3.8100
Month Ended July 31, 2002.............. 3.7400 3.5000 3.5709 3.6500
Month Ended August 31, 2002............ 3.6000 3.5400 3.5736 3.5800
Month Ended September 30, 2002......... 3.7000 3.5700 3.6043 3.6950
Month Ended October 31, 2002........... 3.7000 3.4700 3.6059 3.4700
- -------------
(1) The high rate shown was the highest month-end rate during the year or any
shorter period, as noted.
(2) The low rate shown was the lowest month-end rate during the year or any
shorter period, as noted.
(3) Average of month-end rates.
(4) From December 23, 2001 through January 11, 2002 Banco de la Nacion
Argentina did not publish an official exchange rate due to governmental
suspension of the exchange market.
Source: Central Bank; Banco de la Nacion Argentina, Bloomberg
Fluctuations in the exchange rate between the Peso and the U.S. dollar
may affect the U.S. dollar equivalent of the Peso price of the convertible notes
on the Buenos Aires Stock Exchange. Increases in Argentine inflation or
devaluation of the Argentine currency could materially and adversely affect our
operating results.
11
C. RISK FACTORS
RISKS RELATED TO ARGENTINA
OVERVIEW OF ARGENTINE ECONOMIC AND POLITICAL RISKS
All of our operations and properties are located in Argentina. Domestic
demand for our agricultural products is affected by prevailing conditions in the
Argentine economy. Accordingly, contraction in the domestic economy or other
adverse economic conditions may reduce internal demand for agricultural products
and their values and may adversely affect our ability to generate revenues and
to meet our future obligations. The Argentine economy has experienced
significant volatility in recent decades, characterized by periods of low or
negative growth and high and variable levels of inflation. In 1988, 1989 and
1990, the annual inflation rates were approximately 338%, 4,924% and 1,344%,
respectively, based on the consumer price index and approximately 432%, 5,386%
and 798%, respectively, based on the wholesale price index. As a result of
inflationary pressures, the Argentine currency was devalued repeatedly during
the 1960s, 1970s and 1980s, and macroeconomic instability led to broad
fluctuations in the real exchange rate of the Argentine currency relative to the
U.S. dollar. To address these pressures, the Argentine government implemented
various plans and utilized a number of exchange rate systems during this period.
At various times throughout Argentine history, the foreign exchange market has
been subject to exchange controls.
In 1991, the Argentine government launched a plan aimed at controlling
inflation and restructuring the economy, enacting Law No. 23,928 and its
Regulatory Decree 529/91 (together, the "Convertibility Law"). The
Convertibility Law fixed the exchange rate at one Peso per U.S. dollar and
required that the Argentine Central Bank maintain reserves in gold and foreign
currency in an amount at least equivalent to the monetary base. Following
adoption of the Convertibility Law, inflation declined steadily and the
Argentine economy experienced growth through most of the period from 1991 to
1997. In the fourth quarter of 1998, however, the Argentine economy entered into
a recession that caused the gross domestic product to decrease by 3.0% in 1999,
0.5% in 2000 and 4.9% in 2001. During the second half of 2001, Argentina's
recession worsened significantly, precipitating the political and economic
crisis described in greater detail below.
RECENT POLITICAL AND ECONOMIC INSTABILITY HAS PARALYZED COMMERCIAL AND
FINANCIAL ACTIVITIES
Following his election in October 1999, President Fernando De la Rua
was confronted with the challenges of dealing with Argentina's enduring economic
recession and obtaining political consensus on critical issues related to the
economy, public sector spending, legal reforms and social programs. However, he
lacked the support of Congress, which was controlled by the opposition Peronista
party, and the cooperation of several provincial governors who were also
Peronistas. His political strength was further weakened by infighting within his
own party which reached a peak with the resignation of the Vice-President in
October 2000.
The De la Rua administration failed to address adequately the growing
public sector deficit, both at the federal as well as at the provincial level.
As tax revenues dropped as a result of the recession, the public sector relied
increasingly on financing from local, and to a lesser extent, foreign banks,
effectively foreclosing private sector companies from bank financing. As the
public sector's creditworthiness deteriorated, interest rates increased to
record highs, bringing the Argentine economy to a virtual standstill. The lack
of confidence in the country's economic future and its ability to sustain the
Peso's parity with the U.S. dollar led to massive withdrawals of deposits from
the financial system. Despite prior assurances to the contrary, on December 1,
2001, the Argentine government enacted Decree 1570/2001 by which it effectively
froze bank deposits and introduced exchange controls restricting capital
outflows. Some of these measures, known as the "corralito," included
restrictions on rights to withdraw deposits from financial institutions and the
prohibition of transfers of money abroad. These measures caused social
discontent to increase, triggering the looting of stores throughout Argentina on
December 19, 2001, and the resignation of Minister of Economy, Domingo Cavallo,
the following day. On December 21, 2001, after declaring a state of siege,
President De la Rua resigned in the midst of an escalating political, social and
economic crisis.
Following the resignation of an interim President only one week after
his appointment, on January 1, 2002, the Legislative Assembly elected Peronista
senator Eduardo Duhalde as President to serve for the
12
remaining term of former President De la Rua until December 2003. On July 2,
2002, President Duhalde announced that presidential elections would be held in
March 2003 instead of October 2003 and that new president would assume his
mandate on May 2003 instead of December 2003. On November 18, 2002, an agreement
between provincial governors was signed so as to postpone presidential elections
until April 27, 2003, with the new president assuming his mandate in May, 2003.
Since his appointment on January 2, 2002, President Duhalde and the current
Argentine government have undertaken a number of far-reaching initiatives
including:
o ratifying the suspension of payment of almost all of Argentina's
sovereign debt declared by the interim President;
o ending the Peso-U.S. dollar parity set forth in the
Convertibility Law and the resulting devaluation of the Peso;
o converting certain U.S. dollar-denominated debts into
Peso-denominated debts at a one-to-one exchange rate;
o converting, with limited exceptions (financial and commercial),
U.S. dollar-denominated bank deposits into Peso-denominated bank
deposits on an exchange rate of Ps. 1.4 per U.S. dollar;
o restructuring bank deposits and continuing restrictions on bank
withdrawals and transfers abroad;
o enacting an amendment to the Argentine Central Bank's charter to
allow it to print currency in excess of the amount of the foreign
reserves it holds, make short-term advances to the federal
government and provide financial assistance to financial
institutions with liquidity constraints or solvency problems; and
o requiring that, beginning June 26, 2002, the general exchange
positions of financial entities cannot exceed 5% of the value of
their assets available to pay their liabilities (a minimum of
US$1,000,000 for banking institutions and US$500,000 for
non-banking financial institutions), as registered in November,
2001; and
o allocating Argentine government bonds to financial institutions
in compensation for their obligation to both convert all U.S.
dollar-denominated loans into Peso-denominated loans at a
one-to-one exchange rate and convert all U.S. dollar-denominated
bank deposits into Peso-denominated deposits at an exchange rate
of Ps. 1.40 per U.S. dollar.
At this time, the degree of internal and external support for the
Duhalde administration still remains unclear. Widespread political protests and
social disturbances are continuing on an almost daily basis, and to date the
International Monetary Fund and other multilateral and official sector lenders
have indicated their unwillingness to provide financial aid until a sustainable
economic program has been presented. It is unclear whether President Duhalde
will be able to finish his mandate, whether he will have the necessary support
to implement the reforms required to restore economic growth or whether he will
even be able to remain in power. The rapid and radical nature of the recent
changes in the Argentine social, political, economic and legal environment, and
the absence of a clear political consensus in favor of the new Argentine
government, or any particular set of economic policies, have created an
atmosphere of great uncertainty. This uncertainty is aggravated by the
increasing tension between the executive branch and Congress. As a result,
virtually all commercial and financial activities have been paralyzed, further
aggravating the economic recession which precipitated the current crisis.
Although the agribusiness sector has been less affected than other
business sectors by the current crisis, because many of its commodities are
exported and have internationally fixed prices, these conditions have had and
could have a material adverse effect on our cattle and milk operations, since
all of our production is sold in the Argentine market.
13
ARGENTINA'S INSOLVENCY AND RECENT DEFAULT ON ITS PUBLIC DEBT HAS
DEEPENED THE CURRENT FINANCIAL CRISIS
As of December 2001, Argentina's total gross public debt was
approximately US$137.0 billion. On December 23, 2001, former interim President
Rodriguez Saa declared the suspension of payments on certain of Argentina's
sovereign debt, and President Duhalde ratified this measure on January 2, 2002.
In addition, the principal international rating agencies have recently and
repeatedly downgraded the rating of Argentina's sovereign debt. On November 6,
2001, Standard & Poor's lowered Argentina's long-term local and foreign currency
sovereign credit ratings from "CC" to "SD" (selective default), indicating that
Argentina is defaulting on some of its obligations. The single-'C' ratings on
the short-term debt were affirmed. On December 1, 2001, Fitch IBCA and Duff &
Phelps lowered the ratings for the long term debt from "CCC" to "DDD" and the
ratings for the short term debt from "B" to "C". On December 21, 2001, Moody's
Investors Service lowered Argentina's foreign currency country ceiling for bonds
to "Ca" from "Caa3", indicating that the downgrade reflects rapidly
deteriorating economic, financial and social conditions.
The Argentine government's current insolvency and inability to obtain
financing can be expected to affect significantly its ability to implement any
reforms, undermining the private sector's ability to restore economic growth,
and may result in deeper recession, higher inflation and unemployment and
greater social unrest. Furthermore, the restrictions on bank withdrawals, and
the ensuing paralysis of economic activity, have caused tax revenues to drop
dramatically in recent months.
Moreover, on November 14, 2002, the Argentine government defaulted on
all but a fraction of an US$ 805 million payment due on that date to the World
Bank, deepening the country's rift with the international financial
establishment and stirring concern about a new deterioration in relations
between the United States and Latin America. Countries that fail to pay official
multilateral institutions such as the World Bank risk becoming full-fledged
international financial pariahs and, though Argentina fully intends to meet its
obligations once an IMF agreement is reached, the country could fall further
into economic isolation. Eventually, the World Bank will suspend disbursements
on projects that aid the country's poor and Argentine businesses that are still
receiving loans from abroad to finance exports and imports will probably find it
much more difficult to do so.
As a result, our beef cattle and milk businesses and commercial credit
could be materially and adversely affected because these activities are mainly
targeted at domestic consumption. Argentina's economic crisis can be expected to
adversely affect consumers' demand due to the loss of their purchasing power as
a consequence of inflation.
THE ARGENTINE PESO MAY CONTINUE TO BE SUBJECT TO SUBSTANTIAL
DEPRECIATION AND VOLATILITY
The Argentine government's economic policies and any future changes in
the value of the Peso against the U.S. dollar could adversely affect our
financial condition and results of operations. The Peso has been subject to
large devaluations in the past and may be subject to significant fluctuations in
the future.
As a result of inflationary pressures, the Argentine currency was
devalued repeatedly during the 1960s, 1970s and 1980s, and macroeconomic
instability led to broad fluctuations in the real exchange rate of the Argentine
currency relative to the U.S. dollar. To address these pressures, the Argentine
government implemented various plans and utilized a number of exchange rates,
and prior to December 1989, the Argentine foreign exchange market was subject to
exchange controls. During the 1990s the devaluation and fluctuation of the Peso
against the U.S. dollar was controlled by the Convertibility Law, which fixed
the exchange rate at one Peso per U.S. dollar. However, the Economic Emergency
Law puts an end to ten years of U.S. dollar-Peso parity, and in recent months,
the Argentine government has authorized a free floating exchange rate for all
transactions. This has resulted in a significant devaluation of the Peso. Since
the devaluation of the Peso, the Peso has fluctuated significantly, causing the
Argentine Central Bank to intervene in the market to support the value of the
Peso by selling U.S. dollars. As of November 19, 2002, the exchange rate was Ps.
3.47 = US$1.00.
No assurance can be given that future policies to be adopted by the
Argentine government will succeed in controlling or that the Argentine
government will not enforce a differentiated exchange rate regime
14
for foreign trade, establishing regulated rates for exports and imports which
could differ from rates set in the nonregulated market. These policies could
materially and adversely affect our financial condition and results of
operations.
THE RECENT DEVALUATION OF THE PESO WILL ADVERSELY AFFECT ARGENTINE
ECONOMIC CONDITIONS AND OUR FINANCIAL POSITION
On January 6, 2002, Congress enacted the Public Emergency and Foreign
Exchange System Reform Law No. 25,561 (the "Public Emergency Law"), putting an
end to ten years of U.S. dollar-Peso parity under the Convertibility Law and
eliminating the requirement that the Argentine Central Bank's reserves in gold,
foreign currency and foreign currency denominated bonds be at all times
equivalent to the sum of the Pesos in circulation and the Peso deposits of the
financial sector with the Argentine Central Bank. The Public Emergency Law
grants the executive branch the power to set the exchange rate between the Peso
and foreign currencies and to issue regulations related to the foreign exchange
market. On the same day, the executive branch established a temporary dual
exchange rate system, a fixed rate for transactions subject to Argentine Central
Bank approval, and import and export transactions at an exchange rate of Ps. 1.4
per U.S. dollar and a floating rate to be freely determined by the market for
all other transactions.
On January 11, 2002, after the Argentine Central Bank ended a banking
holiday that it had imposed since December 21, 2001, the exchange rate began to
float for the first time since April 1991. Higher demand for scarce U.S. dollars
caused the U.S. dollar to trade well over the Ps. 1.4 per U.S. dollar rate used
by the Argentine government. As a result, the Argentine Central Bank intervened
on several occasions by selling U.S. dollars to support the Peso. However, the
Argentine Central Bank's ability to support the Peso by selling U.S. dollars
depends on its limited U.S. dollar reserves and external financial assistance
from the IMF which it has been unable to obtain. On February 3, 2002, the
executive branch announced the elimination of the dual exchange rate in favor of
a single floating rate for all transactions and on the same day another banking
holiday was imposed, preventing the conversion of Pesos until February 11, 2002.
Moreover, to allow for a period to find a solution to the continuing problem of
decreasing bank reserves, the Argentine government imposed another banking
holiday from April 22 to April 26. Since January 2002, trading in foreign
currency has been limited and involved small amounts mainly due to restrictions
imposed on bank deposits. Furthermore, the Argentine Central Bank has approved
only a limited number of transactions involving the transfer of foreign currency
abroad and has determined certain transfer of funds to be made only with its
prior approval.
The Argentine government is facing severe fiscal problems due to the
recent devaluation. Peso-denominated tax revenues constitute the primary source
of its earnings, but most of its financial liabilities are U.S.
dollar-denominated. Therefore, the Argentine government's ability to honor its
foreign debt obligations has been materially and adversely affected by the
devaluation of the Peso.
Past history prior to the adoption of the Convertibility Law raises
serious doubts as to the ability of the Argentine government to maintain a
strict monetary policy and control inflation. In the past, inflation materially
undermined the Argentine economy and the Argentine government's ability to
create conditions that would permit growth.
Since the end of Convertibility, according to numbers released by the
Instituto Nacional de Estadistica y Censos the consumer price index has
increased by 40.0% in the first nine months of the year while the wholesale
price index has grown by 123.5%.
Numerous uncertainties exist surrounding the ultimate resolution of
Argentina's economic and political instability and actual results are
unpredictable. The Argentine economic and political situation continues to
evolve and the Argentine government may enact future regulations or policies
that, when finalized and adopted, may materially and adversely impact, among
other items: (i) the revenues produced by the beef cattle and milk sectors; (ii)
our asset valuations; and (iii) our Peso-denominated monetary assets and
liabilities.
The Peso devaluation has had several effects on us. Our agricultural
products are quoted in U.S. dollars, and as a result, the devaluation has had a
positive effect on their prices. Nevertheless, this positive
15
short-term effect has been largely offset by the imposition of new export taxes
and increases in our U.S. dollar-denominated costs. Our cattle and milk products
are quoted in Pesos and the effect of the devaluation on their prices in U.S.
dollar terms has been negative.
THERE IS RISK THAT THE ARGENTINE FINANCIAL SYSTEM WILL COLLAPSE
Although the amount of deposits in the Argentine banking system has
been decreasing during the last few years, during the last quarter of 2001, a
significant amount of deposits were withdrawn from Argentine financial entities
as a consequence of the increasing political instability and uncertainty. This
run on deposits had a material adverse effect on the Argentine financial system
as a whole. For the most part, banks suspended the disbursement of new loans and
focused on collection activities in an attempt to pay back depositors. However,
the general unavailability of external or local credit created a liquidity
crisis, which triggered numerous payment defaults which in turn undermined the
ability of many Argentine banks to pay back depositors.
To prevent a run on the U.S. dollar reserves of local banks, on
December 1, 2001, the De la Rua administration restricted the amount of cash
that account holders could withdraw from banks. Subsequently, the Duhalde
administration in an attempt to stop the continuing drain on bank reserves
enforced a mandatory rescheduling of maturities and released a schedule stating
how and when money in savings and checking accounts and maturing time deposits
would become available. These restrictions, known as the "corralito," are still
in effect, although restrictions on withdrawals for banking and saving accounts
have been relaxed. In addition, in an attempt to resolve the "corralito"
problem, the Argentine government published a decree which offers deposit
holders the opportunity to exchange their rescheduled deposits for three
different types of bonds:
o bonds due 2012: offered to holders of deposits in U.S. dollars
which had been pesified at an exchange rate of Ps. 1.40 per U.S.
dollar. These bonds are denominated in U.S. dollars;
o bonds due 2007: offered to holders of deposits in U.S. dollars or
Pesos. These bonds are denominated in Pesos, with an annual
interest rate of 2% plus an inflation adjustment; and
o bonds due 2005: offered to holders of deposits in U.S. dollars or
Pesos who are over 75 years old, received the deposited amount as
indemnity or suffer from health problems. These bonds grant the
holder the option to exchange the original deposit into a bond in
U.S. dollars at an exchange rate of Ps. 1.40 per U.S. dollar.
These bonds can be used to purchase public goods, machinery and new
cars, to acquire properties under construction, to pay bank debts, to pay taxes
due June 1, 2001, and to invest in trust funds to finance investment projects.
Deposit holders who decide not to subscribe to these bonds, will be granted a
rescheduled deposit certificate (CEDRO), with which they will be able to
purchase certain new securities and notes. This certificate may also be sold on
the Buenos Aires Stock Exchange and on other Argentine stock exchanges, or kept
until its rescheduled maturity date.
Despite the "corralito," between January 1 and July 1, 2002,
approximately Ps. 20.0 billion were withdrawn from banks due to court rulings
that enabled certain depositors to withdraw their money. This resulted in a
further weakening of the banking system. Consequently, on April 25, 2002, the
Argentine government enacted Law No. 25,587 in an attempt to stop the outflow of
funds caused by several judicial measures which forced financial institutions to
return deposited funds to their owners as a precautionary measure, pending the
resolution of claims. This new law prevents judges from adopting said
provisional measures in all proceedings against the Argentine government or any
financial institution which involve funds frozen in the financial system.
The "corralito" led to the paralysis of virtually all commercial and
financial activities and significantly diminished consumer retail spending as a
result of increased uncertainty, the inability for depositors to access their
savings and a general shortage of cash. Additionally, social unrest and protests
directed against financial institutions and the Argentine government became
widespread.
16
On November 24, 2002, Economy Minister Roberto Lavagna, announced that
the Government would lift the unpopular limits it had established on cash
withdrawals from savings and checking accounts as from December 2, 2002,
although fixed-term deposits would remain frozen for the time being. As the
devastating recession shows signs of levelling out and confidence in banks
slowly returns, restrictions on about 21 billion pesos in deposits will be freed
up. A step-by-step loosening of the bank restrictions should free up more money
for economic activity, be popular politically, have neutral effect on the
currency and please the International Monetary Fund.
Nevertheless, the solvency of the Argentine financial system is still
in jeopardy, and the system's failure would have a material and adverse effect
on the prospects for economic recovery and political stability, thus materially
and adversely affecting our financial condition and results of operations,
especially due to the rise in our defaulting obligors and our diminished
possibility of obtaining new loans.
THE PARALYSIS OF ARGENTINE PAYMENT SYSTEM IS ADVERSELY IMPACTING
ECONOMIC ACTIVITY AND OUR ABILITY TO OPERATE
Argentina's economy is currently suffering from a disruption in
traditional systems of payment due to a severe shortage of liquidity in the
marketplace. The current shortage is the result of several factors. Argentina
has been in an economic recession since the fourth quarter of 1998, which
reduced excess cash and access to credit. Due to mounting concern over the
sustainability of De la Rua's economic plan, large quantities of bank deposits
were withdrawn from local financial institutions and transferred abroad. This
run on deposits threatened to collapse the banking system, effectively
suspending access to deposits and credit. The former De la Rua administration
imposed strict limits on withdrawals on December 1, 2001, which are still in
place in a less restrictive form. In addition, when the Argentine government
repealed the Convertibility Law on January 10, 2002, widespread fear of major
devaluations of the Peso further increased demand for U.S. dollars, and
consumers have become more reluctant to use U.S. dollars for payments of goods
and services.
The ensuing shortage of cash disrupted Argentina's payment system,
which has historically favored cash settlements. The shortage of cash and
resulting scarcity of working capital has contributed to a severe contraction of
customary trade credit and to considerably longer periods for collecting
receivables. Increased difficulty in collection could adversely affect our
revenues from operations and, potentially, our financial condition.
INFLATION IS ESCALATING AND UNDERMINING PROSPECTS FOR ECONOMIC RECOVERY
IN ARGENTINA
On January 24, 2002, the Argentine government amended the charter of
the Argentine Central Bank to allow the Argentine Central Bank to print currency
in excess of the amount of the foreign reserves it holds without having to
maintain a fixed and direct relationship with the foreign currency and gold
reserves, to make short-term advances to the federal Argentine government to
cover its anticipated budget deficits, and to provide financial assistance to
financial institutions with liquidity or solvency problems.
There is considerable concern that if the Argentine Central Bank prints
currency to finance deficit spending, significant inflation will result. Through
October 31, 2002, the consumer price index and the wholesale price index had
already exhibited cumulative increases of 40.0%% and 123.5%, respectively. Past
history raises serious doubts as to the ability of the Argentine government to
maintain a strict monetary policy and control inflation. In the past, inflation
materially undermined the Argentine economy and the Argentine government's
ability to create conditions that would permit growth. We cannot assure that the
Argentine economy will not be negatively affected by a resurgence of inflation,
which will deteriorate the purchasing power of the Peso, thus affecting the
domestic consumption of food products. As a result, our revenues from beef
cattle and milk production could be adversely affected, thus affecting the
results of operations.
HIGH UNEMPLOYMENT AND OTHER LABOR DIFFICULTIES HAVE CONTRIBUTED TO THE
SOCIAL UNREST IN ARGENTINA AND MAY AFFECT OUR OPERATIONS
In October 2001, the official unemployment rate in Argentina was 18.3%.
As a consequence of the continued recession, unemployment increased to 21.5% in
May 2002. Figures are released bi-annually in May
17
and October, and the current unemployment rate is believed to be significantly
higher than the most recently published official rate. Moreover, during the last
few months since the devaluation of the Peso, the labor market has not only been
affected by unemployment but it has also been negatively affected by a
significant decrease in real salary due to growing inflation.
Unemployment and underemployment continue to create serious social
problems in Argentina. In order to moderate the social instability arising from
the labor situation, the present administration has included in its 2002 budget,
social aid programs aimed at improving health and food provision, employment
generation and a subsidy for the unemployed. Nevertheless, such programs have
yet to mitigate the current social unrest, and if unemployment rates do not
decrease substantially, consumption of retail goods will be detrimentally
affected which in turn will adversely affect our results of operations.
RECENT AMENDMENTS TO THE "BANKRUPTCY LAW" ADVERSELY AFFECT PROPERTY
RIGHTS
In February 2002, the Argentine Congress amended the bankruptcy law
that impaired certain protections afforded to creditors. Such law suspended any
foreclosure proceedings, whether in or out of court, including under mortgage
and pledge-secured loans, for a 180-day period after its enactment.
Faced with an increasing pressure, the Government promulgated a new
bankruptcy law which repealed the suspension of foreclosures. However, the
suspension of foreclosures was retained for a period of 270 days after its
enactment with respect to a debtor's dwelling, or a debtor's property dedicated
to production, trade or service provision activities. Although the period of 270
days has expired on November 15, 2002, IRSA cannot assure you that the Argentine
government would not concede debtors a new extension of the suspension of the
foreclosures.
UNCERTAINTY REGARDING ARGENTINE AND BRAZILIAN PRESIDENTIAL ELECTIONS.
There is great uncertainty with respect to the Argentine electoral
future. It is not still clear if presidential elections will be held in May
2003, as a consequence of the anticipated early resignation of President
Duhalde, or if they will be postponed until December, 2003. The political
turbulence caused by oncoming elections can jeopardize the relative economic
stability achieved during the last months of year 2002.
The future of Argentina relies in a great extent on the policies that
the newly elected president will implement. Investment decisions will depend on
the future government's ability to regain investors' confidence by guarantying
the fulfillment of property rights, contracts and laws. The future of the
country will as well depend on the achievement of a sustainable and solvent
fiscal situation.
Moreover, the measures that are expected to be adopted by the
recently elected president in Brazil, Luiz Inacio Da Silva, beginning in January
2003, would also have a significant impact on Argentina's political and economic
future.
FUTURE GOVERNMENTAL POLICIES WILL LIKELY SIGNIFICANTLY AFFECT THE
ECONOMY AS WELL AS THE OPERATIONS OF FINANCIAL INSTITUTIONS
The Argentine government has historically exercised significant
influence over the economy, and financial institutions, in particular, have
operated in a highly regulated environment. Due to the current Argentine crisis,
in the last few months the Argentine government has promulgated numerous,
far-reaching and not always consistent laws and regulations affecting the
economy and foreign trade of agricultural products in particular. We cannot
assure you that laws and regulations currently governing the economy and foreign
trade of agricultural products will not continue to change in the future,
particularly in light of the continuing economic crisis, or that any changes
will not adversely affect our business, financial condition or results of
operations as well as our ability to honor future foreign-currency denominated
debt obligations, including our 8% convertible notes due 2007.
Due to the current social and political crisis, investing in Argentina
also entails the following risks:
18
o civil unrest, rioting, looting, nation-wide protests, widespread
social unrest and strikes;
o expropriation, nationalization and forced renegotiation or
modification of existing contracts; and
o taxation policies, including royalty and tax increases and
retroactive tax claims.
RISKS RELATED TO OUR BUSINESS
FLUCTUATION IN MARKET PRICES FOR OUR AGRICULTURE PRODUCTS COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prices for cereals, oilseeds and by-products, like those of other
commodities, can be expected to fluctuate significantly. The prices that we are
able to obtain for our agriculture products from time to time depend on many
factors beyond our control including:
o prevailing world prices which historically have been subject to
significant fluctuations over relatively short periods of time,
depending on worldwide demand and supply;
o changes in the agriculture subsidies levels of certain important
producers (mainly the USA and the European Economic Community)
and the adoption of other government policies affecting industry
market conditions and prices; and
o demand for and supply of competing commodities and substitutes.
Our financial condition and results of operations could be materially
and adversely affected if the prices of grains and by-products were to decline
below current levels.
OUR BUSINESS IS SEASONAL AND OUR REVENUES MAY FLUCTUATE SIGNIFICANTLY
DEPENDING ON THE GROWING CYCLE
As with any agribusiness enterprise, our business operations are
predominantly seasonal in nature. The harvest and sale of crops (corn, soybean
and sunflower) generally occurs from February to June. Wheat is harvested from
December to January. Our operations and sales are affected by the growing cycle
of the crops we process and by decreases during the summer in the price of the
cattle we fatten. As a result, our results of operations have varied
significantly from period to period, and are likely to continue to vary, due to
seasonal factors.
UNPREDICTABLE WEATHER CONDITIONS MAY ADVERSELY IMPACT CROP AND
BEEF-CATTLE PRODUCTION
The occurrence of severe adverse weather conditions, especially
droughts or floods, is unpredictable and may have a potentially devastating
impact upon crop production and, to a lesser extent, beef-cattle production. The
effect of severe adverse weather conditions may reduce yields in our farms or
require higher levels of investment to maintain yields. As a result, we cannot
assure you that severe future adverse weather conditions will not adversely
affect our operating results and financial condition.
DISEASE MAY STRIKE OUR CROPS WITHOUT WARNING POTENTIALLY DESTROYING
SOME OR ALL OF OUR YIELD
The occurrence and effect of crop disease and pestilence can be
unpredictable and devastating on crops, potentially rendering all or a
substantial portion of the affected harvests. Even when only a portion of the
crop is damaged, our results of operation could be adversely affected because
all or a substantial portion of the production costs for the entire crop have
been incurred. Although some crop diseases are treatable, the cost of treatment
is high, and we cannot assure that such events in the future will not adversely
affect our operating results and financial condition.
OUR CATTLE ARE SUBJECT TO DISEASES
Diseases among our cattle herds, such as tuberculosis, brucellosis and
foot-and-mouth disease, can have an adverse effect on milk production and
fattening, rendering cows unable to produce milk or meat for
19
human consumption. Outbreaks of cattle diseases may also result in the closure
of certain important markets such as the United States to Argentine cattle
products. Although we abide by national veterinary health guidelines, which
include laboratory analyses and vaccination, to control diseases among the
herds, especially foot-and-mouth disease, we cannot assure that future outbreaks
of cattle diseases will not occur or that future outbreaks will not adversely
affect our beef-cattle and milk sales, operating results and financial
condition.
WORLDWIDE COMPETITION IN THE MARKETS FOR OUR PRODUCTS COULD ADVERSELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS
We experience substantial worldwide competition in each of our markets
and in many of our product lines. The market for cereals, oil seeds and
by-products is highly competitive and also sensitive to changes in industry
capacity, producer inventories and cyclical changes in the world's economies,
any of which may significantly affect the selling prices of our products and
thereby our profitability. Due to the fact that many of our products are
agricultural commodities, they compete in the international markets almost
exclusively on the basis of price. Many other producers of these products are
larger than we are and have greater financial and other resources. Moreover,
many other producers receive subsidies from their respective countries that do
not exist in Argentina. These subsidies may allow them to produce at lower costs
than we do and/or endure periods of low prices and operating losses for longer
periods than we can. Any increased competitive pressure with respect to our
products could materially and adversely affect our financial condition and
results of operations.
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIP WITH OUR CUSTOMERS,
PARTICULARLY WITH THE SINGLE CUSTOMER WHO PURCHASES MONTHLY OUR ENTIRE RAW MILK
PRODUCTION, OUR BUSINESS MAY BE ADVERSELY AFFECTED
Though our cattle sales are diversified, we are and will continue to be
significantly dependent on a number of third party relationships, mainly with
our customers for crop and milk sales.
We currently sell our entire raw milk production to one customer in
Argentina. For fiscal year 2002, these sales represented 2.8% of our total
revenues. There can be no assurance that this customer will continue to purchase
our entire raw milk production or that, if it fails to do so, we could enter
into satisfactory sale arrangements with new purchasers in the future.
We sell our crop production mainly to exporters and manufacturers that
process the raw materials to produce meal and oil, products that are then sent
to the export markets. The Argentine crop market is characterized by a few
number of purchasers and a large number of sellers. Although most of the
purchasers are international companies with strong financial conditions, we
cannot assure you that this situation will remain the same in the future or that
this market will not get more concentrated in the future.
We may not be able to maintain or form new relationships with customers
or others who provide products and services that are important to our business.
Accordingly, we cannot assure you that our existing or prospective relationships
will result in sustained business or the generation of significant revenues.
WE DO NOT MAINTAIN INSURANCE ON OUR CROP STORAGE FACILITIES; THEREFORE,
IF A FIRE OR OTHER DISASTER DAMAGES SOME OR ALL OF OUR HARVEST WE WILL NOT
RECEIVE ANY COMPENSATION
We store a significant portion of our grain production during harvest
due to the seasonal drop in prices that normally occurs at that time. Currently,
we have approximately 20,577 tons of storage capacity at various farms and plan
to further increase our storage capacity. We do not maintain insurance on our
storage facilities. Although our storage capacity is in several different
locations, and it is unlikely that a natural disaster would affect all of our
silos simultaneously, a fire or other natural disaster which damages the stored
grain, particularly if such an event occurs shortly after harvesting, could have
an adverse effect on our operating results and financial condition.
WE MAY BE EXPOSED TO MATERIAL LOSSES DUE TO VOLATILE CROP PRICES SINCE
WE HOLD SIGNIFICANT UNCOVERED FUTURES AND OPTIONS POSITIONS TO HEDGE OUR CROP
PRICE RISK
20
Generally, we may have uncovered futures and options positions for up
to 50% of our current inventory and minimum projected production in a given crop
as part of the crop price risk management strategy. However, we have had, and we
cannot assure that we will not have in the future, uncovered futures and options
positions substantially in excess of such amount for a limited period of time.
Due to the fact that we do not have 100% of our crops hedged, we are
unable to have minimum price guarantees for all of our production and are
exposed to significant risks associated with the level and volatility of crop
prices. We are subject to fluctuations in crop prices which could result in our
receiving a lower price for our crops than our production cost. We are also
subject to exchange rate risk related to our crops that are hedged, because our
futures and options positions are valued in U.S. dollars, and thus are subject
to exchange rate risk.
WE MAY NOT BE ABLE TO SELL OUR LAND AT ITS APPRAISED VALUE IN U.S.
DOLLARS AND THIS MAY ADVERSELY AFFECT OUR ABILITY TO PAY OUR U.S.
DOLLAR-DENOMINATED DEBT
As a result of devaluation, the price of our properties decreased an
average of 30% in their U.S. dollar values. However, the value in Pesos has
remained approximately the same, and, in some cases, has even slightly risen in
comparison to the values prior to devaluation. We believe that the prices will
stabilize at these current levels, and, therefore, we do not expect a decrease
in the Peso value of our properties. If we are forced to sell one or more of our
properties to satisfy U.S. dollar-denominated debt service obligations, the
proceeds from such sales may decrease in the future, due to devaluations, and
this could have an adverse effect on our ability to satisfy such debt
obligations.
WE MAY FACE POTENTIAL CONFLICTS OF INTEREST RELATING TO OUR PRINCIPAL
SHAREHOLDERS
Our largest shareholder, Mr. Eduardo S. Elsztain, currently is the
beneficial owner of approximately 53.7% of our common shares. This consists of:
o 64,397,457 of our common shares owned by Inversiones Financieras
del Sur S.A., an Uruguayan holding company, for which Mr. Eduardo
S. Elsztain may be deemed beneficial owner by virtue of his
voting power to control Inversiones Financieras del Sur S.A.; and
o 2,354,054 shares owned by Dolphin Fund, plc (formerly Quantum
Dolphin, plc) for which Mr. Eduardo S. Elsztain may be deemed the
beneficial owner by virtue of his position with Dolphin Fund
Management S.A., the investment manager of Dolphin Fund, plc,
based on publicly available reports filed as of October 31, 2002.
Pursuant to a consulting agreement with Dolphin Fund Management, we pay
a management fee equal to 10% of our annual net income for certain agricultural
advice and other administrative services. Eduardo S. Elsztain and M. Marcelo
Mindlin are President and Vice President, respectively, of the board of
directors of Dolphin Fund Management. In fiscal years 2002, 2001 and 2000, we
paid management fees to Dolphin Fund Management aggregating, Ps. nil, Ps.
833,104 and Ps. 294,285, respectively.
Conflicts of interest between our management, ourselves and our
affiliates may arise in the performance of our respective business activities.
Mr. Eduardo S. Elsztain is also the beneficial owner of approximately 31.1% of
the common shares of IRSA, an Argentine company that currently owns
approximately 49.7% of the common shares of its subsidiary Alto Palermo S.A.
(APSA) whose CEO is Mr. Alejandro G. Elsztain, the CEO of Cresud. In some
circumstances, our interests may not be the most important consideration to our
principal shareholders or to their affiliates with influence over our actions.
We cannot assure you that our principal shareholders will not limit or cause us
to forego business opportunities that their affiliates may pursue or that the
pursuit of other opportunities will be in our interest.
WE DEPEND ON OUR SENIOR MANAGEMENT
Our success depends, to a significant extent, on the continued
employment of Eduardo S. Elsztain, our president and chairman of the board of
directors, M. Marcelo Mindlin, our vice-president and first vice-chairman of the
board of directors and Alejandro G. Elsztain, our chief executive officer. The
loss of their
21
services for any reason could have a material adverse effect on
our business. If our current principal shareholders were to lose their influence
on the management of our business, our principal executive officers could resign
or be removed from office.
Our future success also depends in part upon our ability to attract and
retain other highly qualified personnel. We cannot assure you that we will be
successful in hiring or retaining qualified personnel, or that any of our
personnel will remain employed by us.
WE HOLD POSITIONS IN ARGENTINE SECURITIES, WHICH ARE MORE VOLATILE THAN
UNITED STATES SECURITIES, AND CARRY A GREATER RISK OF DEFAULT
We currently have and in the past have had certain investments in
Argentine government debt, corporate debt, and equity securities. In particular,
we hold a significant interest in IRSA, an Argentine company that has recently
suffered material losses. Although our holding of these investments, with the
exception of IRSA, tends to be short term, investments in such securities
involve certain risks, including:
o market volatility, higher than those typically associated with
U.S. government and corporate securities; and
o loss of principal.
Some of the issuers in which we have invested and may invest, including
the Argentine government, have in the past experienced substantial difficulties
in servicing their debt obligations, which have led to the restructuring of
certain indebtedness. We cannot assure that the issuers in which we have
invested or may invest will not be subject to similar or other difficulties in
the future which may adversely affect the value of our investments in such
issuers. In addition, such issuers and, therefore, such investments, are
generally subject to many of the risks that are described in this section, with
respect to us, and, thus, could have little or no value.
WE COULD BE ADVERSELY AFFECTED BY OUR INVESTMENT IN IRSA IF IRSA'S
VALUE DECREASES
From December 2000 to July 2002, we acquired approximately 20.29% of
IRSA for a total consideration of Ps. 113.3 million. Initially, we classified
this investment as a current investment and carried it at market value.
Effective March 31, 2002, as a result of a change in our strategy to hold such
shares as a permanent investment, we began valuing our investment in IRSA using
the equity method of accounting. At June 30, 2002, our investment in IRSA had a
value of Ps. 91.4 million and represented 26.1% of our total consolidated
assets.
As mentioned in Note 5.b) to our consolidated financial statements, we
own a 19.85% equity interest in IRSA. On September 9, 2002 IRSA 's
independent accountants issued a report stating that the company had suffered a
negative impact as a result of the continuous deterioration of the Argentine
economy, the Argentine government's adoption of various economic measures and
the devaluation of the Argentine peso as a result of which there is substantial
doubt as to IRSA's ability to continue as a going concern. The financial
statements of IRSA do not include any adjustment that might result from the
outcome of this uncertainty.
Our investment in IRSA is subject to risks common to investments in
commercial and residential properties in general, many of which are not within
IRSA's control. Any one or more of these risks might materially and adversely
affect IRSA's business, financial condition or results of operations. The yields
available from equity investments in real estate depend on the level of sales or
rental income generated and expenses incurred. In addition, other factors may
affect the performance and value of a property adversely, including local
economic conditions where the properties are located, macroeconomic conditions
in Argentina and the rest of the world, competition from other real estate
developers, IRSA's ability to find tenants, tenant default or rescission of
leases, changes in laws and governmental regulations (including those governing
usage, zoning and real property taxes), changes in interest rates (including the
risk that increased interest rates may result in decreased sales of lots in the
residential development properties) and the availability of financing. IRSA may
also be unable to respond effectively to adverse market conditions or may be
forced to
22
sell one or more of its properties at a loss because the real estate market is
relatively illiquid. Certain significant expenditures, such as debt service,
real estate taxes, and operating and maintenance costs, generally are not
reduced in circumstances resulting in a reduction in income from the investment.
It is possible that these or other factors or events will impair IRSA's
ability to respond to adverse changes in the performance of its investments,
causing a material decline in IRSA's financial condition or results of
operations. During the fiscal year ended June 30, 2002, the price of IRSA shares
declined by 52% from Ps. 3.17 on June 30, 2001 to Ps. 1.52 on June 30, 2002.
Given the relative size of our investment in IRSA, any such declines could
continue to give us a material adverse effect on our financial condition and
results of operations.
THE CREATION OF NEW EXPORT TAXES MAY HAVE AN ADVERSE IMPACT ON OUR
SALES
In order to prevent inflation and variations in the exchange rate from
adversely affecting prices of primary and manufactured products (including
agricultural products), and to increase tax collections and reduce Argentina's
fiscal deficit, the Argentine government has recently imposed new taxes on
exports. Pursuant to Resolution No. 11/02 of the Ministry of Economy, as amended
by Resolution 35/02, effective as of April 3, 2002, the Argentine government
imposed a 20%, 10% and 5% export tax on primary and manufactured products.
Export taxes might have a material and adverse effect on our sales. We produce
exportable goods, and, therefore, an increase in export taxes is likely to
result in a decrease in our products' price, and, therefore, may result in a
decrease to our sales. We cannot guarantee what the impact of these measures
will be, or any other future measures that might be adopted by the Argentine
government, on our financial condition and result of operations.
GOVERNMENT INTERVENTION IN OUR MARKETS MAY HAVE A DIRECT IMPACT ON OUR
PRICES
The Argentine government has set certain industry market conditions and
prices in the past. In order to prevent a substantial increase in the price of
basic products as a result of inflation, the Argentine government is adopting an
interventionist policy. In March 2002, the Argentine government fixed the price
for milk after a conflict among producers and the government. There can be no
assurance that the Argentine government will not interfere in other areas by
setting prices or regulating other market conditions. Accordingly, we cannot
assure you that we will be able to freely negotiate all our products' prices in
the future or that the prices or other market conditions that the Argentine
government might impose will allow us to freely negotiate the price of our
products.
THE INVESTMENT COMPANY ACT MAY LIMIT OUR FUTURE ACTIVITIES
Under Section 3(a)(3) of the Investment Company Act of 1940, as
amended, an investment company is defined in relevant part to include any
company that owns or proposes to acquire investment securities that have a value
exceeding 40% of such company's unconsolidated total assets (exclusive of U.S.
government securities and cash items). Investments in minority interests of
related entities as well as majority interests in consolidated subsidiaries
which themselves are investment companies are included within the definition of
"investment securities" for purposes of the 40% limit under the Investment
Company Act.
Companies that are investment companies within the meaning of the
Investment Company Act and that do not qualify for an exemption from the
provisions of such Act, are required to register with the Securities and
Exchange Commission and are subject to substantial regulations with respect to
capital structure, operations, transactions with affiliates and other matters.
In the event such companies do not register under the Investment Company Act,
they may not, among other things, conduct public offerings of their securities
in the United States or engage in interstate commerce in the United States.
Moreover, even if we desired to register with the Commission as an investment
company, we could not do so without an order of the Commission because we are a
non-U.S. corporation, and it is unlikely that the Commission would issue such an
order.
If we invest proceeds of our rights offering in instruments other than
U.S. government securities, such investments could cause us to exceed the 40%
limit under Section 3(a)(3) of the Investment Company Act. If we exceed such
limit, we may still be able to avail ourselves of certain regulatory exemptions
from
23
application of the Investment Company Act, including but not limited to Rule 3a2
thereunder. Rule 3a2 provides us a temporary exemption from investment company
status for a period of up to one year from the closing of the rights offering,
provided that we have a bona fide intent to be engaged primarily, as soon as
reasonably possible and in any event by the end of such one-year period, in a
business other than that of investing, reinvesting, owning, holding or trading
in securities. We may not rely on Rule 3a2 more than once in any three-year
period.
We expect to avail ourselves of the temporary exemption for up to the
one year period provided by Rule 3a2 of the Investment Company Act and intend to
invest the proceeds of the rights offering, and otherwise make investments and
conduct our operations, in such a manner that by the end of the one-year period
we will not fall within the definition of "investment company" under the
Investment Company Act or we will be exempt from compliance with such Act.
In order to meet such requirements, we may be restricted in our ability
to increase our existing minority positions in related companies and to acquire
minority participations in additional enterprises. Moreover, we may invest cash
proceeds of the rights offering in U.S. government securities in order to avoid
characterization of short-term investments as "investment securities." In the
past, a significant portion of our income has been derived from investments in
Argentine corporate and government securities which, although riskier than U.S.
government securities, sometimes yield higher returns than U.S. government
securities. As a result, our earnings may be adversely affected to the extent
that we decide to invest funds in U.S. government securities that would
otherwise be invested in Argentine corporate and government securities.
PASSIVE FOREIGN INVESTMENT COMPANY
Although it is an inherently uncertain factual issue, we may be passive
foreign investment company ("PFIC") for the current or future taxable years. Any
U.S. holder that owns shares or ADSs, at any time during a taxable year in which
we are a PFIC will be subject to special United States federal income tax rules
and, generally, will be subject to additional tax and an interest charge upon
certain distributions by us or upon gains realized upon a sale or other
disposition of the shares or ADSs. See "United States Taxation--Passive Foreign
Investment Company Rules" for a more detailed discussion of the consequences of
the Company being deemed a PFIC. Investors are urged to consult their tax
advisors regarding the application of the PFIC rules to them.
RISKS RELATED TO IRSA'S BUSINESS
UNCERTAINTIES RESULTING FROM THE CONTINUED DETERIORATION OF THE
ARGENTINE ECONOMY, THE ARGENTINE GOVERNMENT'S ADOPTION OF VARIOUS ECONOMIC
MEASURES AND THE DEVALUATION OF THE PESO GIVE RISE TO A SUBSTANTIAL DOUBT AS TO
IRSA'S ABILITY TO REMAIN A GOING CONCERN.
IRSA's consolidated financial statements have been prepared on the
assumption that it will continue as a going concern. As a result of the
continued deterioration of the Argentine economy, the devaluation of the Peso
and the Argentine government's adoption of various economic measures, as further
described in the Risk Factors discussed below, we cannot assure you that IRSA
will be able to obtain the necessary financial resources to repay or refinance
its debt, that the restrictions imposed by the Argentine Central Bank on the
transfer of funds abroad will not prevent it from paying principal and interest
on its external debt as it comes due or that these conditions will not have a
material adverse effect on its financial condition or results of operations.
On September 9, 2002, IRSA's independent auditors issued a report
stating that it was negatively impacted by the continued deterioration of the
Argentine economy, the Argentine government's adoption of various economic
measures and the devaluation of the Peso which raises substantial doubt as to
its ability to continue as a going concern. You should review the report of
PricewaterhouseCoopers carefully. We cannot assure you that IRSA will be able to
continue as a going concern. IRSA's consolidated financial statements do not
include the effects of eventual adjustments and restatements, if any, if it is
required to sell its assets to pay off its liabilities, including contingent
liabilities, under any circumstance other than in the ordinary course of its
business.
24
THE ARGENTINE CENTRAL BANK HAS IMPOSED RESTRICTIONS ON THE TRANSFER OF
FUNDS OUTSIDE OF ARGENTINA WHICH COULD PREVENT IRSA FROM SERVICING CERTAIN OF
ITS EXTERNAL DEBT AS IT COMES DUE, AND COULD THEREFORE RESULT IN THE
ACCELERATION OF ALL OF ITS INDEBTEDNESS AND ITS INABILITY TO REMAIN A GOING
CONCERN.
Since early December 2001, the Argentine government has imposed a
number of monetary and currency exchange control measures that include
significant restrictions on the free disposition of funds deposited with banks
and on the transfer of funds abroad. The prior approval of the Argentine Central
Bank is required for all of IRSA's transfers of funds outside of Argentina
before February 8, 2003 when such transfers relate to debt principal or interest
payments. Payments on US$ 100 million of IRSA's convertible notes, US$ 37.4
million secured floating rate notes and US$ 51.0 million unsecured credit
facility may require such approval. We cannot assure you that the Argentine
Central Bank will authorize principal payments to IRSA's foreign creditors
pursuant to the terms of its existing financial agreements. Even if IRSA
obtained such authorization, due to the scarcity of dollars it may find it
difficult to convert a large amount of Pesos to dollars to make payments on its
dollar-denominated debt. If the restrictions on funds transfers remain in effect
and the Argentine Central Bank does not authorize IRSA to remit funds abroad,
current and noncurrent debt obligations may become immediately due and payable,
unless new financing is available to it from outside Argentina or IRSA is able
to renegotiate the indebtedness that is subject to such restrictions. Although
IRSA may in the future undertake to obtain such financing or renegotiate its
indebtedness, We cannot assure you that such efforts would succeed and enable
IRSA to remain a going concern.
IRSA MAY FACE POTENTIAL CONFLICTS OF INTEREST RELATING TO ITS PRINCIPAL
SHAREHOLDERS
IRSA's largest shareholder, Mr. Eduardo S. Elsztain, currently is the
beneficial owner of approximately 31.1% of its common shares. At October 31,
2002, this consists of:
o 15,582,057 of its common shares owned by Dolphin Fund, plc, an
investment fund in which the principal investment manager is
Dolphin Fund Management, a company where Mr. Eduardo S. Elsztain
has a controlling interest;
o 111,575 of its common shares purchased pursuant to a
noncontributory management stock ownership plan of which 68,797
shares are held by a trust for the benefit of Mr. Eduardo S.
Elsztain;
o 43,491,866 of IRSA's common shares owned by us, for which Mr.
Eduardo S. Elsztain by reason of his position with us, may be
deemed to own all of IRSA's common shares held for our account;
and
o 5,392,546 shares are directly owned by Mr. Eduardo S. Elsztain.
Conflicts of interest between IRSA's management, themselves and its
affiliates may arise in the performance of its respective business activities.
Mr. Eduardo S. Elsztain and certain other members of the board of directors and
senior management also own (i) approximately 58.9% of our common shares, and we
currently own approximately 21.0% of IRSA's common shares and (ii) approximately
7.73%% of the common shares of IRSA's subsidiary APSA. In some circumstances,
IRSA's interests may not be the most important consideration to IRSA's principal
shareholders or to their affiliates with influence over IRSA's actions. IRSA
cannot assure you that IRSA's principal shareholders and their affiliates will
not limit or cause IRSA to forego business opportunities that their affiliates
may pursue or that the pursuit of other opportunities will be in IRSA's
interest.
THE RECENT DEVALUATION OF THE ARGENTINE PESO AND THE CONTINUED
DETERIORATION OF THE ARGENTINE ECONOMY HAVE HAD, AND MAY CONTINUE TO HAVE, A
MATERIAL ADVERSE EFFECT ON IRSA'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For so long as the Convertibility Law remained in effect, IRSA had no
exchange rate risk relating to its Peso-denominated revenues and its U.S.
dollar-denominated liabilities. However, with the repeal of the Convertibility
Law on February 4, 2002, all U.S. dollar-denominated obligations, which were
within the
25
Argentine banking sector and subject to Argentine Law, were mandatorily
converted into Peso-denominated liabilities at an exchange rate of one Peso to
one U.S. dollar. Nevertheless, the majority of IRSA's liabilities as of that
date (the US$ 80.0 million syndicated credit facility, the US$ 41.2 million
floating rate notes, the loan from IRSA's partner Goldman Sachs for US$13.3
million and the loan granted by Bank Boston to IRSA's subsidiary Hoteles
Argentinos for US$12.0 million) are subject to New York law and thus have not
been converted into Pesos. Moreover, IRSA's recently issued US$ 100.0
convertible notes are dollar-denominated.
IRSA realizes a substantial portion of its revenues in Pesos (such as
rental contracts and seller financing) and, as a result, the devaluation of the
Peso has adversely affected the U.S. dollar value of IRSA's earnings and, thus,
impaired IRSA's financial condition. Moreover, IRSA's Peso-denominated assets
(which represent 95.31% of its total assets as of June 30, 2002), have
depreciated against IRSA's indebtedness denominated in foreign currency. As of
June 30, 2002, IRSA had outstanding debt amounting to Ps. 566.4 million, of
which 93.1% was denominated in U.S. dollars. Any further depreciation of the
Peso against the U.S. dollar will correspondingly increase the amount of debt in
Pesos, with further adverse effects on IRSA's results of operation and financial
condition, and may increase the collection risk of IRSA's leases and other
receivables from tenants and mortgage debtors, most of whom have
Peso-denominated revenues.
THE MANDATORY PESIFICATION OF CONTRACTS ORIGINALLY DENOMINATED IN U.S.
DOLLARS WILL ADVERSELY AFFECT IRSA'S PROFITABILITY
Although IRSA's lease agreements and seller financing loans were
denominated in U.S. dollars, the Argentine government mandatorily converted all
U.S. dollar-monetary obligations entered into between private parties prior to
January 7, 2002 that are not related to the financial system into
Peso-denominated obligations at a rate of Ps. 1.00 = US$ 1.00. Although the
Argentine government sought to mitigate the adverse effects of this mandatory
"pesification" by permitting the Peso-denominated obligations to be adjusted for
inflation pursuant to an index known as the Coeficiente de Estabilizacion de
Referencia ("CER"), we cannot assure you that an adequate adjustment will apply
to amounts payable to it under its lease and loan agreements. If, as a
consequence of this adjustment, the agreement is unfair to any of the parties,
either may ask the other for a fairness adjustment. If they do not reach an
agreement, a court will make the decision. New lease agreements may be freely
entered into between parties. This new measure is likely to materially and
adversely affect IRSA's financial condition and IRSA's ability to pay its
liabilities in U.S. dollars (mostly banking and financial loans), because IRSA's
cash flows will be dominated in recently devalued Pesos.
IRSA'S BUSINESS IS SUBJECT TO EXTENSIVE REGULATION, AND THE ARGENTINE
GOVERNMENT MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE LEASE, OPERATION AND
OWNERSHIP OF PROPERTY
The real estate business is subject to extensive building and zoning
regulations by various federal, state and municipal authorities, which affect
land acquisition, development and construction activities, and certain dealings
with customers, as well as consumer credit and consumer protection statutes and
regulations. IRSA is required to obtain approval from various governmental
authorities for its development activities, and new laws or regulations could be
adopted, enforced or interpreted in a manner that could adversely affect its
results of operations and levels of cash flow necessary or available to meet its
obligations. Development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining all necessary zoning, environmental,
land-use, development, building, occupancy and other required governmental
permits and authorizations.
In the past, in response to housing shortages, high rates of inflation
and difficult access to credit, the Argentine government has imposed strict and
burdensome regulations regarding leases. Such regulations limited or prohibited
rental increases and prohibited eviction of tenants, even for failure to pay
rent. We cannot assure you that the Argentine government will not impose similar
or other regulations in the future. Changes in existing laws or the enactment of
new laws governing the ownership or operation or leasing of properties in
Argentina could materially and adversely affect its operations and
profitability.
There can be no assurance that additional regulations will not be
imposed in the future. Such regulations could negatively affect the Argentine
real estate market, in general, and the rental market, in particular.
Furthermore, most of IRSA's leases provide that the tenants pay all costs and
taxes related to their
26
respective leasable areas. In the event of a significant increase in the amount
of such costs and taxes, the Argentine government may respond to political
pressure to intervene by regulating this practice, thereby negatively affecting
its rental income.
IRSA HOLDS POSITIONS IN ARGENTINE SECURITIES WHICH ARE MORE VOLATILE
THAN UNITED STATES SECURITIES, AND CARRY A GREATER RISK OF DEFAULT
IRSA currently has and in the past has had certain investments in
Argentine government debt, corporate debt and equity securities. In particular,
IRSA holds a significant interest in Banco Hipotecario S.A., an Argentine bank
that has recently suffered material losses. Although the holding of these
investments, with the exception of Banco Hipotecario S.A., tends to be short
term, investments in such securities involve certain risks, including:
o market volatility, higher than those typically associated with
U.S. government and corporate securities; and
o loss of principal.
Some of the issuers in which IRSA has invested and may invest,
including the Argentine government, have in the past experienced substantial
difficulties in servicing their debt obligations, which have led to the
restructuring of certain indebtedness. We cannot assure you that the issuers in
which IRSA has invested or may invest will not be subject to similar or other
difficulties in the future which may adversely affect the value of IRSA's
investments in such issuers. In addition, such issuers and, therefore, such
investments, are generally subject to many of the risks that are described in
this section, and may have little if any value.
REAL ESTATE INVESTMENTS ARE SUBJECT TO MANY RISKS
IRSA's real estate investments are subject to risks common to commercial and
residential properties in general, many of which are not within its control. Any
one or more of these risks might materially and adversely affect IRSA's
business, financial condition or results of operations. The yields available
from equity investments in real estate depend on the level of sales or rental
income generated and expenses incurred. IRSA's ability to generate income from
its properties sufficient to service its debt and cover other expenses may be
adversely affected by the following factors, among others, some of which IRSA
cannot control:
o oversupply of retail space or a reduction in demand for retail
space, which could result in lower rent prices and lower revenues
for IRSA;
o increased competition from other real estate operators which
might drive down IRSA's prices and profits;
o changes in IRSA's ability or its tenants' ability to provide for
adequate maintenance and insurance, possibly decreasing the life
of and revenue from a property;
o increases in operating expenses which could lower IRSA's
profitability;
o the inability to collect rents due to bankruptcy or insolvency of
tenants or otherwise;
o the need to periodically renovate, repair and release space, the
higher costs thereof and the ability of IRSA's tenants to provide
adequate maintenance and insurance, possibly decreasing the life
of and revenue from a property; and
o the exercise by IRSA's tenants of their legal right to early
termination of their leases.
In addition, other factors may adversely affect the performance and
value of IRSA's properties, including changes in laws and governmental
regulations (including those governing usage, zoning and real
27
property taxes), changes in interest rates (including the risk that increased
interest rates may result in decreased sales of lots in the residential
development properties) and the availability of financing. Increases in
operating costs due to inflation and other factors may result in some tenants
being unable or unwilling to pay rent or expense increases. Certain significant
expenditures, such as debt service, real estate taxes, and operating and
maintenance costs, are generally not reduced in circumstances resulting in a
reduction in income from the investment. The foregoing and any other factor or
event that would impede IRSA's ability to respond to adverse changes in the
performance of its investments could have a material adverse effect on IRSA's
financial condition and results of operations.
IRSA'S FAILURE TO SELL PLANNED PROPERTIES WILL ADVERSELY AFFECT ITS
FINANCIAL CONDITION
Puerto Retiro and Santa Maria del Plata are two unique plots of land
characterized by their size and their waterfront location in the heart of the
City of Buenos Aires. IRSA had initially intended these to become two of the
largest projects in its history, but currently IRSA has been forced to delay
their launch due to the economic crisis in Argentina. Due to the absence of
available financing and lack of demand for such new developments, IRSA will not
be able to resume these important projects unless a substantial economic
recovery occurs in Argentina. To date, IRSA has invested Ps. 41.2 million in
Puerto Retiro and Ps. 103.2 million in Santa Maria del Plata. Historically, a
great part of IRSA's revenues have been derived from the sale and
development of properties, so if IRSA fails to develop these new projects,
IRSA's future revenues would be materially and adversely affected.
IRSA's failure to sell these properties for the prices and by the dates
initially forecasted would adversely affect IRSA's results of operations and
financial condition.
REAL ESTATE MARKET ILLIQUIDITY AND DECLINING PROPERTY VALUES IN U.S.
DOLLARS MAY ADVERSELY AFFECT IRSA'S FINANCIAL CONDITION
The current Argentine crisis, including the freezing of bank deposits
and the devaluation of the Peso, is deteriorating the value on a U.S. dollar
basis and increasing the illiquidity of real estate investments. As a result, it
may be more difficult for IRSA to adjust its property portfolio promptly in
response to changes in economic or business conditions or to the factors
described above. The economic recession and the devaluation of the Peso have
significantly reduced consumer spending power, and the social unrest and ensuing
political instability together with the succession of governmental measures have
adversely affected the normal operations of banks have heightened uncertainty
and eroded confidence in the possibility of recovery. If IRSA is forced to sell
one or more of its properties in order to cover operating expenses or to satisfy
debt service obligations, or if it were liquidated, the proceeds from such sales
might be less than its total investment in the properties sold.
EVICTION PROCEEDINGS IN ARGENTINA ARE DIFFICULT AND TIME CONSUMING
Despite the enactment of a law amending the Argentine civil procedures
by which the lessor may, through a security interest, obtain the immediate
eviction of the tenant, historically, the heavy workload on the courts that hear
these matters and the numerous procedural steps required have generally delayed
efforts of landlords to evict tenants. Before the enactment of the above
mentioned law, eviction proceeding generally lasted from six months to two years
from the date of filing of the suit to the time of actual eviction.
Historically, delinquency regarding office rental space has been very low,
approximately 2%, and IRSA has usually attempted to negotiate the termination of
lease agreements with defaulting tenants after the first few months of
non-payment in order to avoid legal proceedings. Delinquency may increase
significantly in the future, and such negotiations with tenants may not be as
successful as they have been in the past. Moreover, new Argentine laws and
regulations may forbid or restrict eviction proceedings, and in such case, they
would likely have a material and adverse effect on IRSA's financial condition
and results of operations.
DEVELOPMENT AND CONSTRUCTION ACTIVITIES ARE INHERENTLY RISKY
IRSA is engaged in the development and construction of office, retail
and residential properties, generally through third-party contractors. Risks
associated with its development and construction activities include the
following, among others:
o IRSA may abandon development opportunities and renovation
proposals;
28
o construction costs of a project may exceed IRSA's original
estimates, making a project unprofitable;
o occupancy rates and rents at a newly completed project may be
insufficient to make the project profitable;
o pre-construction buyers may default on their purchase contracts
or units in new buildings may remain unsold upon completion of
construction;
o IRSA may be unable to obtain financing on favorable terms for the
development of the project;
o sale prices for residential units may be insufficient to cover
development costs;
o construction and lease-up may not be completed on schedule,
resulting in increased debt service expense and construction
costs; and
o IRSA may be unable to obtain, or may face delays in obtaining,
all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
IRSA MAY NOT BE ABLE TO RECOVER THE MORTGAGE LOANS IT HAS MADE
In recent years, IRSA has provided mortgage financing to purchasers of
units in its residential development properties. Before January 2002, IRSA's
mortgage loans were U.S. dollar-denominated and accrued interest at a fixed
interest rate ranging from 10% to 15% per year and for terms ranging from 3 to
15 years. However, on March 13, 2002, the Argentine Central Bank converted all
U.S. dollar-denominated debts into Pesos at the exchange rate of Ps. 1.00 to US$
1.00 and imposed maximum interest rate on mortgage loans of 3.0% for residential
mortgage loans granted to individuals and 6% for mortgage loans granted to
business organizations. These modifications adversely affected the dollar value
of its outstanding mortgage loans which at June 30, 2002, aggregated
approximately Ps. 4.9 million.
IRSA is subject to risks normally associated with providing mortgage
financing, including the risk of default in the payment of principal and
interest, which could adversely affect its cash flow. Argentine law imposes
significant restrictions on its ability to foreclose and auction properties.
Thus, if there is a default under a mortgage loan, IRSA does not have the right
to foreclose on the unit. Instead, in order to reacquire a property, IRSA is
required to purchase each unit at a public court ordered auction, or at an
out-of-court auction, in accordance with Law No. 24,441. We cannot assure you
that IRSA will be able to recover any amount outstanding on any mortgage loan
through the sale of any property at such an auction.
We cannot assure you that any future inflation adjustment coefficient
will adequately reflect inflation so or that such adjustment will not increase
delinquency on IRSA's outstanding mortgage portfolio, thus reducing future
revenues.
IRSA'S SUBORDINATED PARTICIPATIONS IN SECURITIZED MORTGAGE LOANS MAY
HAVE NO VALUE
Additionally, in December 2001, IRSA securitized almost the entirety of
the mortgage portfolio originated by it since late 1992, amounting to Ps. 26.6
million, through the sale of this portfolio to a financial trust. Banco
Sudameris Argentina acts as trustee and collection agent for the trust.
Fideicomiso IRSA I issued four classes of participation certificates under a
scheme of complete subordination, in which each class is serviced only upon the
total payment of the preceding senior class. IRSA holds all of the Class B,
Class C and Class D participation certificates and approximately 10% of the
Class A certificates. Class D certificates represent the most junior class, have
no fixed return and will yield the funds remaining in the trust after Classes A,
B and C and all the expenses of the trust have been completely paid for. Face
value for this class amounts to Ps. 10.7 million.
This portfolio was originally originated in U.S. dollars and mandatory
converted into Pesos in January 2002. Additionally, mortgages in the trust were
subject to inflation adjustment between February and April 2002. Following these
changes, the terms and conditions of the certificates of deposit issued by the
29
trust were modified to reflect changes in the underlying assets. In May,
inflation adjustment on residential mortgages on homes granted to individuals
was eliminated until next October, when adjustment will be performed according
to a different inflation index. The terms and conditions of the certificates of
deposit were modified again to reflect this new change.
The asset quality of the portfolio has declined as a result of the
current economic crisis in Argentina, and as a result, we cannot assure you that
the trust will have sufficient or any funds to service initially the
subordinated certificates held by IRSA. If it does not, the value of these bonds
might be considerably reduced or even equal zero.
We cannot assure you that the theoretical cash flow to be generated by
the participation certificates owned by IRSA (and included in the prospectus),
will be the actual one, as successive changes in the terms and conditions of the
underlying assets have been occurring since January 2002 and additional
modifications might be introduced by fiscal authorities or the Ministry of
Finance, which could have further consequences on the respective cash flows.
IRSA IS SUBJECT TO RISKS AFFECTING THE HOTEL INDUSTRY
The full-service segment of the lodging industry in which IRSA operates
its hotels is highly competitive. The success of IRSA's hotels will depend, in
large part, upon its ability to compete in areas such as access, location,
quality of accommodations, room rate structure, quality and scope of food and
beverage facilities and other services and amenities. IRSA's hotels may face
additional competition if other companies decide to build new hotels or improve
their existing hotels such that they are more attractive to potential guests. In
this regard, several prominent hotel chains, like Nikko, have announced that
they plan to build new hotels in the city of Buenos Aires, although they have
not yet done so.
In addition to the general risks associated with investments in
Argentina and in real estate discussed elsewhere in this section, the
profitability of IRSA's hotels depends on
o its ability to form successful relationships with international
operators to run its hotels;
o changes in travel patterns, including seasonal changes; and
o taxes and governmental regulations which influence or determine
wages, prices, interest rates, construction procedures and costs.
30
PART II
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF CRESUD
GENERAL INFORMATION
Our legal name is Cresud Sociedad Anonima Comercial, Inmobiliaria,
Financiera y Agropecuaria. We were incorporated and organized on December 31st,
1936 under Argentine law as a stock corporation (sociedad anonima) and were
registered with the Public Registry of Commerce of the City of Buenos Aires
(Inspeccion General de Justicia) on February 19, 1937 under number 26, on page
2, book 45 of national bylaws volume. Pursuant to our Bylaws, our term of
duration expires on July 6, 2082. Our principal executive offices are located at
Av. Hipolito Yrigoyen 440, 3rd Floor, (C1086AAF) Buenos Aires, Argentina. Our
telephone is +54 (11) 4814-7800, and our website is www.cresud.com.ar
HISTORY
We were incorporated and organized on December 31, 1936 under Argentine
law as a stock corporation (sociedad anonima) and were registered with the
Public Registry of Commerce of the City of Buenos Aires (Inspeccion General de
Justicia) on February 19, 1937. We were incorporated in 1936 as a subsidiary of
Credit Foncier, a Belgian company engaged in, among other things, the business
of providing rural and urban loans in Argentina. We were incorporated to, among
other things, administer real estate holdings foreclosed by Credit Foncier.
Credit Foncier was liquidated in 1959, and as a part of such liquidation, our
shares were distributed to Credit Foncier's shareholders and, on December 12,
1960, were listed on the Buenos Aires Stock Exchange. From 1960s to 1970s, our
business shifted to exclusively agricultural activities.
During a period of approximately two years and ending in September 1994,
Dolphin Fund Management (former Consultores Asset Management S.A.) acquired on
behalf of certain invertors an aggregate of 22% of our outstanding shares on the
Buenos Aires Stock Exchange. In September 1994, an investor group led by Dolphin
Fund Management and including Dolphin Fund plc. (former Quantum Dolphin plc.)
acquired the control by purchasing an additional 51.4% of our outstanding
shares. In November 1994, the investor group acquired an additional 13.6% of our
outstanding shares. On May 29, 1995, we completed a rights offering in Argentina
which was fully subscribed and added paid-in capital of Ps. 129 million
(including prior capital contributions of the investor group of Ps. 55 million).
On December 31, 1996, our largest single shareholder, Dolphin Fund plc., owned
39.0% of our shares.
From June 30, 1994 (approximately two months prior to the change of
control) to June 30, 1996, our net worth increased from approximately Ps. 33.5
million to Ps. 174.8 million, our total assets have increased from Ps. 36.1
million to Ps. 187.7 million, the number of our farms increased from seven to
sixteen, the number of our hectares from approximately 20,263 to 345,410, the
number of our leased hectares from 5,350 to 16,381, the number of our hectares
sown from 4,719 to 15,839, the number of our leased hectares sown from 736 to
6,227 hectares, the number of beef-cattle heads from 20,177 to 58,346 and the
number of our cattle head involved in milk production from approximately 1,669
to approximately 4,262.
From December 2000 to July 2002, we invested approximately Ps. 113.3
million to acquire approximately 20.29% of the outstanding shares of IRSA, one
of Argentina's largest real estate companies. As of June 30, 2002, IRSA had
total assets of Ps. 1,144.7 million, and its net loss for the fiscal year ended
June 30, 2002, was Ps. 499.6 million. At June 30, 2002, our investment in IRSA
represented approximately 26.1% of our total assets.
On September 29, 2000, our board of directors, pursuant to the provisions
set forth in Section 83, subsection 1(degree) of Law 19.550, decided the merger
of the companies "Agro Riego San Luis S.A." and "Colonizadora Argentina S.A." in
our Company, effective as from July 1st, 2000; and on August 30, 2002
31
approved the signing of a final merger agreement with the absorbed companies
Agroriego San Luis S.A. and Colonizadora Argentina S.A.
As of June 30, 2002, our net worth was Ps. 304.8 million, total assets
were Ps. 350.7 million, the number of farms owned by us, together with our
subsidiaries, was twenty one, the number of owned hectares was 429,865
(including 35.723% of 8,299 hectares owned by Agro-Uranga S.A., and 50% of 170
hectares owned by Cactus Argentina S.A.), the number of hectares sown was 48,437
(including 35.723% of 11,335 hectares sown by Agro-Uranga S.A.), the number of
leased hectares sown was 28,913, the number of beef-cattle heads was 78,250
(including 35.723% of 4,148 owned by Agro-Uranga S.A.) and the number of cows
involved in milk production was 2,834 (including 35.723% of 683 cows owned by
Agro-Uranga S.A.). For fiscal year ended June 30, 2002, our total net sales
totaled Ps. 70.8 million.
On October 15, 2002, we initiated a preemptive rights offering to
subscribe for 50,000,000 units consisting of US$ 50.0 million of 8% convertible
notes due 2007 and non-detachable warrants to purchase additional shares of our
common stock. The convertible notes may be converted into shares of our common
stock after December 13, 2002, and until maturity on November 14, 2007, at the
initial conversion price of US$ 0.5078 per common share. Each warrant will be
exercisable on or after conversion of the convertible note to which it is
attached at the same conversion price plus a 20% premium (US$ 0.6093). The
rights offering to holders of our common shares and ADSs expired on November 13,
2002. Existing shareholders have subscribed through the exercise of their
preemptive rights for US$ 20.5 million and they have exercised their accretion
rights for US$ 1.7 million, adding together US$ 22.2 million. During the
allocation of the remainder new investors have subscribed the remaining US$ 27.8
million units completing the US$ 50 million offering. The offering was fully
subscribed and the funds have already been received by the Company. Proceeds of
the offering were applied to subscribe IRSA's convertible notes.
B. BUSINESS OVERVIEW
GENERAL
We are a leading Argentine producer of basic agricultural products and
the only such company with shares listed on the Buenos Aires Stock Exchange and
on the Nasdaq. We are currently involved in various operations and activities
including crop production, cattle raising and fattening, milk production and
certain forestry activities. We are not directly engaged in the real estate
development business but from time to time sell properties to profit from real
estate appreciation opportunities which supplement our primary operations.
Most of our farms are located in Argentina's pampas, one of the largest
temperate prairie zones in the world and one of the richest areas of the world
for agricultural production, covering portions of the provinces of Buenos Aires,
Santa Fe, Cordoba, Chaco, San Luis, Catamarca and Salta. At June 30, 2002, we,
together with our subsidiaries, owned 21 farms. Approximately 22,423 hectares of
the land we own is productive and suitable for crop production and approximately
123,757 hectares are best suitable for beef-cattle production. The remaining
hectares are primarily natural woodlands. In addition, during fiscal year 2001,
we leased farms on an aggregate total area of 19,601 hectares and during fiscal
year 2002 we have signed leases for 41 farms for crop production and one for
beef-cattle production.
32
The following table sets forth, for the periods indicated below, the
amount of land used for each production activity (including total owned and
leased land):
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1998(1)(2) 1999(1)(3) 2000(1) 2001(1)(9) 2002(1)(10)
------------ ------------ ---------- ------------ --------------
(in hectares)
Crops(4) ................. 69,492 62,882 47,204 40,208 48,437
Beef-Cattle(5) ........... 207,298 175,648 177,267 170,392 147,566
Milk ..................... 2,723 2,555 2,926 2,492 3,049
Natural woodlands(6) ..... 280,680 283,099 275,995 275,889 275,928
Recently acquired land(7) -- -- --
------- ------- ------- ------- -------
Total(8) .......... 560,193 524,184 503,392 488,981 474,980
======= ======= ======= ======= =======
- ------------------
(1) Includes 35.723% of approximately 8,299 hectares owned by Agro-Uranga S.A.
(2) Includes 7,880 hectares of Moroti and Santa Rita farms that were sold in
June 1998, 70% of 6,590 hectares owned by Agro-Riego San Luis S.A. and 50%
of 170 hectares owned by Cactus Argentina S.A. The area of La Suiza,
Tourne and La Esmeralda farms were included as "owned" because they were,
prior to their acquisition at the end of fiscal year 1998, leased by us.
See "Business--Subsidiaries and Affiliated Companies."
(3) Includes 3,128 hectares of the Runciman farm which was sold in May 1999,
but excludes 6,302 hectares of the El Meridiano farm which was sold in
August 1998.
(4) Includes wheat, corn, sunflower, soybean, sorghum, cotton, bean and
peanuts. (5) Raising and fattening.
(6) We use portions of our natural woodlands to produce charcoal and fence
posts and rods. See "--Other Production."
(7) Refers to land acquired as of the date shown, but which had not entered
production as of such date.
(8) 17,476 hectares and 17,500 hectares were leased during fiscal year 1997;
46,760 hectares and 31,654 hectares were leased during fiscal year 1998,
44,162 hectares and 8,770 hectares were leased during fiscal year 1999,
and 31,114 hectares and 1,500 hectares were leased during fiscal year 2000
for crop and beef-cattle production, respectively. During fiscal year
2001, 19,601 hectares were leased for crop production. As of June 30,
2002, 28,913 hectares were leased for crop production and 2,500 for
beef-cattle production.
(9) Includes Tourne. This farm was sold in Ps. 5.5 million on December 4,
2000.
(10) Includes La Sofia and the plot sold from El Coro.
OPERATIONS AND PRINCIPAL ACTIVITIES
During the fiscal year ended June 30, 2001, our operations were
conducted on 23 farms which we and our subsidiaries owned, 32 farms which we
leased for crop production and one farm which we leased for beef-cattle
production. In fiscal year 2002, our operations are being conducted on 21 farms
and 42 leased farms. Some of the farms we own are engaged in more than one
productive activity at a time. The following table sets forth, for the periods
indicated below, the volumes of our production by principal product line:
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
1998(1) 1999(1) 2000(1) 2001(1) 2002(1)
--------- --------- --------- --------- ---------
Crops (2)................. 196,111 136,363 159,992 104,974 142,478
Beef-Cattle (3)........... 16,674 14,829 12,903 12,725 10,493
Milk (4).................. 17,038 18,193 10,933 7,057 6,783
- ------------------
(1) Does not include production from Agro-Uranga S.A.
(2) Production measured in tons.
(3) Production measured in tons of live weight. Production is the sum of the
net increases (or decreases) during a given period in live weight of each
head of beef-cattle owned by us.
(4) Production measured in thousands of liters.
33
LAND
Land Acquisition. We believe that due to the lack of liquidity and low
productivity in the Argentine agricultural sector resulting from high levels of
indebtedness, lack of investment and outdated technology, farmland prices in
Argentina are low compared to those in the United States and Europe. The low
prices and large supply of land, combined with our financial position relative
to other Argentine producers in this sector, provide us with an opportunity to
increase our landholdings at attractive prices, increase our scale of production
and obtain capital appreciation.
Several major brokers with whom we work on a regular basis generally
bring farms available for sale to our attention. The decision to purchase land
is based on an evaluation of a number of factors. In addition to the location of
the land, we normally review soil and water analyses, including the quality of
the soil and its suitability for our intended use (whether for the production of
crops, beef-cattle or milk), a classification of the various sections of the
parcel, the past uses of the land, a description of improvements on the land,
applicable easements, rights of way or other variances of title and satellite
photographs of the farm (which are useful to reveal drainage characteristics of
the soil during different cycles of precipitation) and detailed comparative data
regarding neighboring farms (generally within a 50-kilometer radius). Based on
the foregoing factors, we evaluate a farm in terms of the asking price as
compared to the potential productivity of the land and the potential for capital
appreciation. We believe that competition for the acquisition of land is
generally limited to small producers (Ps. 1.3-2.6 million or less in annual
sales) for the purchase of smaller lots and that there is little competition for
the purchase of larger lots.
In addition, we may consider purchasing marginal land and improving
such land through clearing, irrigation and the installation of watering
facilities in order to achieve attractive production yields and provide for
potential capital appreciation.
Land Sales. We do from time to time sell properties to profit from the
appreciation in value of real estate. We consider the sales of land based upon a
number of factors, including the expected future return from the farmland upon
continual agricultural production, availability of other investment
opportunities and cyclical factors affecting global agricultural land values.
The following table sets forth, for the periods indicated below,
certain information concerning sales of land by us during each of the last five
fiscal years ending June 30, 2002.
SALES OF LAND
---------------------------------------------------------------------------------
BOOK VALUE
GROSS PROCEEDS OF PROPERTIES
FISCAL YEAR NO. OF FARMS FROM SALES SOLD GAIN/(LOSS)(1)
- --------------------------------- --------------- ---------------- ----------------------- -----------------
(in millions of Pesos)
1998............................. 2 12.9 3.6 9.3
1999............................. 2 54.4 36.0 18.4
2000............................. -- -- -- --
2001............................. 2 17.6 12.4 5.2
2002............................. 3 47.4 32.6 14.8
- ------------------
(1) Including all taxes and commissions
On October 15, 2002, a bill of sale was signed for the farm Los
Maizales, of 618 hectares, located in the District of Villa Canas, Santa Fe. The
price for the sale of the farm was US$ 1.9 million. This sale generated an
approximate Ps. 5.1 million profit.
On August 30, 2002 our Company Board of Directors approved the signing
of a final merger agreement with the Absorbed Companies Agro Riego San Luis S.A.
and Colonizadora Argentina S.A.
34
During May 2002, we sold a 3,240 hectares plot of El Coro farm, for Ps.
2.29 million and in a subsequent sale a 1,432 hectare plot for Ps. 1.0 million.
The total sale of El Coro generated a profit of Ps. 3.03 million.
On May 8, 2002, we signed the deeds of sale for two plots of the 6,149
hectare La Sofia farm. The two plots of the farm were purchased in 1997, and
since then, they had undergone an extensive transformation due to the
implementation of the no tillage system. At the date of sale, 100% of the farm's
surface was devoted to agriculture. The sale price was US$ 10 million which was
paid at the date of the signing of the deeds and the taking possession of the
plots. Crops for the 2001/2002 season, which will be harvested during May and
June, will remain our property. We believe that the sale of La Sofia was an
attractive opportunity for us, because the sale price was higher than the farm's
book value, and the sale generated a Ps. 11.5 million profit.
On August 3, 2001, a bill of sale was signed for the farm El Silencio,
of 397 hectares, located in the district of Rojas, Buenos Aires. The price for
the sale of the farm was of US$ 1.03 million. This sale generated a profit of
Ps. 0.2 million.
In December 2001, we sold a 5,649 plot of El Coro farm, in the district
of Rio Seco, Province of Cordoba, for US$4.5 million.
During the fiscal year 2001, we sold El Banadito for US$6.2 million and
Tourne for US$2.8 million. El Banadito was part of the original purchase in
September 1994 and the sale resulted in a gain of Ps. 5.5 million taking into
account acquisitions expenses, improvements, depreciation, taxes and
commissions. Tourne was acquired in June 1998 and was sold at a loss of Ps. 0.4
million.
Land Leasing. Decisions to enter into a lease involve similar criteria
of quality and expected return, although our analysis of such criteria is
adjusted to meet our production and yield goals in the short- or medium-term. We
usually learn of land available for lease directly through owners. Generally,
land leases have initial terms of one season or less. Leases of land for crop
production consist of rental contracts with payments based upon a fixed amount
of Pesos per hectare or crop sharing agreements with payments in kind based upon
a percentage of the crops harvested or a fixed amount of tons of crop harvested
or its equivalent value in Pesos. Leases of land for beef-cattle raising consist
of lease contracts with fixed payments based upon a fixed amount of Pesos per
hectare or per the number of head of cattle, or capitalization contracts with
payments in kind or in cash based upon the number of kilograms fattened.
Land Management. Unlike traditional Argentine family-held farms, we
centralize policymaking in an Executive Committee, which meets on a weekly basis
in Buenos Aires. Management of individual farms is delegated to farm managers
who are responsible for operating their assigned farms. The Executive Committee,
taking into consideration sales and market expectations and risk allocation,
establishes production and commercial guidelines.
We rotate the use of our pastures between crop production and grazing
with a frequency that depends on the location and characteristics of the land.
Land use is typically rotated between four years of grazing and four to twelve
years of crop production, depending on the region. The use of conservation
techniques (including no-till farming) often permits us to extend crop
production periods.
After acquiring land we invest in technology to improve the
productivity and increase the land value. At the time of acquisition, a given
tract of land could be under-utilized or the infrastructure may need
improvements. We have invested in traditional and electric fencing, watering
troughs for cattle herds, irrigation equipment and machinery among others
things.
CROP PRODUCTION
Our crop production consists primarily of the sowing and harvesting of
fine and coarse grains and oilseeds. Principal crops include wheat, corn,
soybean and sunflower. Other crops, such as sorghum, are occasionally sowed and
represent a small percentage of total sown land.
35
The following table sets forth, for the periods indicated below, our
production of principal crops:
CROP PRODUCTION
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1998(1) 1999(1) 2000(1) 2001(1) 2002(1)
----------- ----------- ----------- --------- ----------
(in tons)
Wheat..................... 36,573 34,474 26,283 9,835 28,051
Corn...................... 77,671 39,880 81,343 46,745 63,175
Sunflower Seeds........... 21,393 26,396 19,413 5,080 4,122
Soybeans.................. 47,917 30,199 31,704 42,068 43,335
Other .................... 12,557 5,414 1,249 1,246 3,795
--------- --------- --------- --------- ---------
Total................... 196,111 136,363 159,992 104,974 142,478
========= ========= ========= ========= =========
- ------------------
(1) Does not include production from Agro-Uranga S.A.
The following table sets forth, for the periods indicated below, our
owned and leased sown land for crop production:
SOWN LAND FOR CROP PRODUCTION (1)
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1998(2) 1999(2) 2000(2) 2001(2) 2002(2)
----------- ----------- ----------- --------- ----------
(in hectares)
Owned...................... 23,381 18,952 16,090 20,069 19,524
Leased..................... 50,847 44,904 31,114 20,139 28,913
------- ------- ------- ------- -------
Total.................... 74,228 63,856 47,204 40,208 48,437
======= ======= ======= ======= =======
- ------------------
(1) Sown land may differ from "Uses of Land," since some hectares are sown twice
and therefore are counted twice.
(2) Includes hectares from Agro-Uranga S.A. See "Business--Subsidiaries and
Affiliated Companies."
As of June 30, 2002, leased land as a percentage of total land sown by
us was 60% of total sown area.
The sowing of wheat occurs from June to September, with harvesting in
December and January. Corn, soybean and sunflower are sowed from September
through December and harvested from February through June. Crops become
available for sale as commodities after harvesting during the period from
December to June, and we usually store a portion of our production until prices
recover from the drop that normally occurs at harvesting time. A larger portion
of production, especially wheat and sunflower seeds, is sold and delivered to
purchasers under contracts, in which the price term is set with reference to
market price at a specific time determined by us in the future. Remaining
production is either sold at prevailing market prices or delivered to cover
futures contracts entered into by us.
Our crop inventory at any given time varies according to market
conditions. At June 30, 2002, our crop inventory consisted of 3,866 tons of
wheat, 35,176 tons of corn, 2,343 tons of sunflower seed, 24,843 tons of
soybean, 456 tons of sorghum, and 2 tons of rye.
BEEF-CATTLE PRODUCTION
Our beef-cattle production principally involves the raising and
fattening of beef-cattle from our own stock. In some cases, if the market
conditions are favorable we acquire and fatten beef-cattle for sale to
slaughterhouses and supermarkets. We only sell live beef-cattle, and have no
slaughtering facilities.
At June 2002, beef-cattle fattening and raising activities were carried
out on 147,566 hectares of owned land and 2,500 hectares of leased land. Parcel
management of our pastures is aided by electric fences, which may be readily
moved to complement our land rotation. The beef-cattle herd is fattened from 160
kg to
36
300 kilograms through grazing in pastures in our northern farms where conditions
are suitable for this initial fattening. The cattle are further fattened to
reach 450 kilograms at our southern farms and at the feed lot located in the
province of San Luis. The feed lot enables uniform production and higher quality
and degree of tenderness in the meat, due to the younger age of the animals
slaughtered, resulting in stronger demand from international markets and higher
prices.
Brood cows and bulls are used in raising activities, while steers,
heifers and calves are used for fattening activities. Brood cows give birth
approximately once a year and have a productive life of six to seven years. Six
months after birth, calves are moved from suckling to fattening pastures.
Purchased cattle go directly into the fattening process. Upon reaching this
process the cattle graze for approximately one to one and a half years to fatten
for sale. Steers and heifers are sold once they have achieved a weight of
between 380-480 kilograms and 280-340 kilograms, respectively, depending upon
the breed.
Our beef-cattle stock is organized into raising and fattening
activities. The following table indicates, for the periods set forth below, the
number of head of beef-cattle for each activity:
HEAD OF BEEF-CATTLE(1)
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1998(2) 1999(2) 2000(2) 2001(2) 2002(2)
--------- ---------- ---------- ---------- ----------
Raising..................... 44,125 46,262 41,242 41,419 32,304
Fattening................... 96,846 69,443 66,560 54,732 44,464
------- ------- ------- ------- -------
Total................. 140,971 115,705 107,802 96,151 76,768
======= ======= ======= ======= =======
- -------------------
(1) For classification purposes, upon birth, all calves are considered to be in
the fattening process.
(2) Does not include head of beef-cattle from Agro-Uranga S.A. See "Business--
Subsidiaries and Affiliated Companies."
We seek to improve beef-cattle production and quality to obtain a
higher price through the use of advanced breeding techniques. We cross breed our
stock of Indicus, British (Angus and Hereford) and Continental breeds to obtain
characteristics for our herd most suitable for the land on which the beef-cattle
graze. To further enhance the quality of our herd, we plan to continue to
improve our pastures used for grazing. Such improvement is expected from
continued investment in superior seeds and fertilizers to improve grasses, an
increase in the number of watering troughs available on the pastures and through
the acquisition of round bailers to cut and roll hay for storage. In addition,
we have introduced lower-cost, alternative feed, which we expect will further
improve results.
Our emphasis on improving the quality of our herd also includes the use
of health-related technologies. We adhere to national veterinary health
guidelines, which include laboratory analyses and vaccinations to control and
prevent diseases among our herd, particularly foot-and-mouth disease.
Direct costs of beef-cattle production are relatively low, as the main
inputs are seeds for pastures (e.g. alfalfa, oats and barley) and purchases of
cattle for fattening.
Since the change of control, we have invested approximately Ps. 23.43
million in equipment, machinery, pastures, genetic improvements, research and
developments related to beef-cattle operation.
MILK PRODUCTION
We operated two fully equipped dairy facilities during the fiscal year
ended June 30, 2001. These facilities were located on farms, La Adela and La
Juanita.
During December 2001, the dairy farm at La Adela was closed; hence the
land will be used for agriculture. Part of the cattle stock was sold, and the
remaining was sent to La Juanita dairy farm to increase the amount of milking
cows and its productivity. As a consequence, total dairy cattle stock decreased
17.8%.
37
During fiscal year 2002, milk production fell compared to the previous
fiscal year since the number of milking cows dropped by 25.3% as a consequence
of the sale of the El Banadito dairy farm and part of La Adela dairy cattle
stock and due to the change to a lower cost feeding system, which adversely
affected the individual production per cow.
The following table sets forth, for the periods indicated below the
total number of our milking cows, average daily production per cow and our total
milk production:
MILK PRODUCTION
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
1998(1) 1999(1)(2) 2000(1) 2001(1) 2002(1)
---------- ----------- --------- --------- ----------
Milking cows................... 2,174 2,439 1,519 1,135 1,143
Daily production (liters per
cow)......................... 21.7 20.4 19.7 18.5 16.26
Total production (thousands of
liters)...................... 17,038 18,193 10,933 7,057 6,783
- ------------------
(1) Does not include production from Agro-Uranga S.A. See
"Business--Subsidiaries and Affiliated Companies."
(2) Includes milking cows located at Runciman which were in production until the
sale of Runciman in May 1999.
During fiscal year 2001, we dedicated 2,492 hectares for dairy
activities. At June 30, 2002, we had 2,590- head of cattle on 3,049 hectares
involved in the production of milk.
We produce milk from a herd of high-quality Holstein milking cows
obtained through selective breeding using imported frozen semen from American
Holstein bulls. Male calves born in the breeding process are normally sold for a
nominal amount, while female calves are separated from their mothers after 24
hours, spend approximately 60 days suckling and approximately 100 days being fed
with grass, grains and food supplements. The young heifers are then grazed for
an additional 12 to 15 months before being artificially inseminated at the age
of 18 to 20 months, giving birth nine-months later. The cows are then milked for
an average of 300 days. Milking cows are inseminated again during the sixty- to
ninety-day period after giving birth. This process is repeated once a year for
six or seven years. Our pregnancy rate for our milking cows is 85-90%.
We milk our dairy herd mechanically twice a day. Extracted milk is
cooled to less than five degrees centigrade to preserve quality and stored in a
cistern for delivery once a day to trucks sent by the purchaser. Milking cows
are primarily grass-fed, supplemented as needed with grain, hay and silage.
Cornstalks are also used for winter pasturing.
We have invested in certain technologies centered on breeding, health
and feeding to enhance milk production. These investments include the purchase
of high-quality imported frozen semen from genetically improved American
Holstein bulls, machinery and farming implements such as two feed mixer trucks,
the use of feed supplements and the installation of modern milk cooling and
heating control facilities. We currently purchase feed supplements for our
milking cows and have invested to increase the quantity and quality of forage
(pasture, alfalfa and corn silage) to reduce feed costs. Since the change of
control, we have invested approximately Ps. 6.0 million in equipment, machinery
and research and development with respect to our dairy herd.
OTHER PRODUCTION
We undertake forest-related production activities at Tali Sumaj farm in
the Province of Catamarca and Los Pozos in the Province of Salta. We utilize the
natural woodlands at Tali Sumaj for producing charcoal from natural white
breakaxe trees (quebracho blanco) and fence posts and rods from natural red
breakaxe trees (quebracho colorado). After clearing the natural woodlands at
Tali Sumaj and Los Pozos with special-purpose heavy machinery and trucks, the
land is sown for pastures. Once the pastures have matured, we use
38
the land for cattle raising and fattening activities. For fiscal year ended June
30, 2002 charcoal sales amounted to 1,688 tons and totaled Ps. 1.27 million. We
sold all of our charcoal production to Norte S.A. and Coto C.I.C.S.A., two of
the main supermarkets in Argentina.
PRINCIPAL MARKETS
CROPS
We sell our crop production entirely in the local market. Prices for
our crops are based on market prices quoted on the Argentine grain boards, such
as the Bolsa de Cereales de Buenos Aires, and the Bolsa de Cereales de Rosario,
that reference to international grain markets. Most of this production is sold
to exporters who bid and ship this production to the international market.
Prices are quoted with reference to the month of delivery and the port where the
commodity is to be delivered. Conditions other than price, such as storage and
shipment terms, are negotiated between the final purchaser and us.
BEEF-CATTLE
We sell our cattle production entirely in the local markets. Main
buyers are local slaughterhouses and supermarkets.
The market price for cattle in Argentina is set in Liniers (on the
outskirts of Buenos Aires), where hoofed animals are auctioned daily. Liniers
prices are set per kilogram of live beef-cattle and are mainly determined by
domestic supply and demand. The price tends to be lower than the price of beef
in industrialized countries. Some supermarkets and slaughterhouses usually
establish their prices per kilogram of processed meat; in these cases the final
price is affected by processing yields.
MILK
Towards the end of the third quarter of fiscal year 2002, the
government interceded in the negotiation between farmers and the milk industry
in order to establish a minimum price of Ps. 0.20 per liter.
During fiscal year 2001 and 2002, we sold all of our milk production to
the largest dairy company in Argentina, Mastellone S.A., which in turn makes a
variety of consumer dairy products for sale in Argentina and abroad. We
negotiated raw milk prices with this company on a monthly basis based on
domestic supply and demand. We believe that other large dairy companies in
Argentina would be willing and able to buy all or part of our milk production if
we were to elect to diversify our milk sales. The price of the milk sold by us
primarily depends on the percentage of fat and protein contained in the milk and
the degree to which the milk is cooled. The price we get for our milk also
increases or decreases based upon bacteria and somatic cell content.
CUSTOMERS
In 2002, we had net sales of Ps. 70.8 million made to approximately 241
customers. Sales to our ten largest customers accounted for approximately 61.1%
of our net sales in 2001 and approximately 65.9% during fiscal year ended June
30, 2002. Of these, the three largest, Enrique Zeni S.A., Negocios de Granos and
Cargill S.A., accounted for an aggregate of approximately 33.6% of our sales in
2002, and the remaining seven customers together accounted for approximately
32.3% of our net sales during such period.
We are party to non-binding, annual letters of understanding with
certain of our principal customers. These letters of understanding allow us to
estimate demand and plan production accordingly. Individual orders are made on
the basis of purchase orders and short-term contracts with a duration of less
than one year.
MARKETING CHANNELS AND SALES METHODS
CROPS
Normally, we use grain brokers and other intermediaries to execute
transactions at the exchanges. We usually sell a portion of our production in
advance by futures contracts and we buy and sell options to
39
hedge against a drop in prices. Most futures and options contracts are executed
at the Bolsa de Cereales de Buenos Aires and Chicago Board of Trade by equal
parts.
Our storage capacity allows us to condition and store crops without using
intermediaries and to capitalize on fluctuations in the price of commodities.
The largest storage facility owned by us, with a capacity of 12,000 tons, is
located at the Las Vertientes, near Rio Cuarto, Province of Cordoba. Other
storage facilities are located at El Gualicho farm, with a capacity of 2,000
tons. We intend to further increase our storage capacity by renting facilities
from third parties. As of June 30, 2002, we have 9,400 tons of rented storage
capacity.
BEEF-CATTLE
We primarily sell directly to local meat processors and supermarkets,
including Quick Food, Bermejo, Estancias Unidas del Sur, Estancias del Sur,
Finexcor, Novara, Swift Armour S.A., Arrebeef, Amancay, Deheza, Supermercados
Disco, Supermercados Coto, Supermercados La Anonima and Supermercados Norte, at
prices based upon the Liniers' price.
We pay the freight to market and generally do not pay commission for
our transactions.
RAW MATERIALS
Our ongoing direct cost of producing crops varies with respect to each
crop and is normally divided among the costs of tillage, seeds, agrochemicals
and fertilizers. We purchase in bulk and store seeds, agrochemicals and
fertilizers to benefit from off-season discounts.
COMPETITION
The agricultural business is a highly competitive market with many
producers. Cresud is one of the leading producers in Argentina, but its overall
market share is extremely low. Our leading position increases our power of
negotiation with our suppliers and customers, and in the past we have generally
been able to obtain discounts of nearly 15% on our input purchases and 15% net
above price on crops and beef cattle.
Historically, there have been few companies competing in the
acquisition and leasing of agricultural properties in order to achieve profit
from the capital appreciation of land and optimize yields from the different
business activities. However, we anticipate that additional companies, including
international companies, may become active in land acquisition and the lease of
sown land, bringing new competitors to the market in the next few years.
SEASONALITY
As with any agribusiness enterprise, our business operations are
predominantly seasonal in nature. The harvest and sale of crops (corn, soybean
and sunflower) generally occurs from February to June. Wheat is harvested from
December to January. Other segments of our business such as our cattle and milk
sales, and our forestry activities, tend to be more successive than seasonal in
nature. However, beef-cattle and milk production is generally higher during the
second quarter when pasture conditions are more favorable. As a result,
quarter-to-quarter results may vary significantly.
IRSA
From December 2000 to July 2002 and pursuant to our strategy of
diversifying our business activities, we invested an aggregate of Ps. 113.3
million in shares of IRSA. IRSA is one of Argentina's largest real estate
companies in terms of total assets, and is engaged in a range of real estate
activities in Argentina. Its principal activities consist of:
o the acquisition and development of residential properties primarily
for sale;
o the acquisition, development and operation of office and other
non-shopping center retail properties primarily for rental purposes;
40
o the acquisition, development and operation of shopping center
properties;
o the acquisition and operation of luxury hotels; and
o the acquisition of undeveloped land reserves for future development
or sale.
As of June 30, 2001, IRSA had total assets of Ps. 1,494.5 million and
shareholders' equity of Ps. 960 million, and as of June 30, 2002, IRSA had total
assets of Ps. 1,144.7 million and shareholders' equity of Ps. 460.4 million.
IRSA's net loss for the fiscal year ended June 30, 2001, was Ps. 59.9 million,
and IRSA's net loss for the fiscal year ended June 30, 2002, was Ps. 499.6
million.
During our fiscal year 2001, we increased our shareholding in IRSA from
0% to 15.24% of its outstanding shares. A majority of our directors are also
directors of IRSA, and we are under common control by the same group of
controlling shareholders. At June 30, 2002 our investment in IRSA had increased
to 19.85% of its outstanding shares and represented 26.1% of our total assets.
At the time of our investment in IRSA, its shares were trading at a
level approximately 55% below its peak value during the preceding year, and we
believed it to be an attractive investment opportunity. During the fiscal year
ended June 30, 2002, our IRSA investments showed a 23.6% depreciation as a
consequence of matching the quotation at June 2002 of Ps. 91.38 million compared
to the quotation at the beginning of the referred fiscal year of Ps. 100.23
million plus the purchases during that period of Ps. 19.44 million.
On September 9, 2002, IRSA's independent auditors issued a report
stating that it was negatively impacted by the continued deterioration of the
Argentine economy, the Argentine government's adoption of various economic
measures and the devaluation of the Peso which raises substantial doubt as to
its ability to continue as a going concern. You should review the report of
PricewaterhouseCoopers carefully. We cannot assure you that IRSA will be able to
continue as a going concern. IRSA's consolidated financial statements do not
include the effects of eventual adjustments and restatements, if any, if it is
required to sell its assets to pay off its liabilities, including contingent
liabilities, under any circumstance other than in the ordinary course of its
business.
C. REGULATION AND GOVERNMENT SUPERVISION
FARMING AND ANIMAL HUSBANDRY AGREEMENTS
Agreements relating to farming and animal husbandry activities are
regulated by Argentine law, the Argentine Civil Code and local customs.
Pursuant to Argentine law, all lease agreements related to rural
properties and land are required to have a minimum term of duration of 3 years.
Upon death of the tenant farmer, the agreement may continue with his successors.
The land owner may initiate eviction proceeding, upon misuse of the land by the
tenant farmer or default on payment of the rent.
Argentine law also regulates agreements for crop sharing pursuant to
which one of the parties furnishes the other with farm animals or land with the
purpose to share benefits between tenant farmer and land owner. These agreements
are required to have a minimum term of duration of 3 years. The tenant farmer
himself is obligated to perform the agreement and he may not in any case, assign
it. Upon the death, incapacity or impossibility of the tenant farmer, the
agreement will be terminated.
OWNERSHIP OF GRAINS AND CATTLE
The quality of the grains and the health measures of the cattle are
regulated and controlled by the Servicio Nacional de Sanidad y Calidad
Agroalimentaria ("SENASA"). Senasa is an entity within the Ministry of Economy,
which oversees the farming and animal sanitary activities.
41
Argentine law establishes that the brands should be registered with
each provincial registry and that there cannot be brands alike within the same
province.
SALE AND TRANSPORTATION OF CATTLE
The sale of cattle is not specifically regulated but, rather, general
contract provisions are applicable. Further, every province has its own rural
code regulating the sale of cattle.
Argentine law establishes that the transportation of cattle is lawful
only when it is done with the respective certificate that specifies the relevant
information about the cattle. The required information for the certificate is
established by the different provincial regulations, the inter-provinces
treaties and the regulations issued by the SENASA.
SALES AND OWNERSHIP OF REAL ESTATE
The acquisition and transfer of real estate is governed by provisions
of Argentine Civil Code, as well as municipal zoning ordinances.
ANTITRUST LAW
Argentine law provides for antitrust measures and requires
administrative authorization for transactions that, according to the Antitrust
Law, constitute economic concentrations.
According to such law, mergers, transfers of goodwill, acquisitions of
property or rights over shares, capital or other convertible securities, or
similar operations by which the acquirer controls a company, are considered
economic concentrations.
Whenever an economic concentration involves a company or companies, (i)
which hold 25% or more of the relevant market or (ii) whose accumulated sales
volume exceeds approximately Ps. 200 million in Argentina or Ps. 2,500 million
worldwide, the respective concentration must be submitted for approval to the
National Antitrust Commission.
The request for approval may be filed, either prior to the transaction
or within a week after its completion.
Currently, we are not involved in any transaction that requires
notification to the National Antitrust Commission.
PROPERTY AND TRANSFER TAXES
Value Added Tax. Under Argentine law, the sale of cattle, grains and
milk are taxable at a rate equal to 10.5%, 21% and 21% of the sale price,
respectively. The sale of land is not taxable.
Gross Sales Tax. A local transfer tax is imposed on the sale price of
cattle, grains and milk at a general rate of 1%. In some provinces the sale of
primary goods is not taxable.
Stamp Tax. This is a federal tax that the 23 provinces and the city of
Buenos Aires collect based on similar rules regarding subject matter, tax base
and rates. In general, this tax is levied on acts validated by documents, (e.g.
acts related to the constitution, transmission, or expiration of rights,
contracts, contracts for sales of stock and company shares, public deeds
relating to real property, etc.).
Decree 114/93 repealed this tax in the city of Buenos Aires (federal
district), with one exception. It refers to public deeds for the transfer of
real estate, or for any other contract whereby the ownership of real property is
transferred. The purchase and sale of real estate done through public deed is
not taxable if the real estate is to be used for housing. In the City of Buenos
Aires the tax rate is 2.5%. In the Province of Buenos Aires, the tax rate is 4%
in case of public deed of transfer of real property.
42
The purchaser is exempt when the real estate is acquired for unique,
familiar and permanent housing if the fiscal valuation does not exceed the
amount established by law.
D. ORGANIZATIONAL STRUCTURE
SUBSIDIARIES AND AFFILIATED COMPANIES
The following table includes a description of our subsidiaries and
affiliated companies, all of which are organized under the laws of Argentina, as
of June 30, 2002:
EFFECTIVE
OWNERSHIP
SUBSIDIARIES PERCENTAGE PROPERTY/ACTIVITY
- -------------------------------- ------------ -------------------------------------------------------
Inversiones Ganaderas S.A....... 99.99% This company owns two farms located in the Province of
Catamarca: Tali Sumaj and El Recreo.
Cactus Argentina S.A............ 50.00% This company represents our strategic alliance with
Cactus Feeders Inc. for feed lot production. It owns a
170-hectare farm located in the district of Villa
Mercedes in the Province of San Luis. It will have the
capacity to support 75,000 head of beef-cattle per year,
in cycles of 25,000 head each.
Agro-Uranga S.A................. 35.72% Agriculture, dairy and beef-cattle company. Agro-Uranga
S.A. owns two farms (Las Playas and San Nicolas)
covering 8,299 hectares in the provinces of Santa Fe and
Cordoba, and approximately 4,831 beef-cattle head.
Futuros y Opciones.Com S.A...... 70.00% Provides information about markets and services of
economic and financial consulting through Internet.
IRSA Inversiones y 19.85% Is a leading Argentine company devoted to the
Representaciones Sociedad development and management of real estate.
Anonima.......................
IRSA. During the fiscal year ended June 30, 2001, we acquired
31,617,059 shares of IRSA for a total consideration of Ps. 92.3 million,
representing an ownership interest of 15.24%. During the fiscal year ended June
30, 2002, we acquired 9,548,831 additional shares, for a total consideration of
Ps. 19.4 million, representing an additional 4.6% ownership interest. This
investment was classified as current investment and carried at market value as
was held for trading purposes.
At the time we purchased shares of IRSA, IRSA's stock price had dropped
55% compared to its peak in 2000 and the market consensus was that it was an
excellent investment opportunity.
Effective March 31, 2002, as a result of a change in our strategy to
currently hold such shares as permanent investments, our investment in IRSA is
valued using the equity method of accounting, This decision was made as a result
of the impact of the recent economic changes on the financial markets, which
altered the original budget estimates for these types of investments. The
current valuations and present conditions make a permanent investment
opportunity less burdensome and increase the possibility of achieving
considerable profit in the long term. Although the investment was originally
thought of as a short-term investment, it was transformed into a more permanent
investment due to the market conditions.
Futuros y Opciones.Com S.A. In May 2000, we acquired 70% of shares and
an irrevocable purchase option for the remainder of the shares of Futuros y
Opciones.Com S.A. for Ps. 3.1 million. We made additional capital contributions
for Ps. 2.7 million for prospective developments of which, as of June 30,
43
2001, we had provided Ps. 1.9 million. On April 16, 2002 an agreement was signed
whereas Cresud completed the abovementioned contribution. The site was launched
in November 1999 and is aimed at becoming the most important agriculture
business community in Latin America. Futuros y Opciones.Com S.A. has launched
its e-commerce strategy in March 2001, in order to sell products, buy inputs,
ask for loans, and obtain insurance, among other things. The results of Futuros
y Opciones.Com S.A. have been included in our consolidated statement of income
from the date of acquisition through June 30, 2002.
Cactus Argentina S.A. is a company owned by us and Cactus Feeders Inc.,
one of the largest feed lot companies in the United States. The site is located
in Villa Mercedes, in the Province of San Luis and covers 170 hectares. The feed
lot began to operate in September 1999. This feeding system allows an increase
of production in fattening farms, since cattle remain on fattening farms until
they reach 300 kilograms, when they are more efficient at converting into beef.
When they reach that weight the cattle are taken to the feed-lot (grain
feeding), where higher grain-beef conversion speeds up the remainder of the
fattening process.
On August 30, 2002 our Company Board of Directors approved the signing
of a final merger agreement with the Absorbed Companies Agro Riego San Luis S.A.
and Colonizadora Argentina S.A.
E. PROPERTY, PLANT AND EQUIPMENT
OVERVIEW OF PROPERTIES
The following table sets forth our properties size (in hectares),
primary current use and book value. The market value of farmland is generally
higher the closer a farm is located to Buenos Aires:
OWNED FARMS AT JUNE 30, 2002
GROSS SIZE DATE OF PRIMARY NET CARRYING
PROVINCE (IN HECTARES) ACQUISITION CURRENT USE (Millions of Ps.)(1)
---------- --------------- ------------- ------------------- ----------------------
La Adela ..................... Buenos 982 Original Crop 6.4
Aires
El Silencio/San Luis ......... Buenos 708 Jan. `95/Jul. Crop 5.3
Aires `96
San Enrique/Los Maizales ..... Santa Fe 1,602 Original Crop/Beef-Cattle 2.8
La Juanita ................... Buenos 4,302 Jan. `96 Crop/Milk 10.1
Aires
El Gualicho .................. Cordoba 5,729 Feb. `95 Crop/Beef-Cattle 5.8
Las Vertientes ............... Cordoba 4 - Silo 0.8
La Esmeralda ................. Santa Fe 11,841 June `98 Crop/Beef-Cattle 10.3
Nacurutu ..................... Santa Fe 30,350 Aug. `97 Beef-Cattle 7.3
La Suiza ..................... Chaco 41,993 June `98 Beef-Cattle 23.7
Tapenaga/41-42 ............... Chaco 27,311 Aug. `97/ Beef-Cattle 7.1
Sept. '97
Santa Barbara/Gramilla ....... San Luis 7,052 Nov. `97 Crops under 15.7
irrigation
Cactus (2) ................... San Luis 85 Feed Lot 2.3(3)
El Recreo(4) ................. Catamarca 20,271 May `95 Natural Woodlands 1.8
Tali Sumaj(4) ................ Catamarca 12,700 May `95 Beef-Cattle/Charcoal 4.2
Los Pozos .................... Salta 262,000 May `95 Natural Woodlands 11.5
San Nicolas/Las Playas(5) .... Sta.Fe/Cba. 2,935 May `97 Crop/Beef-Cattle 13.8(6)
--------- ------
TOTAL ........................ 429,865 128.9
========= ======
- ------------------
(1) Acquisition costs plus improvements less depreciation.
(2) Owned by us through our 50.0% interest in Cactus Argentina S.A.
(3) Book value of our investment in Cactus Argentina S.A.
(4) Owned by us through Inversiones Ganaderas S.A.
(5) Owned by us through our 35.723% interest in Agro-Uranga S.A.
(6) Book value of our investment in Agro-Uranga S.A.
44
FARMS
At June 30, 2002, we, together with our subsidiaries, owned 21 farms
with a combined total of 429,865 hectares of land, of which four are located in
Buenos Aires, five in the Province of Santa Fe, three in the Province of
Cordoba, three in the Province of Chaco, three in the Province of San Luis, two
in the Province of Catamarca, and one in the Province of Salta.
La Adela. La Adela, located 60 kilometers northwest of Buenos Aires, is
one of our original farms. During December 2001, the dairy farm at La Adela was
closed; since the land will be used for agriculture. Part of the cattle stock
was sent to La Juanita dairy farm to increase the amount of milking cows and its
productivity and the remaining was sold.
El Silencio/San Luis. El Silencio, purchased in January 1995, is
located 240 kilometers northwest of Buenos Aires. This farm together with San
Luis of 1105 hectares form a business unit used for agricultural production. San
Luis, located 250 kilometers north of Buenos Aires, was acquired in September
1996 and is situated only 35 km away from El Silencio. On August 13, 2001 a bill
of sale was signed for the farm El Silencio, of 397 hectares. The price for the
sale of the farm was US$ 1.03 million and generated a profit of Ps. 0.2 million.
San Luis was sown with corn, soybean, and wheat.
San Enrique/Los Maizales. San Enrique and Los Maizales, located 340
kilometers northwest of Buenos Aires, are two of our original farms. The farms
are adjacent and are primarily dedicated to crop production. The climate is mild
and the fertile soil is well suited to high-yield crop harvesting, such as corn.
During the nine-month period ended June 30, 2002, 1,623 hectares of land were
used for crop production and 437 hectares of pasture lands were sown with
alfalfa, red and white clover, grass and wild barley. Livestock production is
carried out as a supplement to agricultural production and capitalizes on lands
which have been temporarily left fallow. At June 30, 2002, there were
approximately 299 head of beef-cattle on 437 hectares of land.
La Juanita. La Juanita, located 440 kilometres southwest of Buenos
Aires, was acquired in January 1996. At June 30, 2002, 2,515 head of cattle
grazed on 2,869 hectares of sown and natural pastures and 1,683 hectares of
crops were used for crop production. Dairy facilities at this farm produced 6.8
million liters of milk in fiscal year 2002, with an average of 959 milking cows
and 15.9 liters per cow per day. In order to increase the amount of milking cows
and its productivity La Juanita received part of La Adela dairy cattle stock.
El Gualicho. El Gualicho, located 600 kilometers northwest of Buenos
Aires, was purchased in February 1995. This farm produces both crops and cattle.
At June 30, 2002, there were approximately 4,194 heads of beef-cattle on 5,167
hectares of land. During the fiscal year ended June 30, 2002, 562 hectares were
destined to corn, sunflower and sorghum.
El Coro. El Coro, located 900 kilometers northwest of Buenos Aires, was
purchased in December 1995. At March 31, 2002, the farm had approximately 31
head of beef-cattle and 3,336 hectares of crops were sown with corn, wheat and
soybean. From September to December of 2001, four plots of El Coro farm of
10,295 hectares, located in the District of Rio Seco, Province of Cordoba, were
sold. In the statements only one of the sales is registered, corresponding to a
plot of 5,649 hectares which had been closed prior to the closing of December
2001. This plot was signed at a price of US$ 4.5 million the total sale of El
Coro generated a profit of Ps. 3.03 million. This farm will be given to its new
owner during the next month of June.
El Recreo. The climatic conditions of El Recreo, located 970 kilometers
northwest of Buenos Aires and purchased in May 1995, are similar to those of
Tali Sumaj, having a semi-arid climate with an average annual precipitation not
greater than 400 mm. The farm is maintained as a productive reserve.
Tali Sumaj. Tali Sumaj, located 1,000 kilometers northwest of Buenos
Aires, was purchased in May 1995 and is located in a semi-arid zone with a
predominance of natural woodlands. Due to these characteristics, we are clearing
the woodlands to produce charcoal and sowing subtropical pastures in order to
45
introduce cattle raising. At June 30, 2002, Tali Sumaj had 5,094 head of
beef-cattle on approximately 9,500 hectares of pastures. The remaining
approximately 3,200 hectares of woodlands are being converted to pasture. The
farm is divided into 16 parcels with perimeter fences and drinking troughs with
a reserve of 1,000,000 liters of water.
Los Pozos. Los Pozos, located 1,600 kilometers northwest of Buenos
Aires and purchased in May 1995, is located in a semi-arid zone with an average
annual rainfall of 500 mm, predominantly from summer rains. The farm forms part
of the Chaquean woods segment. The area is covered with a high proportion of
hardwood tree species such as red breakaxe, white breakaxe, vetch and vinal,
among others. The area is naturally suited for cattle raising and forestry
(poles and charcoal), and offers agricultural potential for summer crops such as
cotton, beans, sorghum and corn, among others. We completed the clearing and
sowing with tropical pastures of approximately 14,000 hectares of woodlands. At
June 30, 2002, there were 12,335 head of beef-cattle on this farm.
San Nicolas. San Nicolas is a 4,005-hectare farm owned by Agro-Uranga
S.A., located in the Province of Santa Fe, approximately 45 kilometers from the
port of Rosario. At June 30, 2002, approximately 5,857 hectares were used for
crop production. The farm also has a silo with a 14,950-ton storage capacity.
Las Playas. Las Playas is a 4,294-hectare farm owned by Agro-Uranga
S.A., located in the Province of Cordoba, used principally for agricultural
production and beef-cattle production. At June 30, 2002, the farm had 1,878 head
of beef-cattle on approximately 908 hectares of pastures. In addition, 5,478
hectares were used for crop production. The farm also has a pre-seed cleaning,
drying, seed classification and storage plant with 3,500 ton capacity.
La Sofia. La Sofia is a 6,149-hectare production unit located in Rio
Cuarto in the Province of Cordoba. We use this farm primarily for crop
production. On April 15, 2002, the bill of sale of La Sofia, of 6,149 hectares,
was signed. The farm was sold for US$ 10 million generating approximately a Ps.
11.5 million profit.
Nacurutu. Nacurutu is a 30,350-hectare property located in Los Amores,
in the northern part of the Province of Santa Fe. This farm is situated along
the provincial highway N(degree) 3, 160 km north of the city of Reconquista and
only 600 km from the city of Rosario. The farm has livestock potential, and its
main activity is cattle breeding. This farm has the advantage of producing at
very low costs. At June 30, 2002 the farm had 11,228 head of beef-cattle.
Tapenaga. This 20,832-hectare property is located in Cotei Lai, in the
south of the Province of El Chaco. The farm is situated along national highway
N(degree) 89, 75 km west of the city of Resistencia and only 120 km from
Nacurutu farm. The farm's main activity is cattle breeding. Like Nacurutu, this
is a low-cost producing farm.
El 41-42. This 6,479-hectare farm is located in the department of
Tapenaga, in the Province of Chaco and is next to Tapenaga farm. With its
acquisition, the scale of Tapenaga farm was increased to a total of 27,311
hectares. This farm's main activity is cattle breeding. At June 30, 2002,
Tapenaga and 41-42 had approximately a total of 9,692 head of beef-cattle on
27,311 hectares of natural pasture.
La Gramilla and Santa Barbara. These farms cover 7,052 hectares in the
Valley of Conlara, Province of San Luis. Unlike other areas in the province,
this valley has a high-quality and well-replenished underground aqueduct, which
makes the farms suitable for agriculture production after making investments in
land clearance, wells and irrigation equipment. During the 2002 season, a total
of 2,595 hectares were sown, mainly under agreements with seed producers.
La Suiza. La Suiza is a 41,993-hectare farm located in Villa Angela,
Province of Chaco; it has excellent livestock potential and is intended for
cattle breeding. La Suiza can support more than 30,000 head of beef-cattle. At
June 30, 2002, La Suiza had approximately 21.659 head of beef-cattle.
La Esmeralda. La Esmeralda is a 11,841-hectare farm located in Ceres,
Province of Santa Fe. The farm, acquired in June 1998, has potential for both
crop and beef-cattle production. During the 2001/2002
46
season, a total of 1,230 hectares were used for crop production. At June 30,
2002, La Esmeralda had approximately 10,995 head of beef-cattle on 11,269
hectares of pasture.
SILOS
At June 30, 2002, we had approximately 20,577 tons of storage capacity
(including 35.723% of 18,450 tons from Agro-Uranga S.A.).
The following table sets forth, for the periods indicated, our storage
facilities:
STORAGE CAPACITY
----------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- ------------
(in tons) (in tons) (in tons) (in tons) (in tons)
El Banadito................ 7,000 7,000 7,000 --
El Gualicho................ 3,500 3,500 2,000 2,000 2,000
El Meridiano(1)............ 1,500 -- -- --
Runciman................... 7,000 -- -- --
Las Vertientes............. 12,000 12,000 12,000 12,000 12,000
San Nicolas(2)............. 1,426 1,426 5,330 5,330 5,330
Las Playas(2).............. 3,209 6,418 1,247 1,247 1,247
------ ------ ------ ------ ------
Total................ 35,635 30,344 27,577 20,577 20,577
====== ====== ====== ====== ======
- ------------------
(1) Sold in August 1998.
(2) Owned through Agro-Uranga S.A. (representing 35.723% of the capacity).
47
ITEM 5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. CONSOLIDATED OPERATING RESULTS
The following management's discussion and analysis of our financial
condition and results of operations should be read together with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes appearing elsewhere in this Form 20-F. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. These forward-looking statements include such words as,
"expects," "anticipates," "intends," "believes" and similar language. Our actual
results may differ materially and adversely from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth elsewhere in this Form 20-F.
For purposes of the following discussion, unless otherwise specified,
references to fiscal years 2002, 2001 and 2000 relate to the fiscal years ended
June 30, 2002, 2001 and 2000, respectively.
We maintain our financial books and records in Pesos and prepare our
financial statements in conformity with Argentine GAAP and the regulations of
the Comision Nacional de Valores. See Note 12 to our financial statements for a
description of the principal differences between Argentine GAAP and U.S. GAAP,
as they relate to us, and a reconciliation to U.S. GAAP of net (loss) income and
total shareholders' equity. The differences involve methods of measuring the
amounts shown in the financial statements as well as additional disclosures
required by U.S. GAAP and Regulation S-X of the SEC.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
In connection with the preparation of the financial statements included
in this Form 20-F, we have relied on variables and assumptions derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operations often requires our management to make judgments regarding the effects
of matters that are inherently uncertain on the carrying value of our assets and
liabilities. Actual results may differ from those estimated under different
variables, assumptions or conditions. In order to provide an understanding about
how management forms its judgments about future events, including the variables
and assumptions underlying the estimates, and the sensitivity of those judgments
to different variables and conditions, we have included comments related to each
critical accounting policy described as follows:
o allowance for doubtful accounts;
o investments in affiliates; and
o impairment of long-lived assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain our allowance for bad debts at a level believed adequate by
our management to reflect probable losses in our trade receivable due to
customer default, insolvency, or bankruptcy. In setting up this allowance, our
management applies the following criteria: customer credit history, current
customer credit rating, delay in the collection of these receivables, our legal
counsel's opinion and other relevant factors. The allowance is revised every
three months. We believe that the accounting estimate relating to the allowance
for bad debts is a critical accounting estimate, as it is subject to change
because it requires estimates by our management and legal counsel. The allowance
is determined on a caseby-case basis taking into account the analysis of all the
overdue balances of our customers. The likelihood of collection of each of them
is calculated on the basis of subsequent collections, agreements reached,
customer credit situation, our legal counsel's opinion, and other variables, on
the basis of which a bad debt allowance is set up in respect of all or part of
the overdue balance. If the estimates made were sensitivized so as to consider
the lack of collection of all the overdue balances, it would have been necessary
to recognize an increase in the loss for bad debts of US$ 0.02 million.
48
INVESTMENTS IN AFFILIATES
We use the equity method of accounting for investments in affiliates in
which we have significant influence. Critical accounting policies of these
affiliates include revenues recognition, rental property depreciation, provision
for allowances and contingencies and impairment of long-lived assets. As of June
30, 2002, the total investment in related companies recorded according to the
proportional equity value method was Ps. 91.4 million, and it accounted for
26.1% of our total assets.
As of March 31, 2002, as a result of a change in our strategy whereby
we currently hold IRSA's shares as a permanent investment, we changed the
accounting method from market value to the equity method of accounting. As a
result, at June 30, 2002 we recognized a negative goodwill of Ps. 13.7 million
representing the excess of equity value over market at that date.
We consider that the valuation of the shares held by us in IRSA
according to the proportional equity method is a critical accounting policy, as
the recoverable value of 96% of its non-current assets is determined by using
independent valuations or future cash flow projections. We have deemed this
accounting policy to be critical, further taking into account that these
estimates are subject to change in that they require estimates by the management
of IRSA or the independent appraiser, and that the impact of recognizing a
depreciation loss could be material. If the estimates made by the management of
IRSA for valuing its real property were sensitivized to consider a 10% reduction
in prices and an increase in vacancy of up to 20%, results in an impairment
amounting to a Ps. 6 million loss in the value of our investment.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, our management reviews long-lived assets
which consist primarily of fixed assets, for impairment when changes in
circumstances indicate that the carrying amount may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. The future net cash flows are based on management's current
estimates and assumptions and are subject to change as it requires estimates
made by the Management, mainly with respect to expected production, weather
factors and other variables that could be consequential; and the impact of
recognizing a depreciation loss could be material. We believe that the
accounting estimate concerning the impairment of long-lived assets is a critical
accounting policy because, when one takes into account that farms are
non-depreciable assets of unlimited useful life, their value could be calculated
as a perpetuity (i.e., dividing the expected return of each farm by a discount
rate representative in the market). As farming is a low-risk business and has
betas near to zero or even negative, a 6% discount rate was taken for purposes
of the calculation. If the estimates made were sensitivized taking into account
a 20% reduction in the expected return, it would not have been necessary to
recognize any loss for depreciation of the referred assets.
PRINCIPAL DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP
We have prepared our consolidated financial statements in accordance
with generally accepted accounting principles used in Argentina which differ in
certain significant respects from generally accepted accounting principles in
the United States of America. Such differences involve methods of measuring the
amounts shown in the financial statements, as well as additional disclosures
required by US GAAP and Regulation S-X of the SEC.
Following is a summary of the principal differences between Argentine
GAAP and US GAAP:
VALUATION OF INVENTORIES
Under Argentine GAAP, livestock is recorded at market value, net of
expenses, or replacement cost as determined by agricultural appraisers. Under US
GAAP, we record breeding and developing livestock at the lower of cost or
market, with costs removed from inventory on a first-in/first-out basis. All
direct and indirect costs of developing livestock, such as the purchase price,
labor costs, feed, vaccines and veterinary fees are accumulated until the
livestock reaches maturity and is either sold or transferred to a productive
49
function. Breeding herd are depreciated using the straight-line method over the
estimated useful life of five years.
RECOGNITION OF DEFERRED INCOME TAXES
Under Argentine GAAP, income taxes are recognized on the basis of
amounts currently due in accordance with Argentine tax regulations. Temporary
differences between the financial reporting and income tax bases of accounting
are therefore not considered in recognizing income taxes. Under US GAAP, we
record income taxes using the method required by Statement of Financial
Accounting Standards N(degree) 109, "Accounting for Income Taxes". Deferred tax
assets and liabilities are determined based on the difference between the
financial statement and income tax bases of assets and liabilities and
carryforwards using currently enacted tax rates. We estimate the tax valuation
allowance by assessing the future recoverability of the deferred tax assets. The
allowance is based on estimates of taxable income in each jurisdiction we
operate and the period over which the assets will be recoverable. In the event
that actual results differ from those estimates, we may need to establish
additional valuation allowances, and such allowances may be material.
INVESTMENTS IN AFFILIATES
Under US GAAP, at the balance sheet date, we evaluate the value of
certain equity investments for potential decline in value deemed other than
temporary when conditions warrant such an assessment. Since these investments
involve entities located in Argentina, the economic crisis affecting the country
could materially and adversely alter this evaluation.
STOCKS OPTIONS
Under Argentine GAAP, we have not recognized any compensation expense
related to a stock option plan. We recorded the transfer of treasury shares to
common stock at their par value and recognized an increase in retained earnings
for the proceeds received from the exercise of the option.
Under US GAAP, we adopted Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". This
Statement gave us the option of either (1) continuing to account for stock-based
employee compensation plans in accordance with the guidelines established by
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and related interpretations (APB No.25) while providing the disclosures required
under SFAS No. 123, or (2) adopting SFAS No. 123 accounting for all employee and
non-employee stock compensation arrangements. We opted to continue to account
for its stock-based awards using the intrinsic value method in accordance with
APB No. 25. As such, compensation expense for compensatory plans is measured as
the quoted market price of the stock on the measurement date less the amount, if
any, the employee is required to pay. The measurement date is the first date at
which both (a) the number of shares the employee is entitled to receive and (b)
the option or purchase price, if any, are known.
EFFECT OF RECENT DEVALUATIONS AND ECONOMIC CRISIS ON US
Argentina is currently experiencing a severe political and economic
crisis. The main features of the current economic crisis are a major public debt
burden, high interest rates, a significant decline in deposit levels, country
risk indicators far above normal averages and adversely economic recession that
has already lasted more than three years. This crisis has led to a significant
decrease in the demand for goods and services and a large rise in the level of
unemployment. These circumstances have adversely affected the Argentine
government's ability to comply with existing commitments and access to bank
financing.
On December 3, 2001 the Argentine government adopted measures to
restrict the free availability and circulation of cash and the transfer of
foreign currency abroad. Subsequently, the Argentine government defaulted on its
external debt on January 6, 2002. After a political crisis that resulted in the
resignation of two presidents, the Argentine government enacted Law 25,561
(referred to as the Public Emergency Law) that involved an in-depth change of
the prevailing economic model and the amendment of the Convertibility Law in
force since March 1991. In early February 2002, the government announced new
economic measures
50
through Decree 214 and Decree 260 (Exchange Regime) dated February 8, 2002,
substantially modifying some of the measures implemented by the Public Emergency
Law. These decrees are being complemented by other regulations being issued by
various governmental agencies, some of which are currently pending. In addition,
on April 24, 2002 the Argentine government signed an agreement with provincial
governors which purports to establish a framework for further reforms that have
yet to be issued or fully implemented.
Our consolidated financial statements included elsewhere in this Form
20-Freflect our current assessment of the impact of the economic situation on
our financial position. Actual results could differ materially and adversely
from our current assessments, and such differences could be material and
adverse. Therefore, our consolidated financial statements may not include all
adjustments that might ultimately result from these adverse conditions.
IMPACT ASSESSMENT OF THE RECENT MEASURES ADOPTED
Although it is impossible to estimate what will be the long-term impact
of devaluation on us, we currently believe that because we produce certain
exportable agricultural goods, in the short-term we may not be as affected by
the devaluation as certain other Argentine companies.
During 2001, the agriculture sector and its products represented
approximately 51% of total Argentine exports. Agricultural products are
commodities with fixed prices in the international market. Soybean and corn
prices are established by reference to the Chicago Board of Trade, and wheat
prices are established by reference to the Kansas market, all of which are in
U.S. dollars. Because of the recent devaluation and the exchange rate increase,
agricultural domestic prices rose in terms of Pesos. Nevertheless, this effect
was offset in large part by the 20% export tax imposed on agricultural exports
by the Argentine government.
Some agricultural products are traded in U.S. dollars, mainly those
with a high proportion of imports with respect to the total trade. Such products
include seeds, agrochemicals, fertilizers and repairs. These costs represent
approximately 20-35% of our total agricultural costs and have increased
significantly as a result of the devaluation of the Peso. In the case of diesel
oil, 60-70% of its cost is based on its import value, and therefore its cost is
affected by changes in the exchange rate. Since the beginning of the year the
cost of this item has increased by nearly 40%. Since it is a component of some
agriculture costs like machinery, harvest, freight, drying and irrigation, in a
level that varies from approximately 20% to 40% of costs, a diesel oil price
rise adversely affects our agricultural margins.
Our costs related to labor, professional fees and administrative
expenses are primarily denominated in Pesos and therefore will likely rise in
the medium term due to inflation.
As a consequence of this new cost structure and the rise in
agricultural prices, our net agriculture margins may increase in the short term.
The agriculture sector represented 60.5% of total sales and continues to make up
a high percentage of our total operating results. For the current fiscal period,
the effect has been positive, as at the time of devaluation, most of our direct
expenses had already been incurred (only commercial and harvest expenses
remained unpaid), but nearly 100% of the new harvest will be sold at the new
prices. In the medium-term, however, any short-term benefit generated by the
exchange rate rise will likely be offset by price increases in costs that quote
in U.S. dollars and those that vary according to the change in the rate of
inflation.
In the case of the cattle and milk sectors, which represent 34.4% and
2.8% of our total sales, respectively, there are no signals of benefits due to
devaluation in the medium term. There is an improvement in the cattle sector
margin in the short term as a consequence of the different effect of inflation
on product and input prices.
Cattle is mainly sold in the domestic market. According to certain
statistics provided by the Secretaria de Agricultura, Ganaderia, Pesca y
Alimentacion (SAGP y A), approximately 89% of the total production of cattle was
sold domestically last year. Prices in the domestic market are likely to rise
according to inflation as will our Peso-denominated costs. As a consequence of
these factors, we do not expect an improvement in cattle sector margins for the
coming fiscal year.
51
We currently expect the nominal price of milk, much like that of
cattle, to reflect changes in the inflation rate. In this sector, a high
proportion of feed costs is composed of agricultural products whose prices in
Pesos will rise in accordance with any increase in the exchange rate. This
negative effect is diminished somewhat for us because 100% of our production is
carried out on La Juanita farm which has a production system based on grass
feed. In March 2002, the Argentine government fixed a minimum price of Ps 0.2
per liter, with the promise of increasing it in the subsequent months. Despite
this favourable factor, we do not expect better margins for our milk sector in
the near future.
With regard to our financial results, most of our current debt is in
Pesos. We were granted pre-export financing facilities for US$ 10.78 million
which were pesified to Pesos at a one-to-one ratio, and, consequently, we were
not negatively affected by the effects of devaluation.
The following table sets forth a comparative analysis regarding prices
before and after the devaluation:
PRICES
PRE DEVALUATION POST DEVALUATION UNIT OF
COMMODITIES MAY, 2001 (1) MAY, 2002 (1) MEASUREMENT INCREASE (2)
- ------------------------------------- ----------------- ------------------ ------------- --------------
AGRICULTURE
Wheat.............................. 126 385 $/ton 205%
Corn............................... 75 250 $/ton 234%
Sunflower Seeds.................... 155 500 $/ton 223%
Soybean............................ 143 480 $/ton 236%
CATTLE............................... 0.830 1.269 $/kg 53%
MILK................................. 0.193 0.215 $/lt 11%
COSTS
PRE DEVALUATION POST DEVALUATION UNIT OF
COMMODITIES NOV, 2001 (1) APR, 2002 (1) MEASUREMENT INCREASE (2)
- ------------------------------------- ----------------- ------------------ ------------- --------------
AGRICULTURE
SEEDS
Sunflower seeds................... 50 134 $/bol 168%
Corn seeds........................ 63 173 $/bol 174%
AGROCHEMICALS.......................
Round up.......................... 3 11 $/lts. 268%
Cypermetrina 25%.................. 8 23 $/lts. 188%
FERTILIZERS
PDA............................... 320 954 $/ton 198%
Urea.............................. 250 656 $/ton 162%
TILLAGE
Farmings.......................... 53 77 $/Ha, 46%
52
PRE DEVALUATION POST DEVALUATION UNIT OF
COMMODITIES NOV, 2001 (1) APR, 2002 (1) MEASUREMENT INCREASE (2)
- ------------------------------------- ----------------- ------------------ ------------- --------------
OTHERS
Diesel oil........................ 0.5 0.7 $/lts. 40%
Labor............................. 270.0 270.0 $/month/person 0%
Taxes............................. 2.1 2.1 $/Ha. 0%
Office rent....................... 3,900 3,900 $/month 0%
Agriculture freight (300 km)...... 15.28 23.8 $/ton 56%
BEEF CATTLE
Beef cattle freight............... 0.8 1.4 $/kilometer 75%
Veterinary products - Dectomax (500
cc)............................. 89 128 $/lts. 44%
Veterinary products - Fenomax..... 60 68 $/lts. 14%
Taxes............................. 2.1 2.1 $/Ha. 0%
Labor............................. 270.0 270.0 $/month/person 0%
Source: Granar, Margenes Agropecuarios and Cresud
Note: (1) Nominal prices
(2) These variations include the inflation (32%) and exchange rates
changes effects on product and input prices.
EFFECTS OF INFLATION
From 1997 until the end of year 2001, policies adopted by Argentine
government have substantially reduced the level of inflation. Therefore, during
that period, inflation did not affect our financial condition and results of
operations. Nevertheless, inflation increased very substantially during the ten
months ended September 30, 2002. The following are annual inflation rates
figures published by the Ministry of Economy of Argentina:
PERIOD CONSUMER PRICE INDEX WHOLESALE PRICE INDEX
- ------------------------------ ---------------------- -----------------------
Fiscal year 1997.............. 0.9% 0.1%
Fiscal year 1998.............. 1.1% -1.9%
Fiscal year 1999.............. -1.4% -5.3%
Fiscal year 2000.............. -1.2% 4.4%
Fiscal year 2001.............. -0.3% -1.6%
For the ten months ended
October 31,2002............... 40.0% 123.5%
Source: Bloomberg
The Public Emergency Law authorizes the executive branch to establish
the system which will determine the new exchange ratio between the Peso and
foreign currencies, and to approve the corresponding monetary regulations. The
devaluation of the Peso by the executive branch creates a significant risk that
inflation will increase materially, and we have no means of hedging and
protecting ourselves from the risks of inflation.
EFFECTS ON INTEREST RATE FLUCTUATIONS
We are not affected by interest rate fluctuations since most of our
debt bears fixed interest rates.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
From April 1, 1991, until the beginning of 2002, the Convertibility Law
was applicable to Argentina. This law established a fixed exchange rate, under
which the Argentine Central Bank was obliged to sell U.S.
53
dollars to any person at a fixed rate of one Peso per U.S. dollar. Accordingly,
foreign currency fluctuations were reduced to a minimum during fiscal year 2001
and the subsequent interim period. However, the primary economic change
announced by the current Argentine government in January 2002 was the
devaluation of the Peso.
Foreign currency exchange rate fluctuations could affect our cash flow
in Pesos, since some of our products and inputs are payable in U.S. dollars.
Although most of our liabilities are denominated in Pesos, a small percentage
are in U.S. dollars, and fluctuations in the foreign currency exchange rate may
affect us.
Foreign currency exchange restrictions imposed by the Argentine
government in the future could prevent or restrict our access to U.S. dollars,
thus affecting our ability to service our U.S. dollar-denominated liabilities.
Also, fluctuations in the exchange rate between the Peso and the U.S. dollar may
adversely affect the U.S. dollar equivalent of the Peso price of our common
shares on the Buenos Aires Stock Exchange, and as a result would likely affect
the market price of our ADSs in the United States.
EFFECTS OF FLUCTUATIONS IN COMMODITY PRICES
Prices for cereals, oilseeds and by-products, like those of other
commodities, can be expected to fluctuate significantly. Our financial condition
and results of operations could be materially and adversely affected if the
prices of grains and by-products were to decline below current levels. The
prices that we are able to obtain for our agriculture products from time to time
depend on many factors beyond our control including:
o prevailing world prices which historically have been subject to
significant fluctuations over relatively short periods of time,
depending on worldwide demand and supply;
o changes in the agriculture subsidies levels of certain important
producers (mainly the USA and the European Economic Community) and
the adoption of other government policies affecting industry market
conditions and prices; and
o demand for and supply of competing commodities and substitutes.
An indication of the volatility of agriculture commodity prices, the
average monthly prices for our most important agriculture products during the
last five years were:
FAS PRICES (US$/TON) 1998 1999 2000 2001 2002 (1)
- ----------------------------------------- -------- ------- -------- ------- -----------
WHEAT
January................................ 111 106 92 119 103
April.................................. 115 115 103 124 114
July................................... 106 120 115 129 137
October................................ 121 112 122 120 123
SUNFLOWER SEED
January................................ 239 188 153 142 186
April.................................. 260 161 138 146 142
July................................... 245 156 136 176 172
October................................ 240 168 129 181 181
CORN
January................................ 107 109 91 84 83
April.................................. 88 85 83 74 69
July................................... 94 89 74 85 80
October................................ 95 89 75 87 89
SOYBEAN
January................................ 257 191 185 191 166
54
FAS PRICES (US$/TON) 1998 1999 2000 2001 2002 (1)
- ----------------------------------------- -------- ------- -------- ------- -----------
April.................................. 212 154 175 142 129
July................................... 201 148 165 178 160
October................................ 198 179 177 173 176
Note: (1) Quotations corresponding to October 2002, include 20% export taxes on
FOB prices imposed by government.
RECENT SIGNIFICANT INVESTMENT IN IRSA
From December 2000 to July 2002, and pursuant to our strategy of
diversifying our business activities, we invested an aggregate of Ps. 113.3
million in shares of IRSA, an Argentine real estate company. During our 2001
fiscal year, we increased our shareholding in IRSA from 0% to 15.24% of its
outstanding shares. A majority of our directors are also directors of IRSA, and
we are under common control by the same group of controlling shareholders. At
June 30, our investment in IRSA had increased to 19.85% of its outstanding
shares and represented 26.1% of our total assets.
At the time of our investment in IRSA, its shares were trading at a
level approximately 55% below its peak value during the preceding year, and we
believed it to be an attractive investment opportunity. During the fiscal year
ended June 30, 2002, our IRSA investments showed a 23.6% depreciation as a
consequence of matching the quotation at June 2002 of Ps. 91.38 million compared
to the quotation at the beginning of the referred fiscal year of Ps. 100.23
million plus the purchases during that period of Ps. 19.44 million.
On September 9, 2002, IRSA's independent auditors issued a report
stating that it was negatively impacted by the continued deterioration of the
Argentine economy, the Argentine government's adoption of various economic
measures and the devaluation of the Peso which raises substantial doubt as to
its ability to continue as a going concern. You should review the report of
PricewaterhouseCoopers carefully. We cannot assure you that IRSA will be able to
continue as a going concern. IRSA's consolidated financial statements do not
include the effects of eventual adjustments and restatements, if any, if it is
required to sell its assets to pay off its liabilities, including contingent
liabilities, under any circumstance other than in the ordinary course of its
business.
As of March 31, 2002, as a result of a change in our strategy whereby
we currently hold IRSA's shares as a permanent investment, we changed the
accounting method from market value to the equity method of accounting. As a
result, at June 30, 2002 we recognized a negative goodwill of Ps. 13.7 million
representing the excess of equity value over market at that date, and we showed
a loss from equity investment for Ps. 38.2 million.
OPERATING RESULTS
YEAR ENDED JUNE 30, 2002, COMPARED TO YEAR ENDED JUNE 30, 2001
NET SALES
Net sales reached Ps. 70.8 million and were 4.0% higher compared to the
previous fiscal year. The increase in agricultural sales compensated for the
lesser sales in the other segments.
Crops. Crop sales increased 15% from Ps. 37.5 million in fiscal year
2001 to Ps. 43.2 million in the fiscal year 2002. The 30% decrease in the sales
volume from 172,600 tons to 120,624 tons, was offset by a unit price 64.4%
higher in fiscal year 2002 compared to the of fiscal year 2001. The average
price per sold ton was of Ps. 358 as compared to Ps. 217 obtained during the
same period of the previous fiscal year. Crops become available for sale as
commodities after harvesting during the period from December to June. The
decrease in the sales volume was primarily due to a decrease in the volume of
sunflower and corn sold from 18,168 tons and 95,263 tons in fiscal year 2001 to
2,156 and 41,139 tons respectively sold during the of fiscal year 2002.
55
Crop production increased 35.7% from 104,974 tons during fiscal year
2001 to 142,478 tons during fiscal year 2002 (production of wheat, corn and
soybean increased 185.2%, 43.1%, 4.6%, respectively). Total area sown increased
from 40,208 hectares in fiscal year 2001 to 48,437 hectares in fiscal year 2002.
We increased the leased land sown from 20,139 hectares during fiscal year 2001
to 28,913 hectares during fiscal year 2002 and decreased the owned land sown
from 20,069 hectares during fiscal year 2001 to 19,524 hectares during fiscal
year 2002.
Beef-Cattle. Beef-cattle sales decreased 6% from Ps. 26.1 million in
fiscal year 2001 to Ps. 24.6 million in the fiscal year 2002. The 4.3% increase
in the sold volume compensated the 9.7% drop in the price per ton sold.
Sold volume increased from 17,455 tons to 18,200 tons, meanwhile the
sale price decreased from Ps. 1.5 per kilogram in fiscal year 2001 to Ps. 1.35
per kilogram for the same period of fiscal year 2002. Average cattle stock
decreased from 109,982 heads for fiscal year 2001 to 93,380 for the same period
of fiscal year 2002. This was the result of our strategy to continue with the
reduction of our stock holding position in this business segment in order to
increase our efforts in the agricultural segment, which offers better yields. As
a consequence of this change, total beef-cattle production decreased 17.5%, from
12,725 tons for fiscal year 2001 to 10,493 tons for the same period of fiscal
year 2002. The number of owned hectares under beef-cattle production decreased
from 173,568 hectares in fiscal year 2001 to 153,435 in fiscal year 2002.
Milk. Milk sales decreased 13.6% from Ps. 2.3 million during fiscal
year 2001 to Ps. 2.0 during fiscal year 2002. The decrease in the milk sales
volume is attributable to a 3.9% decrease in the milk production, as a result of
a decrease in the individual production by cow due to modifications on the
feeding system, from 7.0 million liters during fiscal year 2001 to 6.8 million
liters during fiscal year 2002 and a 10.2% decrease in the average sale price
from Ps. 330 per thousand liters during fiscal year 2001 to Ps. 296 per thousand
liters during fiscal year 2002. During the second quarter of fiscal year 2002,
almost the total La Adela's dairy cattle stock was sold. The reduction of the
total dairy cattle stock was 29,1%.
COST OF SALES
Cost of sales decreased 26.2% from Ps. 53.1 million for fiscal year
2001 to Ps. 39.2 million for fiscal year 2002. Cost of sales as a percentage of
net sales decreased from 78.1% for the fiscal year 2001 to 55.4% for the fiscal
year 2002.
Crops. Cost of sales for crops decreased 49.2% from Ps. 27.2 million
for fiscal year 2001 to Ps. 13.9 million for fiscal year 2002. This decrease is
mainly attributable to the effect of higher commodity prices on the stock
valuation.
Beef-Cattle. Cost of sales for beef-cattle decreased 6.6% from Ps. 21.7
million for fiscal year 2001 to Ps. 20.3 million for the of fiscal year 2002.
The sale cost decreased since our cattle stock at June 2002 was valued at a
price higher than the initial price. Cost of sales for beef-cattle as a
percentage of beef-cattle sales decreased from 83.1% in fiscal year 2001 to
82.5% for the same period of fiscal year 2002. The cost per ton sold also
decreased from Ps. 1244 in fiscal year 2001 to Ps. 1114 for the same period of
fiscal year 2002 due to the same reasons.
Milk. Cost of milk sales increased 57.1% from Ps. 2.0 million in fiscal
year fiscal year 2001 to Ps. 3.2 million for fiscal year 2002. This increase is
attributable to the losses generated by La Adela dairy farm closing, mainly
salary compensations and dairy stock sale, and also to agriculture by-products
price increases, components of feed cost, as a consequence of the rise in the
U.S. dollar quotation. Cost of milk sales per thousand liters increased from Ps.
286 in fiscal year 2001 to Ps. 467 for the fiscal year 2002.
SELLING EXPENSES
Selling expenses decreased 9.2% from Ps. 9.6 million in fiscal year
2001 to Ps. 8.7 million in the fiscal year 2002. Agriculture selling expenses
represented 73% of total selling expenses, beef-cattle expenses represented 17%,
and the remaining 10% corresponds to our other activities. Crop selling expenses
as a percentage of sales decreased from 17.6% in fiscal year 2001 to 14.8% for
the same period of fiscal year
56
2002. Although significant cost reductions were achieved during the past fiscal
years, such as lower freight costs and conditioning expenses, these percentages
decreased mainly due to higher commodity prices per ton sold. Selling expenses
per ton of crops sold increased from Ps. 38 per ton in fiscal year 2001 to Ps.
53 per ton for the same period of fiscal year 2002, mainly due to the
devaluation effect on the price of selling expenses. Regarding beef-cattle,
selling expenses as a percentage of beef-cattle sales decreased from 6.5% in
fiscal year 2001 to 5.9% for the same period of fiscal year 2002.
Milk sales did not generate any selling expenses since milk production
is sold directly.
ADMINISTRATIVE EXPENSES
Administrative expenses include only corporate overhead and not
administrative expenses related to the farms. Administrative expenses decreased
0.1% from Ps. 7.5 million in fiscal year 2001 to Ps. 7.4 million for the fiscal
year 2002 mainly due to reductions carried out in fees for services and general
offices expenses.
GAIN ON THE SALE OF FARMS
The results for sales of fixed assets were of Ps. 14.8 million, as a
consequence of the sale of the farms El Silencio, of 397 hectares, located in
Rojas, Province of Buenos Aires, El Coro, of 10,231 hectares, located in Villa
Maria del Rio Seco, Province of Cordoba and La Sofia, of 6,149 hectares, located
in Rio Cuarto, Province of Cordoba.
The sale of El Silencio, which was acquired in January 1995, was agreed
at US$1.03 million and generated a gain of Ps. 0.20 million.
Regarding the sale of El Coro farm of 10.231 hectares, it was acquired
in December 1995 and was sold in four plots. The price agreed for this sale was
US$12.2 million and generated a Ps. 3.03 million profit.
The sale of La Sofia, was agreed at US$10 million and generated a gain
of Ps. 11.5 million
INVENTORY HOLDING (LOSS) GAIN
Loss on holdings amounted to Ps. 17.5 million in fiscal year 2002 as
compared to a loss of Ps. 1.4 million for the fiscal year 2001. Most of this
result corresponds to cattle holding result losses. Although cattle nominal
prices showed an important increase, this increment was less than the rate of
inflation and generated this negative result..
OPERATING (LOSS) INCOME
As a result of the foregoing factors, operating gain amounted Ps. 12.8
million in fiscal year 2002 as compared to a gain of Ps. 1.6 million for the
fiscal year 2001. The operating margin was -32.2% in fiscal year 2002 and 21.35%
in fiscal year 2001.
FINANCIAL RESULTS, NET
Net financial expenses were of Ps. 7.5 million (loss) and Ps. 11.0
million (profit) for fiscal year 2002 and 2001, respectively, mainly due to
transactions with stocks and bonds.
The financial expenses are mainly attributable to (i) a loss of Ps.
10.82 million as a result of operations with stocks and bonds (ii) a Ps. 4.4
million profit due to the effect of inflation (iii) a Ps. 1.3 million loss due
to interest (iv) a Ps. 0.94 million profit due to exchange rate difference (v) a
Ps. 0.77 million loss due to tax on debit and credit.
LOSS FROM EQUITY INVESTMENTS
Loss from equity investments increased from Ps. 0.4 million in fiscal
year 2001 to Ps. 37.6 million in fiscal year 2002 mainly due to an operating
loss incurred in the fourth quarter at IRSA of Ps. 38.2 million,
57
an operating loss incurred at Cactus Argentina S.A. of Ps. 0.02 million, an
operating gain obtained by Agro Uranga S.A. of Ps. 1.0 million and a goodwill
and intangibles amortization of Ps. 0.4 million.
During fiscal year 2001 and according to the investment diversification
strategy, the company decided to invest part of its cash in the Buenos Aires
Stock Exchange through the purchase of IRSA stock. This investment was
negatively affected by the Argentine market.
At the moment of deciding the purchase, IRSA stock was quoting with an
important discount compared to its book value, since the stock's quotation had
dropped 55% compared to its peak during 2000 and the market consensus indicated
that it was a good investment opportunity.
As of March 31, 2002, as a result of a change in our strategy whereby
we currently hold IRSA's shares as a permanent investment, we changed the
accounting method from market value to the equity method of accounting. As a
result, at June 30, 2002 we recognized a negative goodwill of Ps. 13.7 million
representing the excess of equity value over market at that date.
OTHER (EXPENSE) INCOME, NET
Other (expense) income for fiscal year 2002 was of Ps. (0.1) million as
compared to Ps. (0.3) million for the fiscal year 2001.
MANAGEMENT FEE
Pursuant to our agreement with Dolphin Fund Management, we pay a fee
equivalent to 10% of our net income for certain agriculture advisory and other
administration services. We did not record a management fee for fiscal year 2002
due to a net income loss. During fiscal year 2001 management fee totaled Ps. 0.8
million.
INCOME TAX
Income tax increased from Ps. 4.0 million for fiscal year 2001 to Ps.
7.6 million for the fiscal year 2002. The income tax provision includes
Argentine income tax calculated on an individual entity basis at the statutory
income tax rate of 35%, based on the current taxable income of each company for
the period, as defined by Argentine income tax law. Despite the fact that during
fiscal year 2002 the net income showed a negative result since it was adjusted
by inflation, current taxable income does not recognize the adjustment for
inflation and it recorded a gain of Ps. 21.7 million. For Inversiones Ganaderas
S.A., Futuros y Opciones.Com S.A. we did not record any income taxes for the
fiscal years 2001 and 2002 due to tax net operating losses. As of June 30, 2002,
these subsidiaries had, in the aggregate, Ps. 1.5 million of tax loss
carryforwards, which, on an individual entity basis, may be offset against
future taxable income. These tax loss carryforwards expire at various dates
beginning 2003 and ending 2007.
MINORITY INTEREST
For fiscal year 2002, we recorded a minority interest of Ps. 0.3
million, to reflect our 70% equity interest in Futuros y Opciones.Com S.A.
NET INCOME
As a result of the foregoing factors, net income decreased from Ps. 7.5
million for fiscal year 2001 to a net loss of Ps. 39.6 million for the fiscal
year 2002. The net margin was 11.0% for fiscal year 2001 and decreased to a net
margin (loss) of 55.9% for the fiscal year 2002.
58
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
NET SALES
Net sales reached Ps. 68.0 million and were 1.0% lower compared to the
previous fiscal year. The increase in agricultural sales compensated for the
lesser sales in the milk and other segments.
Crops. Crop sales increased 3.9% from Ps. 36.2 million in fiscal year
2000 to Ps. 37.5 million in fiscal year 2001. The increase in crop sales is
primarily attributable to a 36.9% increase in the sales volume from 126,068 tons
during fiscal year 2000 to 172,600 tons during fiscal year 2001, partially
offset by a unit price 24.1% lower in 2001 than in 2000. Crops become available
for sale as commodities after harvesting during the period from December to
June, and we usually store a portion of our production until prices recover from
the drop that normally occurs at harvesting time. Our crop inventory at any
given time varies according to market conditions and the proportion of crop sale
at the end of the harvest time depends on the market conditions of each year.
The increase in the sales volume in 2001 was primarily due to an increase in the
volume of corn sold from 32,907 tons in fiscal year 2000 to 95,263 tons in
fiscal year 2001. The average price per sold ton was of Ps. 217 as compared to
Ps. 287 obtained during the previous fiscal year. This decrease was mainly the
result of the drop in prices of agriculture commodities and the relatively high
percentage of corn in the total volume sold (corn has a lesser unit price). The
prices of corn, sunflower oil and wheat showed a 10%, 13% and 1% decrease
respectively compared to fiscal year 2000, while soybean evidenced an increase
of over 4% compared to the same period.
Crop production decreased 34.4% from 159,992 tons during fiscal year
2000 to 104,974 tons during fiscal year 2001 (production of soybean increased
32.7%; and production of wheat, corn and sunflower crops decreased 62.6%, 42.5%
and 73.8 %, respectively) with a reduction of 14.8% in the total area sown from
47,204 hectares in fiscal year 2000 to 40,208 hectares in fiscal year 2001. We
reduced the leased land sown from 31,114 hectares during fiscal year 2000 to
20,139 hectares during fiscal year 2001. However, we increased the owned land
sown from 16,090 hectares during fiscal year 2000 to 20,069 hectares during
fiscal year 2001.
Beef Cattle. Beef Cattle sales decreased 0.2% from Ps. 26.2 million in
fiscal year 2000 to Ps. 26.1 million in fiscal year 2001 as a consequence of a
5.8% decrease in the sales volume, from 18,520 tons in fiscal year 2000 to
17,455 tons in fiscal year 2001, partially offset by a 5.9% increase in sales
price from Ps. 1.4 per kilogram in fiscal year 2000 to Ps. 1.5 per kilogram in
fiscal year 2001. The decrease in the sold volumes was in part caused by a 9%
reduction in the cattle stock. Average cattle stock decreased from 120,898 heads
in fiscal year 2000 to 109,982 in fiscal year 2001 as a result of our strategy
to reduce our stock holding position in this business segment in order to
increase our efforts in the agricultural segment, which offers better yields. As
a result of this change, total beef cattle production decreased 1.4%, from
12,903 tons during fiscal year 2000 to 12,725 tons during fiscal year 2001.
Despite this production decline during fiscal year 2001, compared to fiscal year
2000, yield per head increased 8% as a consequence of the reduced stock. The
number of owned hectares under beef-cattle production decreased from 175,767
hectares in fiscal year 2000 to 173,568 in fiscal year 2001 and leased land
decreased from 1,500 hectares in fiscal year 2000 to zero hectares in fiscal
year 2001.
Milk. Milk sales decreased 30.1% from Ps. 3.3 million during fiscal
year 2000 to Ps. 2.3 million during fiscal year 2001. The decrease in the milk
sales volume is attributable to a 35.8% decrease in the milk production from
10.9 million liters during fiscal year 2000 to 7.0 million liters during fiscal
year 2001 partially offset by an 8.2% increase in the average sale price from
Ps. 303 per thousand liters during fiscal year 2000 to Ps. 330 per thousand
liters during fiscal year 2001. Lower production was a consequence of 25.2%
reduction of the dairy cattle stock and modifications on the feeding system. The
reduction of the dairy cattle stock was caused by the sales of 100% of El
Banadito dairy farm and part of La Adela dairy farm.
COST OF SALES
Cost of sales decreased 7.9% from Ps. 57.7 million in fiscal year 2000
to Ps. 53.1 million in fiscal year 2001. Cost of sales as a percentage of net
sales decreased from 83.9% in fiscal year 2000 to 78.1% in fiscal year 2001.
59
Crops. Cost of sales for crops increased 1.3% from Ps. 27.0 million in
fiscal year 2000 to Ps. 27.3 million in fiscal year 2001. This increase is
mainly attributable to a 3.9% increase in crop sales. Cost per ton sold
decreased from Ps. 213 in fiscal year 2000 to Ps. 158.4 in fiscal year 2001.
These decreases are primarily due to the higher productivity achieved during
last season.
Beef Cattle. Cost of sales for beef cattle decreased 6.8% from Ps. 23.3
million in fiscal year 2000 to Ps. 21.7 million in fiscal year 2001. This
reduction is due to a decrease in beef cattle production and the adjustments
carried out during fiscal year 2001 which resulted in a lower direct cost per
kilogram produced. These adjustments were due to lower feed prices, a reduction
of the farm's overhead and a more efficient use of machinery. Cost of sales for
beef cattle as a percentage of beef cattle sales decreased from 89.1% in fiscal
year 2000 to 83.1% in fiscal year 2001. The cost per ton sold also decreased
from Ps. 1259 in fiscal year 2000 to Ps. 1244 in fiscal year 2001 for the same
reasons.
Milk. Cost of milk sales decreased 59.5% from Ps. 5.0 million in fiscal
year 2000 to Ps. 2.0 million in fiscal year 2001. This decrease is mainly
attributable to the lower sales volume, as a consequence of the stock reduction
policy. Cost of milk sales per thousand liters decreased from Ps. 463 in fiscal
year 2000 to Ps. 286 in fiscal year 2001 due to a change into a lower cost
feeding system which is more suitable to the new milk price structure but
negatively affected the individual production per cow.
SELLING EXPENSES
Selling expenses increased 4.9% from Ps. 9.2 million in fiscal year
2000 to Ps. 9.6 million in fiscal year 2001. Agriculture selling expenses
represented 69.2% of total selling expenses, beef cattle expenses represented
17.7%, and the remaining 13.1% corresponds to our other businesses. Crop selling
expenses as a percentage of sales increased from 16.3% during fiscal year 2000
to 17.6% during fiscal year 2001. These percentages were increased mainly due to
lower commodity prices, even though significant cost reductions were achieved
during fiscal year 2001, such as lower freight costs and conditioning expenses.
Selling expenses per ton of crops sold decreased from Ps. 46.7 per ton in fiscal
year 2000 to Ps. 38 per ton in fiscal year 2001. Regarding beef cattle, selling
expenses as a percentage of beef cattle sales decreased from 6.3% in fiscal year
2000 to 6.5% in fiscal year 2001; this drop is a consequence of the increase in
the price of these expenses due to the higher participation of the feed lot in
the volume of cattle for slaughtering and to lesser amount of defaulting debtors
in this activity. Milk sales did not generate any selling expenses since milk
production is sold directly.
ADMINISTRATIVE EXPENSES
Administrative expenses include only corporate overhead and not
administrative expenses related to the farms. Administrative expenses decreased
3.0% from Ps. 7.7 million in fiscal year 2000 to Ps. 7.5 million in fiscal year
2001 mainly due to cost reduction efforts. Administrative expenses are primarily
composed of fees for services, salaries and wages, and office rents.
GAIN ON THE SALE OF FARMS
The results for sales of fixed assets were of Ps. 5.1 million, as a
consequence of the sale of the farms El Banadito, of 1,789 hectares, located in
Ines Indart, Province of Buenos Aires and of Tourne, of 19,614 hectares, located
in Canada Ombu, Province of Santa Fe. The sale of El Banadito, which formed part
of our original purchase package, was agreed at US$ 6.2 million and generated an
income of Ps. 5.5 million. On the other hand, the sale of Tourne, that formed
part of the land and cattle package acquired from Swift Armour and Arbol Solo
S.A. during 1997 and 1998, was agreed in US$ 2.8 million and generated a loss of
Ps. 0.4 million. The purpose of this operation was to optimize the ratio of the
cattle assets, which were unbalanced after the sale of part of the cattle stock
during the price rise of 1997.
INVENTORY HOLDING (LOSS) GAIN
Loss on holdings of beef cattle amounted to Ps. 1.3 million in fiscal
year 2001 as compared to a gain of Ps. 0.14 million in fiscal year 2000. The
loss accrued for holding of cattle was a consequence of the price readjustment
suffered by some categories.
60
OPERATING INCOME (LOSS)
As a result of the foregoing factors, operating income was Ps. 1.6
million in fiscal year 2001 as compared to a loss of Ps. 5.7 million in fiscal
year 2000. The operating margin was 2.4% in fiscal year 2001 and (8.3)% in
fiscal year 2000.
FINANCIAL RESULTS, NET
Net financial results were Ps. 11.0 million and Ps. 8.9 million in
fiscal year 2001 and 2000, respectively. The increase in the financial income is
attributable to (i) an increase in realized gain on investments from Ps. 0.8
million in fiscal year 2000 to Ps. 2.9 million in fiscal year 2001 and (ii) an
increase in unrealized gain from Ps. 5.5 million in fiscal year 2000 to Ps. 8.2
million in fiscal year 2001. The abovementioned increase was partially offset by
lower interest income and higher interest expense levels.
LOSS FROM AFFILIATED COMPANIES
Loss from affiliated companies increased from a loss of Ps. 0.04
million in fiscal year 2000 to Ps. 0.4 million in fiscal year 2001 mainly due to
operating losses incurred at Cactus Argentina S.A. of Ps. 0.4 million, operating
gain obtained by Agro Uranga S.A. of Ps. 0.6 million and the goodwill
amortization of Ps. 0.6 million.
OTHER (EXPENSE) INCOME, NET
Other (expense) income for fiscal year 2001 was Ps. (0.3) million as
compared to Ps. (0.2) million for fiscal year 2000. Other net expenses in fiscal
year 2001 are primarily comprised of donations and gain from sale of other
property and equipment.
MANAGEMENT FEE
Pursuant to our agreement with Dolphin Fund Management, we pay a fee
equivalent to 10% of our net income for certain agriculture advisory and other
administration services. As a result, management fees totaled Ps. 0.8 million
and Ps. 0.3 million in 2001 and 2000, respectively.
INCOME TAX
Income tax expense increased from Ps. 0.04 million in fiscal year 2000
to Ps. 4.0 million in fiscal year 2001. The income tax provision for fiscal
years 2001 and 2000 includes Argentine income tax calculated on an individual
entity basis at the statutory income tax rate of 35%, based on the current
taxable income of each company for the period, as defined by Argentine income
tax law. For Inversiones Ganaderas S.A. and Futuros y Opciones.Com S.A., we did
not record any income taxes for the fiscal years 2001 and 2000 due to tax net
operating losses. As of June 30, 2001, these subsidiaries had, in the aggregate,
Ps. 2.2 million of tax loss carryforwards, which, on an individual entity basis,
may be offset against future taxable income. These tax loss carryforwards expire
at various dates beginning 2003 and ending 2006.
MINORITY INTEREST
For fiscal year 2001, we recorded a minority interest of Ps. 0.1
million, to reflect our 70% equity interest in FYO.
NET INCOME
As a result of the foregoing factors, net income increased from Ps. 2.7
million in fiscal year 2000 to a net income of Ps. 7.5 million in fiscal year
2001. The net margin of 3.9% for fiscal year 2000 increased to a net margin of
11.0% for fiscal year 2001.
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B. LIQUIDITY AND CAPITAL RESOURCES
The table below shows, for the periods indicated, our cash flows:
AS OF END FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
(Adjusted for price-level changes and expressed in millions
of constant Argentine Pesos of June 30, 2002)
Net cash provided by operating activities........ 22.3 15.4 16.8
Net cash (used in) provided by financing
activities..................................... (19.0) 23.7 (23.2)
Net cash provided by (used in)
investing activities........................... 34.5 (57.2) (7.8)
Effects of inflation accounting.................. (2.0)
Net increase (decrease) in cash and cash
equivalents.................................... 35.7 (18.1) (14.2)
As of June 30, 2002, we had cash and cash equivalents totaling Ps. 39.5
million, an increase from the Ps. 3.8 million balance held as of June 30, 2001.
This increase primarily resulted from the net proceeds from the sale of current
investments for Ps. 42.9 million, net proceeds from the sale of farms for Ps.
46.2 million, cash inflows provided by operating activities for Ps. 20.3 million
and collection of secured receivables from the sale of farms for Ps. 4.1 million
partially offset by the acquisition of investments for Ps. 57.8 million,
dividend payments for Ps. 7.1 million, loan payments for Ps. 44.7 million and
the acquisition of farms and other property and equipment for Ps. 0.8 million,.
As of June 30, 2001, we had cash and cash equivalents totaling Ps. 3.8
million, a decrease from the Ps. 21.9 million balance held as of June 30, 2000.
This decrease primarily resulted from the acquisition of investments of Ps.
137.1 million, the acquisition of farms and other property and equipment of Ps.
2.8 million and dividend payments of Ps. 2.5 million, partially offset by the
net proceeds from sale of current investments of Ps. 68.4 million, a net
increase in short-term debt of Ps. 26.2 million, cash inflows provided by
operating activities of Ps. 15.45 million and net proceeds from sale of farms of
Ps. 13.7 million.
Regardless of whether we receive proceeds from the offering of our
convertible notes and warrants, we currently believe that revenues from our
current agricultural activities are likely to be sufficient to finance next
season's activities and to service our currently outstanding short-term debt.
Additional working capital may arise from sales of non-core assets.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operations increased from Ps. 15.4 million in
fiscal year 2001 to Ps. 20.3 million in fiscal year 2002. The increase in net
cash provided by operations was due primarily to the decrease in other
receivables and a increase in taxes payable and in interest payables which were
partially offset by an increase in inventory and a decrease in trade accounts
payable in fiscal year 2002 as compared to fiscal year 2001. Our operating
activities resulted in net cash inflows for Ps. 20.3 million for fiscal year
2002 essentially due to a decrease in other receivables and in addition to
increases in taxes payable, interest payable and operating gains totaling Ps.
30.7 million, partially offset by an increase in trade accounts receivable and a
decrease in other liabilities for Ps. 7.3 million. The operating cash inflows of
Ps. 15.4 million for fiscal year 2001, essentially due to decreases in other
receivables and inventory accounts, in addition to increases in trade accounts
payable totaling Ps. 24.4 million, partially offset by an increase in trade
accounts receivable and operating losses totaling Ps. 9.0 million.
Net cash provided by operations decreased from Ps. 16.8 million in
fiscal year 2000 to Ps. 15.4 million in fiscal year 2001. The decrease in net
cash provided by operations was due primarily to the increase in trade accounts
receivable which were partially offset by an increase in trade accounts payable
in fiscal year
62
2001 as compared to fiscal year 2000. Our operating activities resulted in net
cash inflows of Ps. 15.4 million for fiscal year 2001, essentially due to
decreases in other receivables and inventory accounts, in addition to increases
in trade accounts payable totaling Ps. 24.4 million, partially offset by an
increase in trade accounts receivable and operating losses totaling Ps. 9.0
million. The operating cash inflows of Ps. 16.8 million for fiscal year 2000
primarily resulted from operating gains, as well as decreases in trade accounts
receivable and inventories totaling Ps. 18.6 million, partially offset by a
decrease in trade accounts payable of Ps. 2.2 million. Our operating activities
resulted in net cash inflows of Ps. 2.4 million for fiscal year 1999, primarily
due to decreases in trade accounts receivable and inventories totaling Ps. 23.7
million, partially offset by operating losses as well as decreased in trade
accounts payable and other liabilities totaling Ps. 22.1 million.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Net cash used in investing activities increased from a net use of Ps.
57.2 million in fiscal year 2001 to a net cash inflow of Ps. 34.5 million in
fiscal year 2002 mainly due by net proceeds from the sale of current investments
and farms partially compensated for the acquisition of investments as well as to
a lower level of acquisition of farms and other property and equipment. Our
investing activities resulted in net cash inflows for Ps. 34.5 million in fiscal
year 2002 mainly due by net proceeds from the sale of current investments for
Ps. 42.9 million, from the sale of farms for Ps. 46.2 million and collection of
secured receivables from the sale of farms for Ps. 4.1 million, partially offset
by the acquisition of investments for Ps. 38.6 million. Our investing activities
resulted in net cash outflows of Ps. 57.2 million for fiscal year 2001,
essentially due to the acquisition of investments by Ps. 137.1 million,
partially offset by the net proceeds from sale of current investments of Ps.
68.4 million and from the sale of farms of Ps. 13.7 million.
Net cash used in investing activities increased from Ps. 7.8 million in
fiscal year 2000 to a net use of Ps. 57.2 million in fiscal year 2001
principally due to the acquisition of current investments, partially compensated
by net proceeds from sale of current investments and farms, as well as to a
lower level of acquisition of farms and other property and equipment during
fiscal year 2001 as compared to fiscal year 2000. Our investing activities
resulted in net cash outflows of Ps. 57.2 million for fiscal year 2001,
essentially due to the acquisition of investments by Ps. 137.1 million,
partially offset by the net proceeds from sale of current investments of Ps.
68.4 million and from the sale of farms of Ps. 13.7 million. Our investing
activities resulted in net cash outflows of Ps. 7.8 million for fiscal year
2000, primarily due to the acquisition of current investments of Ps. 15.8
million, purchases of farms and other property and equipment for Ps. 5.3 million
and the acquisition of a subsidiary company for Ps. 1.6 million, partially
offset by net proceeds from sale of current investments of Ps. 11.3 million and
the collection of receivables from the sale of farms for Ps. 3.1 million. Our
investing activities resulted in net cash inflows of Ps. 18.4 million for fiscal
year 1999, primarily due to the net proceeds from the sale of farms of Ps. 48.8
million, partially offset by the acquisition of current investments for Ps. 21.4
million and purchases of farms and other property and equipment for Ps. 10.3
million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net cash from financing activities decreased from a net cash inflow of
Ps. 23.7 million in fiscal year 2001 to a net use of Ps. 19 million in fiscal
year 2002 primarily due to a decrease in short-term debt and an increase in
dividend payments. Our financing activities resulted in net cash outflows of Ps.
19 million in fiscal year 2002, primarily due to a net increase in dividend
payments for Ps. 7.1 and a decrease in the short-term debt for Ps. 12.6 million.
Our financing activities resulted in net cash inflows of Ps. 23.7 million for
fiscal year 2001, primarily due to a net increase in short-term debt of Ps. 26.2
million, partially offset by dividend payments for Ps. 2.5 million.
Net cash from financing activities increased from a net use of Ps.
23.2 million in fiscal year 2000 to a net cash inflow of Ps. 23.7 million in
fiscal year 2001 primarily due to a net increase in short-term debt and a
decrease in dividend payments. Our financing activities resulted in net cash
inflows of Ps. 23.7 million for fiscal year 2001, primarily due to a net
increase in short-term debt of Ps. 26.2 million, partially offset by dividend
payments for Ps. 2.5 million. Our financing activities resulted in net cash
outflows of Ps. 23.2 million for fiscal year 2000, primarily due to dividend
payments of Ps. 21.5 million. Our financing activities resulted in net cash
outflows of Ps. 52.6 million for fiscal year 1999, primarily due to the
acquisition of
63
treasury stock for Ps. 29.5 million, payments of seller financing for Ps. 16.8
million and dividends payment for Ps. 7.4 million.
OUR INDEBTEDNESS
Our total outstanding debt as of June 30, 2002 was Ps. 6.6 million.
Pursuant to Decree 214, a large portion of our indebtedness was
"pesified", although a portion, governed by foreign laws, continued to be a U.S.
dollar-denominated. "Pesified" indebtedness is adjusted by the CER inflation
index.
Pre-export financing facilities. Between March and April 2001, we
obtained pre-export financing facilities for US$ 10.78 million from our
customers in order to finance the production of soybean and corn that would be
exported to Europe, at the closing of this balance sheet Ps. 4.57 million
remained. These facilities were obtained through two different banks: Sudameris
Bank for Ps. 1.93 million and Bisel Bank for Ps. 2.64 million, all of the
facilities accrue at a fixed interest rate of 8% per annum. These loans,
originally granted in U.S. dollars, were subsequently pesified at a rate of one
U.S. Dollar to one Peso.
On August 1, 2002, we paid a total of Ps. 2.2 million corresponding to
the Sudameris Bank loan.
Loan guaranteed with shares. We have a Ps. 0.7 million loan, under
which we pledged 14,851,299 shares of IRSA as collateral. This loan has accrued
approximately at an average interest rate of 26%.
Notes convertible into common shares of our Company. On October 15, 2002,
we initiated a preemptive rights offering to subscribe for 50,000,000 units
consisting of US$ 50.0 million of 8% convertible notes due 2007 and
non-detachable warrants to purchase additional shares of our common stock. The
convertible notes may be converted into shares of our common stock after
December 13, 2002, and until maturity on November 14, 2007, at the initial
conversion price of US$ 0.5078 per common share. Each warrant will be
exercisable on or after conversion of the convertible note to which it is
attached at the same conversion price plus a 20% premium (US$ 0.6093). The
rights offering to holders of our common shares and ADSs expired on November 13,
2002. Existing shareholders have subscribed through the exercise of their
preemptive rights for US$ 20.5 million and they have exercised their accretion
rights for US$ 1.7 million, adding together US$ 22.2 million. During the
allocation of the remainder new investors have subscribed the remaining US$ 27.8
million units completing the US$ 50 million offering. Proceeds of the offering
were applied to subscribe IRSA's convertible notes.
CAPITAL EXPENDITURES
Capital expenditures totaled Ps. 0.8 million, Ps. 2.8 million, Ps. 5.2
million for fiscal years ended June 2002, 2001 and 2000, respectively, including
property and equipment acquired in business combinations. Our capital
expenditures consisted of the acquisition and improvement of productive
agricultural assets, as well as purchases of farms.
Our future capital expenditures for fiscal year 2002 will depend on the
prevailing prices of land for agriculture and cattle as well as the evolution of
commodity prices. For the fiscal year ended June 30, 2002 our main investments
consisted of Ps. 0.57 million in improvements, Ps. 0.08 million in furniture and
equipment, Ps. 0.05 million in facilities, Ps. 0.05 million in new pastures and
Ps. 0.07 million in others.
For year ended June 30, 2001, capital expenditures were mainly composed
of Ps. 2 million in improvements, Ps. 0.46 million in machinery, Ps. 0.41 in
vehicles, Ps. 0.41 million in silo plants and Ps. 0.37 in furniture and
equipment.
PRINCIPAL DIFFERENCES BETWEEN ARGENTINE GAAP AND U.S. GAAP
The principal differences, other than inflation accounting, between
Argentine GAAP and U.S. GAAP are the following:
64
o the valuation of inventories;
o the accounting for deferred income taxes in accordance with SFAS No.
109;
o the accounting for futures and options contracts in accordance with
SFAS No. 133;
o the accounting for expenses incurred for the development of web
sites under the provisions of EITF 00-02;
o the application of certain U.S. GAAP adjustments to the estimation
of the fair value of net assets acquired;
o the elimination of the gain recognized under Argentine GAAP on the
acquisition of a minority interest;
o the impact of certain U.S. GAAP adjustments on the Company's equity
investees;
o the accounting for the change to the equity method of accounting for
the investments in IRSA;
o the effect of U.S. GAAP adjustments on management fee;
o the effect on minority interest of the foregoing reconciling items
and
o stock options. In addition, certain other disclosures required under
U.S. GAAP have been included in the U.S. GAAP reconciliation. See
Note 12 to our annual financial statements as of June 30, 2002.
Net (loss) income under Argentine GAAP for the years ended June 30,
2002, 2001 and 2000 was approximately Ps. (39.6) million, Ps. 7.5 million and
Ps. 2.6 million, respectively, as compared to approximately Ps. (110.9) million,
Ps. 3.9 million and Ps. (3.3) million, respectively, under U.S. GAAP.
Shareholders' equity under Argentine GAAP as of June 30, 2002 and 2001, was Ps.
304.8 million and Ps. 350.9 million, respectively, as compared to Ps. 192.7
million and Ps. 307.3 million, respectively, under U.S. GAAP.
IRSA'S RESULTS OF OPERATIONS
OVERVIEW
We do not consolidate the consolidated financial statements of our
subsidiary IRSA. However, according to Rule 3-09 of Regulation S-X we are
required to file separate financial statements of significant subsidiaries. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with IRSA's consolidated financial statements
appearing elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. These
forward-looking statements include, among others, those statements including the
words "expects", "anticipates", "intends", "believes" and similar language. The
actual results may differ materially and adversely from those anticipated in
these forward-looking statements as a result of many factors, including those
set forth elsewhere in this prospectus.
IRSA maintains its financial books and records in Pesos and prepares
its financial statements in conformity with Argentine GAAP and the regulations
of the Comision Nacional de Valores. See note 19 to the consolidated financial
statements of IRSA for a description of the principal differences between
Argentine GAAP and U.S. GAAP as they relate to IRSA, and a reconciliation to
U.S. GAAP of net (loss) income and total shareholders' equity. The differences
involve methods of measuring the amounts shown in the financial statements as
well as additional disclosures required by U.S. GAAP and Regulation S-X of the
SEC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In connection with the preparation of the financial statements included
in this prospectus, IRSA has relied on variables and assumptions derived from
historical experience and various other factors that it
65
deemed reasonable and relevant. Although IRSA reviews these estimates and
assumptions in the ordinary course of business, the portrayal of IRSA's
financial condition and results of operation often requires IRSA's management to
make judgments regarding the effects of matters that are inherently uncertain on
the carrying value of its assets and liabilities. Actual results may differ from
those estimated under different variables, assumptions or conditions. In order
to provide an understanding about how management forms its judgments about
future events, including the variables and assumptions underlying the estimates,
and the sensitivity of those judgments to different variables and conditions,
IRSA has included comments related to each critical accounting policy described
as follows:
o proportionate consolidation;
o revenue recognition;
o rental property depreciation;
o provision for allowances and contingencies; and
o impairment of long-lived assets.
IRSA's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles used in Argentina which
differ in certain significant respects from generally accepted accounting
principles in the United States of America. Such differences involve methods of
measuring the amounts shown in the financial statements, as well as additional
disclosures required by U.S. GAAP and Regulation S-X of the SEC.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2002 AND 2001.
SALES
Sales decreased 37.8%, from Ps. 339.8 million in the fiscal year ended
June 30, 2001 to Ps. 211.3 million in the fiscal year ended June 30, 2002, on
account of a decrease in sales in all segments of IRSA's activity. This
decrease was primarily attributable to the severe and ongoing recession that the
Argentine economy is undergoing and that, it is paralyzing IRSA's operations
all of which are conducted in Argentina.
Development and sale of properties. Sales from development and sale of
properties decreased 49.6%, from Ps. 89.8 million for the fiscal year ended June
30, 2001 to Ps. 45.2 million for the fiscal year ended June 30, 2002. The
decrease in sales in the development and sale of properties segment was
attributable to: (i) the Ps. 21.6 million decrease in sales from the residential
communities of Abril and Villa Celina; (ii) the Ps. 12.0 million decrease in
sales of undeveloped parcels of land, on account of the non-recurrence of sales
of Dique IV and Monserrat made in 2001; (iii) the Ps. 4.7 million decrease in
the sales of other real property primarily resulting from the lack of recurrence
of sales in Serrano 250, Sarmiento 580, Av. De Mayo 701, Madero 1020 and
Montevideo 1975, partially offset by new sales during fiscal year 2002 of the
real properties on Santa Fe 1588, Rivadavia 2243 and Libertador 498 and finally
(iv) the Ps. 5.2 million reduction in interest income from financed sales
primarily due to the sale on October 2001 of a significant portion of IRSA's
real estate loans to Banko Sudameris Argentina S.A..
Offices and other. Sales from Offices and other decreased 24.9% from
Ps. 45.6 million during the fiscal year ended June 30, 2001 to Ps. 34.2 million
during the fiscal year ended June 30, 2002. This decrease is primarily due to:
(i) a 22.1% decrease in revenues from office rents from Ps. 39.5 million in the
fiscal year ended June 30, 2001 to Ps. 30.8 million in the fiscal year ended
June 30, 2002 mainly due to decreases in occupancy rates in almost all rental
properties and (ii) a 45.5% decrease in sales from commercial property rents
from Ps. 6.2 million in the fiscal year ended June 30, 2001 to Ps. 3.4 million
in the fiscal year ended June 30, 2002 mainly due to the sales of the
properties: Florida 291, Santa Fe 1588 and Montevideo 1975.
Shopping centers. Sales from Shopping Centers went down by 17.9%, from
Ps. 94.5 million during the fiscal year ended June 30, 2001 to Ps. 77.6 million
for the fiscal year ended June 30, 2002. The decrease
66
in revenues from leases and services is mainly due to the recession that the
Argentine economy has been suffering for over 4 years, which has resulted in a
decrease in sales of tenants giving rise to a fall in both occupancy rates
revenues from minimal rent and goodwill in all IRSA's shopping centers. The
general occupancy rate of IRSA's shopping centers decreased from 94% as of June
30, 2001 to 92% as of June 30, 2002.
Hotels. Sales from hotels went down 27.9%, from Ps. 40.9 million for
the fiscal year ended June 30, 2001 to Ps. 29.5 million for the fiscal year
ended June 30, 2002, due to a decrease in the average occupancy level of hotels
from 58% in 2001 to 44% in 2002, as well as a decrease in rates, giving rise to
a decrease in the sales from Hotel Sheraton Libertador of Ps. 5.2 million, from
Hotel Intercontinental of Ps. 5.9 million and from Hotel Llao Llao of Ps. 0.3
million during this year.
International. Sales from international operations decreased 64.1%,
from Ps. 69.1 million for the fiscal year ended June 30, 2001 to Ps. 24.8
million for the fiscal year ended June 30, 2002, mainly due to a decrease in the
sales of Brazil Realty and the effect of the sale of Fondo de Valores
Inmobiliarios S.A.C.A. ("FVI") on the sales of the international segment during
this fiscal year. Sales from Brazil Realty went down by 61.9%, from Ps. 65.2
million for the fiscal year ended June 30, 2001 to Ps. 24.8 million for the
fiscal year ended June 30, 2002 due to the significant decrease in sales in
Brazilian Reais between both fiscal years and in particular due to the non
recurrence during 2002 of the sales of the JK Financial Center and Brasilinvest
offices and the sale of IRSA's equity interest in such company in February
2002.
COSTS
Costs decreased 29.5%, from Ps. 172.0 million for the fiscal year ended
June 30, 2001 to Ps. 121.4 million for the fiscal year ended June 30, 2002,
mainly due to lesser costs from Development and Sale of properties, Hotels and
International, which decrease was partially offset by an increase in the costs
related to the operation of Offices and other and Shopping Centers. Total costs
as a percentage of sales increased from 50.6% for the fiscal year ended June 30,
2001 to 57.4% for the fiscal year ended June 30, 2002.
Development and Sale of properties. The costs of Development and Sales
of properties decreased 45.1%, from Ps. 68.2 million for the fiscal year ended
June 30, 2001 to Ps. 37.4 million for the fiscal year ended June 30, 2002, due
to fewer sales of real properties. The costs of Development and Sale of
properties as a percentage of sales from Development and Sale of properties
increased from 75.9% for the fiscal year ended June 30, 2001 to 82.7% for the
fiscal year ended June 30, 2002.
Offices and other. Costs of Offices and other rose by 19.9%, from Ps.
8.9 million for the fiscal year ended June 30, 2001 to Ps. 10.7 million for the
fiscal year ended June 30, 2002. The costs of Offices and other as a percentage
of sales resulting from Offices and other increased from 19.6% for the fiscal
year ended June 30, 2001 to 31.2% for the fiscal year ended June 30, 2002. The
increase in the costs of Offices and other in absolute terms and as a percentage
of sales is due to the decrease in the average occupancy rate from 89% during
all fiscal year 2001 to 72% during all fiscal year 2002, which resulted in an
increase in the maintenance costs of the unoccupied units, especially as regards
common expenses. The main component of the cost of offices is represented by the
depreciation of leased properties.
Shopping Centers. The costs of Shopping Centers increased 4.3%, from
Ps. 36.8 million for the fiscal year ended June 30, 2001 to Ps. 38.4 million for
the fiscal year ended June 30, 2002, mainly due to the increase in the cost of
rents derived from the recognition of a one-time loss for charges for expenses
billed to the tenants in the fiscal year which were not recovered, which
increase was partially offset by the reduction in the cost of sale of Torres de
Abasto and the cost of Tarjeta Shopping operations. The costs of Shopping
Centers as a percentage of sales resulting from Shopping Centers increased from
39.0% for the fiscal year ended June 30, 2001 to 49.5% for the fiscal year ended
June 30, 2002. The main component of the cost of shopping centers in this fiscal
year is represented by depreciation and amortization charges of leased
properties, including the goodwill paid upon acquisition thereof.
Hotels. Costs from hotel operations decreased 23.3%, from Ps. 27.1
million for the fiscal year ended June 30, 2001 to Ps. 20.8 million for the
fiscal year ended June 30, 2002, primarily due to: (i) lower levels
67
of activity in this segment; (ii) decrease in the constant value of the cost
components of Hotels such as salaries, fees and services mainly on account of
the effect of this last semester inflation and (iii) the restructuring carried
out to offset the fall in the level of occupancy so as to attain greater
efficiency. Hotel operating costs as a percentage of sales from hotels increased
from 66.2% for the fiscal year ended June 30, 2001 to 70.5% for the fiscal year
ended June 30, 2002 primarily due to the combination of lower sales reflecting
the fall in occupancy rates and to lower rates compared to the previous fiscal
year together with the same incidence in both fiscal years of fixed costs such
as depreciation. Costs of hotels are primarily composed of rooms, depreciation,
food and beverages, salaries and social security contributions.
International. Costs of international operations fell by 54.7% from Ps.
31.0 million for the fiscal year ended June 30, 2001 to Ps. 14.1 million for the
fiscal year ended June 30, 2002, due to (i) lower costs in Brazilian Reais
attributable both to a lower level of sales and to the sale of such company in
the preceding quarter, which resulted in Ps. 17.1 million decrease and (ii) a
decrease in costs attributable to FVI as a consequence of the sale of IRSA's
equity interest during the previous fiscal year. International operating costs
as a percentage of sales from international operations went up from 44.9% for
the fiscal year ended June 30, 2001 to 56.7% for the fiscal year ended June 30,
2002.
GROSS PROFIT
As a result of the foregoing, the gross profit decreased by 46.4% from
Ps. 167.8 million for the fiscal year ended June 30, 2001 to Ps. 90.0 million
for the fiscal year ended June 30, 2002.
SELLING EXPENSES
Selling expenses increased by 1.7% from Ps. 33.7 million for the fiscal
year ended June 30, 2001 to Ps. 34.3 million for the fiscal year ended June 30,
2002, primarily due to the increase in Shopping Centers selling expenses and
partially offset by the reduction in selling expenses of the Hotels,
International and Sales and Development segments. Selling expenses as a
percentage of sales increased from 9.9% for the fiscal year ended June 30, 2001
to 16.2% for the fiscal year ended June 30, 2002.
Development and Sale of properties. Selling expenses for Development
sand Sales decreased by 56.8% from Ps. 8.5 million for the fiscal year ended
June 30, 2001 to Ps. 3.7 million during the fiscal year ended June 30, 2002, as
a consequence of the decrease in sale operations during this fiscal year
generating less direct selling expenses. Selling expenses of Development and
Sale of properties as a percentage of sales from Development and Sale of
properties decreased from 9.5% for the fiscal year ended June 30, 2001 to 8.1%
for the fiscal year ended June 30, 2002. The main components of selling expenses
of Development and Sale of properties are commissions and expenses from sales
and advertising.
Offices and other. Selling expenses of Offices and other increased by
1.9% from Ps. 0.47 million during the fiscal year ended June 30, 2001 to Ps.
0.48 million during the fiscal year ended June 30, 2002. Selling expenses of
Offices and other properties as a percentage of sales from Offices and other
increased from 1.0% for the fiscal year ended June 30, 2001 to 1.4% for the
fiscal year ended June 30, 2002.
Shopping Centers. Selling expenses of Shopping Centers rose by 96.1%
from Ps. 11.4 million for the fiscal year ended June 30, 2001 to Ps. 22.3
million for the fiscal year ended June 30, 2002, resulting mainly from the
increase in bad debts charges, that was partially offset with a decrease in
advertising expenses, salaries and bonuses. Selling expenses of Shopping Centers
as a percentage of sales from Shopping Centers increased from 12.0% for the
fiscal year ended June 30, 2001 to 28.7% for the fiscal year ended June 30,
2002. The main components of selling expenses of Shopping Centers are bad debts
charges and advertising expenses.
Hotels. Selling expenses dropped 30.0% from Ps. 4.7 million during the
fiscal year ended June 30, 2001 to Ps. 3.3 million for the fiscal year ended
June 30, 2002, primarily due to a decrease in advertising expenses and to a
lesser extent a decrease in salaries and social security contributions in all
Hotels. Selling expenses of Hotels as a percentage of sales from Hotels
decreased from 11.6% for the fiscal year ended June
68
30, 2001 to 11.3% for the fiscal year ended June 30, 2002. The main components
of selling expenses are advertising expenses and salaries.
International. Selling expenses of international operations decreased
by 47.3% from Ps. 8.7 million for the fiscal year ended June 30, 2001 to Ps. 4.6
million for the fiscal year ended June 30, 2002, basically due to (i) drop in
selling expenses of FVI of Ps. 0.2 million as a result of the sale of such
company in the previous fiscal year and (ii) a decrease in selling expenses of
Brazil of Ps. 3.9 million as a result of the fall in the sale operations during
this fiscal year, which originated less direct selling expenses, and of the sale
of IRSA's equity interest in Brazil in February 2002. Selling expenses as a
percentage of sales from international operations increased from 12.6% for the
fiscal year ended June 30, 2001 to 18.4% for the fiscal year ended June 30,
2002. The main components of selling expenses are advertising expenses and
commissions.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased by 25.8%, from Ps. 50.7 million for
the fiscal year ended June 30, 2001 to Ps. 37.6 million for the fiscal year
ended June 30, 2002, due to lower expenses in all the segments. As a percentage
of sales, administrative expenses rose from 14.9% for the fiscal year ended June
30, 2001 to 17.8% for the fiscal year ended June 30, 2002. The main components
for the fiscal year are salaries and social security contributions, fees and
compensations for services and depreciation and amortization.
Development and Sale of properties. Administrative expenses of
Development and Sale of properties decreased by 33.2% from Ps. 13.4 million for
the fiscal year ended June 30, 2001 to Ps. 9.0 million for the fiscal year ended
June 30, 2002, primarily due to (i) the restructuring carried out with the
purpose of achieving a structure sustainable in the medium term and (ii) the
decreases as measured in constant values of expenses such as salaries, fees and
services, principally due to the effect of inflation during the last semester.
Administrative expenses of Development and Sale of properties as a percentage of
sales from Development and Sales increased from 15.0% for the fiscal year ended
June 30, 2001 to 19.8% for the fiscal year ended June 30, 2002.
Offices and other. The administrative expenses of Offices and other
fell by 21.0% from Ps. 6.3 million for the fiscal year ended June 30, 2001 to
Ps. 5.0 million for the fiscal year ended June 30, 2002, primarily due to (i)
the restructuring carried out with the purpose of achieving a structure
sustainable in the medium term and (ii) the decreases as measured in constant
values of expenses such as salaries, fees and services, mainly due to the effect
of inflation during the last semester. Administrative expenses of Offices and
other as a percentage of the sales from this segment increased from 13.8% for
the fiscal year ended June 30, 2001 to 14.5% for the fiscal year ended June 30,
2002.
Shopping Centers. Administrative expenses of Shopping Centers decreased
by 20.1%, from Ps. 14.0 million for the fiscal year ended June 30, 2001 to Ps.
11.2 million for the fiscal year ended June 30, 2002 due to a general fall in
administrative expenses, especially salaries and social security contributions,
fees and compensations for services. Administrative expenses of Shopping Centers
as a percentage of sales from Shopping Centers decreased from 14.9% for the
fiscal year ended June 30, 2001 to 14.5% for the fiscal year ended June 30,
2002. The main components of administrative expenses of Shopping Centers are
salaries, fees for services and fees paid to Directors.
Hotels. Administrative expenses of Hotels dropped by 11.1% from Ps. 9.8
million for the fiscal year ended June 30, 2001 to Ps. 8.7 million during the
fiscal year ended June 30, 2002, basically due to the decrease during this
fiscal year of all the administrative expenses of Llao Llao, Intercontinental
and Sheraton Libertador Hotels, and especially due to reductions in fees for
services, salaries and social security contributions. Administrative expenses of
hotels as a percentage of sales from the hotel operation rose from 24% during
the fiscal year ended June 30, 2001 to 29.6% during the fiscal year ended June
30, 2002. The main components of administrative expenses of hotel operation are
salaries, fees for services depreciation and amortization.
International. Administrative expenses of international operations
decreased by 47.4%, from Ps. 7.2 million during the fiscal year ended June 30,
2001 to Ps. 3.8 million during the fiscal year ended June 30,
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2002, mainly due to (i) a decrease in administrative expenses of FVI of Ps. 0.9
million as a result of the sale of such company in 2001 and (ii) a decrease in
the administrative expenses of Brazil of Ps. 2.4 million. Administrative
expenses as a percentage of sales from international operations increased from
10.4% during the fiscal year ended June 30, 2001 to 15.2% during the fiscal year
ended June 30, 2002.
(LOSS) GAIN ON PURCHASERS RESCISSIONS OF SALES CONTRACTS
The losses resulting from the rescission of Torres de Abasto sales
contracts varied from a loss of Ps. 0.01 million in the fiscal year ended June
30, 2001 to a profit of Ps. 0.03 in the fiscal year ended June 30, 2002.
(LOSS) FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET
Loss from operations and holdings of real estate assets, net, showed a
Ps. 58.7 million loss change between both fiscal years, from a Ps. 6.3 million
loss for the fiscal year ended June 30, 2001 to a Ps. 65.0 million loss for the
fiscal year ended June 30, 2002. This decrease results mainly from the net
result between (i) the gain obtained from the sale of IRSA's equity interest
in Brazil Realty which amounted to Ps. 31.5 million in this fiscal year; (ii)
the non-recurrence in 2002 of the Ps. 1.0 million loss attributable to the sale
of IRSA's equity interest in FVI recognized in 2001 and (iii) the Ps. 91.2
million loss from the impairment of long-lived assets, which rose from Ps. 5.7
million during 2001 to Ps. 96.9 million during 2002. This Ps. 91.2 million loss
from the impairment of long-lived assets between both fiscal years, was
distributed among IRSA's segments as follows: (a) Development and Sales: Ps.
27.0 million, (b) Offices and Others: Ps. 39.8 million and (c) Shopping Centers:
Ps. 24.4 million.
OPERATING INCOME
As a result of the foregoing, the total operating income decreased from
a Ps. 77.0 million gain during the fiscal year ended June 30, 2001 to a Ps. 46.9
million loss during the fiscal year ended June 30, 2002.
Development and Sale of properties. Operating results from Development
and Sales of properties showed an improvement, from a Ps. 4.1 million loss for
the fiscal year ended June 30, 2001 to a Ps. 35.6 million loss for the fiscal
year ended June 30, 2002.
Offices and other. The operating results from Offices and other
decreased from a Ps. 28.1 million profit for the fiscal year ended June 30, 2001
to a Ps. 23.6 million loss for the fiscal year ended June 30, 2002.
Shopping Centers. The operating results from Shopping Centers decreased
from a Ps. 28.1 million profit for the fiscal year ended June 30, 2001 to a Ps.
18.3 million loss for the fiscal year ended June 30, 2002.
Hotels. The operating results from hotels increased from a Ps. 0.8
million loss for the fiscal year ended June 30, 2001 to a Ps. 3.4 million loss
for the fiscal year ended June 30, 2002.
International. The operating results from international operations
increased 57.0% from Ps. 21.6 million for the fiscal year ended June 30, 2001 to
Ps. 33.9 million for the fiscal year ended June 30, 2001 to 136.7% for the
fiscal year ended June 30, 2002.
FINANCIAL RESULTS, NET
The financial, net results reflected an increase from a loss of Ps.
110.3 million during the fiscal year ended June 30, 2001 to a loss of Ps. 432.2
million during the fiscal year ended June 30, 2002. The total increase in
financial results was primarily due to: (i) the increase in the net loss of Ps.
294.9 million as compared to the previous fiscal year due to the joint effect of
the peso devaluation and inflation, the impact of foreign currency denominated
net debts, partially offset by a Ps. 84.6 million reduction in financing
expenses, which dropped from Ps. 100.7 million during 2001 to Ps. 16.1 million
during 2002 as a result of the impact of the negative actual financing interest
rate on IRSA's loans and (ii) an increase in the loss for financial
70
transactions for Ps. 113.4 million as compared to 2001, mainly due to the fall
in the value of the stock of Banco Hipotecario, to losses connected with
investments such as Telecom stock, Pro1 bonds and FRB and the drop in the
quotation of Quantum Fund during this fiscal year.
NET (LOSS) IN EQUITY INVESTMENTS
The net loss derived from affiliated companies showed an 80.9%
reduction from a loss of Ps. 10.3 million during the fiscal year ended June 30,
2001 to a loss of Ps. 2.0 million during the fiscal year ended June 30, 2002,
mainly due to a reduction in the loss derived from IRSA Telecommunicaciones
investment for an aggregate amount of Ps. 8.0 million.
OTHER (EXPENSES) INCOME, NET
The other expenses, net line increased 51.3% from a loss of Ps. 5.6
million during the fiscal year ended June 30, 2001 to a loss of Ps. 8.5 million
during the fiscal year ended June 30, 2002, basically due to: (i) the loss
originated during the current fiscal year by the new tax on bank credits and
debits for Ps. 1.8 million; (ii) the Ps. 1.3 million decrease in the results
from the repurchase of Negotiable Obligations of Alto Palermo in the open
market, from an income of Ps. 1.2 million during 2001 to a loss of Ps. 0.2
million during 2002; (iii) the loss resulting from a contingency due to lawsuits
of Alto Palermo for Ps. 3.5 million, mainly resulting from a provision for a
lawsuit brought by Carrefour supermarket in connection with the construction of
Paseo Alcorta shopping center, which decreases were partially offset by (iv)
lower charges from gifts and non-computable VAT as compared to the previous
fiscal year for Ps. 3.7 million.
LOSS BEFORE TAXES
As a consequence of the factors described above, the loss before taxes
and extraordinary results showed an increase from a Ps. 49.2 million loss during
the fiscal year ended June 30, 2001 to a loss of Ps. 489.6 million during the
fiscal year ended June 30, 2002.
INCOME TAX
Income tax increased 97.1% from Ps. 5.1 million during the fiscal year
ended June 30, 2001 to Ps. 10.0 million during the fiscal year ended June 30,
2002 mainly due to the net variation between (i) the increase during the current
fiscal year of IRSA's minimum presumed income tax charges by Ps. 3.6 million, as
an income tax recovery for such amount was computed during 2001 as a result of
the amendments of Law 25,360, and of Brazil's income tax by Ps. 1.6 million; and
(ii) the reduction during this fiscal year of the income tax charges of APSA
group by Ps. 0.2 million and FVI by Ps. 0.2 million, due to the sale of this
company during the previous fiscal year.
ORDINARY (LOSS) INCOME FOR THE PERIOD
As a consequence of the factors described above, the ordinary loss
before extraordinary results showed an increase from a Ps. 54.3 million loss
during the fiscal year ended June 30, 2001 to a loss of Ps. 499.6 million during
the fiscal year ended June 30, 2002.
EXTRAORDINARY LOSS
During the fiscal year ended June 30, 2002 no extraordinary results
were registered as compared to the fiscal year ended June 30, 2001, when they
amounted to a loss of Ps. 5.7 million due to IRSA's share in the results
recognized by Llao Llao Resorts S.A. as a consequence of adjustments in the
provisions recorded in connection with a lawsuit brought by the National Parks
Administration (Administracion de Parques Nacionales).
71
NET (LOSS) INCOME FOR THE PERIOD
As a consequence of the factors mentioned above, the net loss for the
fiscal year changed from a loss of Ps. 60.0 million during the fiscal year ended
June 30, 2001 to a loss of Ps. 499.6 million during the fiscal year ended June
30, 2002.
RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
SALES
Sales decreased by 6.1% from Ps. 361.9 million in fiscal year 2000 to
Ps. 339.8 million in fiscal year 2001, mainly due to a decrease in sales from
hotels, international and offices and other non-shopping center rental
properties segments, partially offset by increases in sales from shopping
centers and development and sale of properties.
Development and sale of properties. Sale from development and sale of
properties increased by 11.5% from Ps. 80.6 million in fiscal year 2000 to Ps.
89.8 million for fiscal year 2001, primarily attributable to
o an increase of Ps. 7.3 million relating to the sale of development
properties, mainly April and
o an increase of Ps. 9.8 million relating to the sale of undeveloped
parcels of land, mainly Dique 4. These increases were partially
offset by a decrease of Ps. 4.4 million relating to lower sales from
Torres Jardin and Alto Palermo Park properties and a decrease of Ps.
3.0 million relating to lower sales from other properties.
Offices and other non-shopping center rental properties. Sales from
offices and other non-shopping center rental properties decreased by 2.4% from
Ps. 46.8 million in fiscal year 2000 to Ps. 45.6 million during fiscal year
2001. This decrease is primarily attributable to (i) a decrease in sales of Ps.
2.4 million from the properties Libertador 498 and Suipacha 652, respectively,
and (ii) lower sales from Galerias Pacifico, which was sold during this year, as
compared to Ps. 2.4 million for fiscal year 2000. These decreases were partially
offset by higher sales stemming from Laminar Plaza of Ps. 5.0 million as
compared to Ps. 3.1 million for fiscal year 2000, and from Edificios Costeros of
Ps. 1.9 million as compared to Ps. 0.1 million for fiscal year 2000.
Shopping centers. Sales from shopping centers rose by 5.8% from Ps.
89.2 million in fiscal year 2000 to Ps. 94.5 million in fiscal year 2001,
primarily due to higher sales from credit card operations attributable to the
opening of new points of sale for the marketing and selling of IRSA's
branded credit card Tarjeta Shopping outside its shopping centers, and to the
brand's positioning derived from an active commercial approach in shopping
centers such as Abasto Shopping, Alto Avellaneda, Alto Palermo Shopping and
Paseo Alcorta. The increase was partially offset by lower sales from leases and
services due to a drop in the shopping centers' occupancy rate by 2.4%, thus
decreasing from 96.76% as of June 30, 2000 to 94.36% as of June 30, 2001.
Hotels. Sales from hotels decreased by 30.8% from Ps. 59.1 million in
fiscal year 2000 to Ps. 40.9 million in fiscal year 2001, attributable to
o a decrease in sales from Hotel Sheraton Libertador from Ps. 19.7
million in fiscal year 2000 to Ps. 16.0 million in fiscal year 2001
and from Hotel Intercontinental from Ps. 22.4 million in fiscal year
2000 to Ps. 16.4 million in fiscal year 2001 as a result of lower
occupancy levels and average rates per room for fiscal year 2001;
and
o a decrease in sales from Hotel Llao Llao from Ps. 17.2 million in
fiscal year 2000 to Ps. 8.4 million in fiscal year 2001 due to the
sale of a 50% equity stake in Llao Llao Resorts in June 2000.
72
International. Sales from international operations decreased 20.0%,
from Ps. 86.2 million in fiscal year 2000 to Ps. 69.0 million in fiscal year
2001. IRSA's sales from Brazil Realty decreased by 9.0% from Ps. 71.6
million in fiscal year 2000 to Ps. 65.2 million in fiscal year 2001 due
primarily to the effect of the Brazilian Reais devaluation in the third and
fourth quarters of fiscal year 2001, which was not offset by the fact of higher
sales or equity increases in this company. Since IRSA sold its equity interest
in Fondo de Valores Inmobiliarios in December 2000, IRSA recognized lower sales
from this investment in fiscal year 2001, from Ps. 14.8 million in fiscal year
2000 to Ps. 3.9 million in fiscal year 2001.
COSTS
Costs increased 2.6% from Ps. 167.7 million in fiscal year 2000 to Ps.
172.0 million in fiscal year 2001, mainly due to higher costs of development and
sale of properties, offices and other non-shopping center rental properties and
shopping centers, partially offset by a decrease in costs associated with hotels
and international operations. Costs as a percentage of sales increased from
46.3% for fiscal year 2000 to 50.6% for fiscal year 2001.
Development and sale of properties. Costs of development and sale of
properties increased by 29.9% from Ps. 52.4 million in fiscal year 2000 to Ps.
68.1 million in fiscal year 2001, due to lower gross margin levels for fiscal
year 2001 as compared to fiscal year 2000 despite the fact of higher property
sales volume.
Offices and other non-shopping center rental properties. Costs of
offices and other non-shopping center rental properties increased 10.0% from Ps.
8.0 million in fiscal year 2000 to Ps. 9.0 million in fiscal year 2001. Costs of
offices and other non-shopping center rental properties as a percentage of sales
rose from 17.4% in fiscal year 2000 to 19.6% in fiscal year 2001. Although the
most significant component of costs from office and other non-shopping center
rental properties is depreciation (Ps. 7.4 million and Ps. 6.7 million in fiscal
years 2001 and 2000, respectively), slightly lower occupancy rates for fiscal
year 2001 as compared to fiscal year 2000 (from 93.1% to 92.0%) resulted in
higher maintenance and other common expenses paid by IRSA for unoccupied units.
Shopping Centers. Costs of shopping centers increased 8.3%, from Ps.
34.1 million in fiscal year 2000 to Ps. 36.7 million in fiscal year 2001,
primarily due to (i) higher costs of credit card operations attributable to
higher activity levels and (ii) higher costs from leases and services primarily
due to increased depreciation and amortization and parking lots expenses. Costs
of shopping centers as a percentage of sales increased from 38.1% in fiscal year
2000 to 39.0% in fiscal year 2001.
Hotels. Costs of hotel operations dropped 29.6%, from Ps. 38.5 million
in fiscal year 2000 to Ps. 27.0 million in fiscal year 2001, primarily due to
lower salaries, bonuses and other fees as a result of the effect of cost
reduction programs and improved efficiency levels and lower costs from Hotel
Intercontinental and Hotel Llao Llao due to the sale of a 50% equity stake
interest in Llao Llao Resorts. Costs of hotel operations as a percentage of
sales increased from 65.1% in fiscal year 2000 to 66.2% in fiscal year 2001.
International. Costs of international operations decreased 10.4% from
Ps. 34.7 million in fiscal year 2000 to Ps. 31.1 million in fiscal year 2001,
primarily due to the net effect of (i) lower costs from Brazil Realty operations
due to the effect of the Brazilian Reais devaluation and improved efficiency,
and (ii) the sale of IRSA's equity interest in Fondo de Valores
Inmobiliarios in December 2000, thus resulting in the recognition of only six
months of costs in fiscal year 2001 as compared to a full year of operations for
fiscal year 2000. Costs of international operations as a percentage of sales
increased from 40.1% in fiscal year 2000, to 44.9% in fiscal year 2001.
TOTAL GROSS PROFIT
As a result of the foregoing, total gross profit decreased 13.6% from
Ps. 194.2 million in fiscal year 2000 to Ps. 167.8 million in fiscal year 2001.
73
SELLING EXPENSES
Selling expenses decreased 8.5%, from Ps. 37.0 million in fiscal year
2000 to Ps. 33.8 million in fiscal year 2001, primarily due to lower selling
expenses related to the offices and other non-shopping center rental properties,
shopping centers and hotels business segments partially offset by higher selling
expenses associated with the development and sale of properties and
international business segments. Selling expenses as a percentage of total sales
decreased from 10.2% in fiscal year 2000 to 9.9% in fiscal year 2001.
Development and sale of properties. Selling expenses of development and
sale of properties increased 80.4%, from Ps. 4.7 million in fiscal year 2000 to
Ps. 8.4 million for fiscal year 2001, primarily attributable to higher sale
levels for fiscal year 2001, which resulted in higher direct selling expenses
and other expenses related mainly to the Alto Palermo Park project, derived from
an agreement signed with Perez Companc. Selling expenses of development and sale
of properties as a percentage of sales increased from 5.9% in fiscal year 2000
to 9.5% in fiscal year 2001.
Offices and other non-shopping center rental properties. Selling
expenses of offices and other non-shopping center rental properties decreased
19.3%, from Ps. 0.6 million in fiscal year 2000 to Ps. 0.4 million in fiscal
year 2001 due to lower doubtful accounts recorded during fiscal year 2001 as
compared to the previous year. Selling expenses of offices and other
non-shopping center rental properties as a percentage of sales decreased from
1.2% in fiscal year 2000 to 1.0% in fiscal year 2001.
Shopping centers. Selling expenses of shopping centers decreased 40.5%
from Ps. 19.1 million in fiscal year 2000 to Ps. 11.4 million in fiscal year
2001, basically due to: (i) a decrease of 8.5% in bad debts charged; (ii) a
decrease in advertising expenses of 71.8%, basically due to the discontinuation
of the Altochecks promotional campaign during fiscal year 2001; and (iii) lower
fees for services. Selling expenses of shopping centers as a percentage of sales
decreased from 21.4% in fiscal year 2000 to 12.0% in fiscal year 2001.
Hotels. Selling expenses dropped 26.7%, from Ps. 6.5 million in fiscal
year 2000 to Ps. 4.7 million in fiscal year 2001, mainly attributable to: (i) a
decrease of Ps. 0.4 million in advertising expenses associated with IRSA's
Hotel Sheraton Libertador operations; and (ii) the sale of a 50% equity stake in
Llao Llao Resorts in June 2000, thus resulting in the recognition of 50 % equity
interest of related selling expenses in fiscal year 2001 as compared to a 100%
equity interest for fiscal year 2000. Selling expenses of hotel operations as a
percentage of sales increased from 10.9% in fiscal year 2000 to 11.6% in fiscal
year 2001.
International. Selling expenses of international operations increased
43.7%, from Ps. 6.1 million in fiscal year 2000 to Ps. 8.6 million in fiscal
year 2001, primarily due to: (i) the recognition of expenses related to
construction projects and the increase in selling and advertising expenses; and
(ii) the increase in the average equity interest in Brazil Realty. Selling
expenses of international operations as a percentage of sales increased from
7.0% in fiscal year 2000 to 12.6% in fiscal year 2001.
ADMINISTRATIVE EXPENSES
Administrative expenses decreased 8.8%, from Ps. 55.6 million in fiscal
year 2000 to Ps. 50.7 million fiscal year 2001, primarily attributable to lower
administrative expenses related to IRSA's development and sale of
properties, offices and other non-shopping center rental properties, hotels and
International business segments, partially offset by higher administrative
expenses stemming from IRSA's shopping centers segment. As a percentage of
total sales, administrative expenses decreased from 15.4% in the fiscal year
2000 to 14.9% in the fiscal year 2001.
Development and sale of properties. Administrative expenses of
development and sale of properties decreased 11.6% from Ps. 15.3 million in
fiscal year 2000 to Ps. 13.5 million in fiscal year 2001, primarily due to lower
salaries, fees and other compensation for services. Administrative expenses of
development and sale of properties as a percentage of respective sales decreased
from 18.9% in fiscal year 2000 to 15.0% in fiscal year 2001.
Offices and other non-shopping center rental properties. Administrative
expenses of offices and other non-shopping center rental properties decreased
5.5%, from Ps. 6.7 million in fiscal year 2000 to Ps. 6.2
74
million in fiscal year 2001, primarily due to lower salaries, fees and other
compensation for services. Administrative expenses of offices and other
non-shopping center rental properties as a percentage of respective sales
decreased from 14.2% in fiscal year 2000 to 13.8% in fiscal year 2001.
Shopping centers. Administrative expenses of shopping centers increased
13.4%, from Ps. 12.3 million in fiscal year 2000 to Ps. 14.1 million in fiscal
year 2001, primarily attributable to an increase in salaries, bonuses and fees
for services associated with IRSA's credit card operations, partially offset
by lower salaries and bonuses related to IRSA's shopping center operations.
Administrative expenses of shopping centers as a percentage of respective sales
increased from 13.9% in fiscal year 2000 to 14.9% in fiscal year 2001.
Hotels. Administrative expenses of hotel operations decreased 12.9%,
from Ps. 11.4 million in fiscal year 2000 to Ps. 9.8 million in fiscal year
2001, primarily due to (i) a decrease in salaries and other compensation
expenses associated with Hotel Sheraton Libertador and Hotel Intercontinental
operations and (ii) the sale of a 50% equity stake in Llao Llao Resorts in June
2000, thus resulting in the recognition of 50% equity interest of related
administrative expenses in fiscal year 2001 as compared to a 100% equity
interest for fiscal year 2000. Administrative expenses of hotel operations as a
percentage of respective sales increased from 19.1% in fiscal year 2000 to 24.0%
in fiscal year 2001.
International. Administrative expenses of international operations
decreased 29.2%, from Ps. 10.2 million in fiscal year 2000 to Ps. 7.3 million in
fiscal year 2001, primarily due to the sale of IRSA's equity interest in
Fondo de Valores Inmobiliarios in December 2000, thus resulting in the
recognition of only six months of related administrative expenses in fiscal year
2001 as compared to a full year of operations for fiscal year 2000.
Administrative expenses of international operations as a percentage of
respective sales decreased from 11.7% in fiscal year 2000 to 10.4% in fiscal
year 2001.
LOSS ON PURCHASERS RESCISSIONS OF SALES CONTRACTS
During the fiscal year 2000, IRSA suffered a loss of Ps. 1.6 million as
a consequence of the rescission of certain Torres de Abasto sales contracts due
to the failure of purchasers to fulfill their obligations. IRSA experienced
minor rescissions during the fiscal year 2001, amounting to Ps. 0.01 million.
LOSS FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET
Losses from operations and holdings of real estate assets increased
from Ps. 2.7 million in fiscal year 2000 to Ps. 6.2 million in fiscal year 2001,
primarily due to: (i) the write-down of certain property (mainly related to
Torres Jardin and Constitucion 1111) totaling Ps. 5.6 million for fiscal year
2001 as compared to Ps. 0.7 million for fiscal year 2000; (ii) a loss of Ps. 1.0
million related to the sale of IRSA's equity interest in Fondo de Valores
Inmobiliarios in December 2000; and (iii) a non-recurrent loss of Ps. 2.7
million related to the sale of the shares of Parque Arauco S.A. during last
fiscal year.
OPERATING INCOME
As a result of the foregoing, total operating income decreased 21.0%,
from Ps. 97.5 million in fiscal year 2000 to Ps. 77.0 million in fiscal year
2001. Operating margin dropped 15.9%, from 26.9% in fiscal year 2000 to 22.7% in
fiscal year 2001.
Development and sale of properties. Operating income from development
and sale of properties decreased from a gain of Ps. 5.9 million in fiscal year
2000 to a loss of Ps. 4.1 million in fiscal year 2001.
Offices and other non-shopping center rental properties. Operating
income from offices and other non-shopping center rental properties decreased
10.5%, from Ps. 31.3 million in fiscal year 2000 to Ps. 28.0 million in fiscal
year 2001. Operating margin for offices and other non-shopping center rental
properties decreased from 67.2% in fiscal year 2000 to 61.5% in fiscal year
2001.
75
Shopping centers. Operating income from shopping centers increased
35.4%, from Ps. 23.9 million in fiscal year 2000 to Ps. 32.3 million in fiscal
year 2001. Operating margin for shopping centers increased from 26.7% in fiscal
year 2000 to 34.1% in fiscal year 2001.
Hotels. Operating income from hotel operations decreased from Ps. 3.0
million in fiscal year 2000 to a loss of Ps. 0.7 million in fiscal year 2001.
International. Operating income from international operations fell
35.7%, from Ps. 33.6 million in fiscal year 2000 to Ps. 21.5 million in fiscal
year 2001. Operating margin for international operations decreased from 38.9% in
fiscal year 2000 to 31.3% in fiscal year 2001.
FINANCIAL RESULTS, NET
Total financial results, net, decreased 87.4% from a loss of Ps. 58.8
million in fiscal year 2000 to a loss of Ps. 110.4 million in fiscal year 2001.
The decrease in total financial results is mainly attributable to
o a loss of Ps. 13.3 million in fiscal year 2001 arising from the
devaluation of the Brazilian currency net of the effects of the
inflation over the book value of Brazil Realty compared to a gain of
Ps. 7.4 million in fiscal year 2000;
o higher interest expenses of Ps. 21.3 million in fiscal year 2001,
attributable to the higher average indebtedness at higher rates in
fiscal year 2001;
o the write-off of certain deferred expenses related to aborted
capital market transactions, and
o the decline of the fair market value of the shares of Banco
Hipotecario S.A., resulting in a loss of Ps. 15.3 million in fiscal
year 2001 as compared to a loss of Ps. 7.6 million in fiscal year
2000.
NET (LOSS) INCOME IN EQUITY INVESTMENTS
Net loss in affiliated companies represents the share of the earnings
or losses of related companies of IRSA. Net loss in affiliated companies
increased Ps. 9.0 million, from a Ps. 1.3 million loss in fiscal year 2000 to a
Ps. 10.4 million loss in fiscal year 2001, primarily attributable to losses
generated by IRSA's new investments in Latin American Econetworks and IRSA
Telecomunicaciones N.V. totaling Ps. 7.4 million in fiscal year 2001, and to a
lesser extent to losses generated by APSA's investments in Perez Cuesta and
E-Commerce Latina, totaling Ps. 1.3 million in fiscal year 2001 as compared to
Ps. 0.01 for the previous fiscal year.
OTHER EXPENSES, NET
Other expenses, net decreased 52.8%, from Ps. 12.0 million in fiscal
year 2000 to Ps. 5.6 million in fiscal year 2001, basically attributable to an
increase in gains from the repurchase of PARCKS in the open market, from a loss
of Ps. 3.6 million during fiscal year ended June 30, 2000 to a gain of Ps. 1.2
during fiscal year ended June 30, 2001; a decrease in other expenses of Fondo de
Valores Inmobiliarios due to the recognition of the indemnity for the rescission
of the management contract with Asesoria Financiera Velutini y Asociados C.A.
recorded during fiscal year ended June 30, 2000, and a decrease in other income
from hotel activity as compared with that at June 30, 2000.
(LOSS) GAIN BEFORE TAXES
As a result of the foregoing, (loss) income before taxes and
extraordinary loss decreased from a gain of Ps. 25.2 million in fiscal year 2000
to a loss of Ps. 49.3 million in fiscal year 2001.
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EXTRAORDINARY LOSS
In fiscal year 2001, IRSA recognized a Ps. 5.6 million extraordinary
loss representing its proportionate share of the extraordinary loss recorded by
one of its subsidiaries, Llao Llao Resorts. This loss relates to the judgment
against this company entered by Parques Nacionales, a governmental agency,
following a dispute on the amount of the selling price of the Hotel Llao Llao,
sole asset of the subsidiary; Llao Llao Resorts had filed an appeal contending
the verdict was erroneous as a matter of law, both as to liability and damages,
and the plaintiff filed a cross appeal, which outcome resulted adverse to
IRSA's subsidiary. IRSA recorded no extraordinary items in fiscal year 2000.
INCOME TAX
This line item includes the income tax and asset tax charges. Income
tax decreased 63.1%, from Ps. 13.6 million in fiscal year 2000 to Ps. 5.0
million in fiscal year 2001, primarily due to (i) the net charge to income
currently of Ps. 9.0 million in respect of the asset tax, and Ps. 2.5 million in
respect of income tax of APSA, and (ii) the increase in the income tax of Ps.
1.3 million reported by Brazil Realty and Ps. 1.0 million reported by Inversora
Bolivar.
The statutory rate for those periods was 35.0%. IRSA does recognize
deferred taxes. The difference between the statutory rate and the effective rate
is due to the allocation of temporary differences.
NET (LOSS) GAIN INCOME FOR THE PERIOD
As a result of the foregoing, net (loss) income decreased from a gain of
Ps. 11.6 million in fiscal year 2000 to a loss of Ps. 59.8 million in fiscal
year 2001.
IRSA'S LIQUIDITY AND CAPITAL RESOURCES
IRSA's liquidity and capital resources include cash and cash
equivalents, proceeds from bank borrowings and long-term debt, capital
financings and sales of real estate investments.
As of June 30, 2002, IRSA had a working capital deficiency of Ps. 469.8
million. At the same date, it had cash and cash equivalents totaling Ps. 25.3
million a decrease of 13.7% from Ps. 33.3 of cash and cash equivalents held as
of June 30, 2001.
IRSA's operating activities resulted in net cash inflows of Ps. 47.3
million, Ps. 95.9 million and Ps. 123.8 million for fiscal years 2002, 2001 and
2000, respectively. Net cash inflows for fiscal year 2002 significantly
decreased from net cash inflows for fiscal year 2001, primarily due to low in
IRSA's operating results caused by the economic recession. The operating cash
inflows for fiscal year 2002, primarily resulted from the increase financial
results of Ps. 301.1 million, the decrease in investments for Ps. 16.1 million
and in a decrease of receivables for Ps. 38.0 million. The operating cash
inflows for fiscal year 2001 primarily resulted from operating gains of Ps. 7.9
million, a decrease in inventories of Ps. 52.2 million and an increase in
accrued interest of Ps. 55.0 million, partially offset by an increase in
investment of Ps. 34.8 million. The operating cash inflows for fiscal year 2000
primarily resulted from operating gains of Ps. 23.3 million, decreases in
investments and inventories totaling Ps. 51.1 million and an increase in accrued
interest of Ps. 44.6 million.
IRSA's investing activities resulted in net cash outflows of Ps. 17.5
million for fiscal year 2002, net cash inflows of Ps. 72.8 million for fiscal
year 2001 and net cash outflows of Ps. 33.5 million for fiscal year 2000. In
December 2000, IRSA sold its equity interest in Fondo de Valores Inmobiliarios
for US$ 67.0 million and in February 2002 its investment in Brazil Realty for
US$ 44.2 million. In fiscal years 2002, 2001 and 2000, IRSA purchased and/or
invested in existing properties for Ps. 24.0 million, Ps. 9.0 million, Ps. 20.9,
respectively. In fiscal year 2002, IRSA also granted loans to related parties
for Ps. 94.4 million.
IRSA's net cash used in financing activities of Ps. 37.9 million for
fiscal year 2002 was primarily due to the payment of short term debt partially
offset by the income for new loans for Ps. 151.3 million. Net cash used in
financing activities of Ps. 164.6 million for fiscal year 2001 was primarily due
to the repayment
77
of short-term and long-term indebtedness and seller financing for Ps. 403.9
million and Ps. 80.4 million of cash paid to repurchase shares of IRSA's common
stock outstanding, partially offset by Ps. 129.2 million proceeds from the sale
of IRSA's convertible notes in December 2000 and Ps. 195.4 million proceeds from
other short-term and long-term indebtedness. Net cash used in financing
activities of Ps. 104.4 million for fiscal year 2000 was primarily due to the
repayment of IRSA's convertible notes and other short-term and long-term
indebtedness and cash dividends paid of Ps. 373.8 million and Ps. 29.9 million
of cash paid to repurchase shares of IRSA's common stock outstanding, partially
offset by Ps. 287.4 million proceeds from other short-term and long-term
indebtedness.
IRSA believes that the restructuring of its existing debt, the issuance
of the convertible notes and the sale of non-core assets, together with its cash
generating activities, will provide IRSA with the working capital necessary to
cover its needs and invest as opportunities may rise.
IRSA'S INDEBTEDNESS
IRSA's total outstanding debt as of June 30, 2002 was Ps. 566.4 million
of which 93.11% is dollar-denominated. Of their total debt, at such date, 100%
was short-term debt.
Pursuant to Decree No. 214, part of IRSA's indebtedness was "pesified,"
although a large portion, governed by foreign laws continued to be
dollar-denominated. "Pesified" indebtedness is to be adjusted by the CER index.
Between January and June of 2002, IRSA repaid "pesified" short-term
debt in an aggregate amount of Ps. 46.7 million with the proceeds of the sale of
Brazil Realty and cash from operations, using rescheduled time deposits as
payment. Repayment was made at discounts on the original U.S. dollar value of
the debt and on the converted Peso value of the debt. Nevertheless, IRSA
currently intends to continue selling assets in order to raise funds to repay
their debt.
Syndicated Credit Facility and Floating. On May 24, 2000, IRSA entered
into a US$ 80 million syndicated loan arranged by BankBoston N.A. Loans under
this syndicated credit facility bear interest at three-month LIBOR plus a margin
of 500 basis points.
Amounts owing under the syndicated credit facility were payable in U.S.
dollars. Although final maturity on the loan agreement was on August 30, 2002,
due to the continuing effects of economic recession, the unavailability of
financing sources and the succession of recent governmental measures adversely
affecting the normal operations of the banking and payments system, IRSA could
not make the scheduled payment on that date. As explained below, IRSA
renegotiated this facility under new conditions.
On December 18, 2000, IRSA issued US$ 43.5 million unsecured Class 2
floating rate notes due December 24, 2001. Proceeds from this issuance were used
to repay certain outstanding short-term indebtedness. IRSA's floating rate notes
matured in December 2001, and IRSA was unable to pay the principal then due. As
a result of such non-payment, in December 2001, IRSA entered into negotiations
with the holders of the floating rate notes and to date has been able to obtain
short-term deferrals of its obligation to pay such matured notes. On February 8,
2002, IRSA agreed with its holders to replace the floating interest rate for an
annual fixed interest rate of 12%. Pursuant to the most recent deferral, granted
on October 31, 2002, principal and interest on the floating rate notes were due
in full on November 14, 2002 and were further renegotiated as explained below.
The capitalization of interest due on October 31, 2002 was also agreed upon with
the holders. On May 15, 2002, IRSA partially repurchased from Banco Sudameris
its participation in the mentioned convertible note for US$ 6.8 million.
The floating rate notes and the syndicated credit facility included
various restrictive covenants, which among other things, require IRSA to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, repurchases of stock
and investments. As of June 30, 2002, IRSA was not in compliance with certain of
the financial covenants under the floating rate notes and syndicated credit
facility, and a waiver had been granted by the respective holders and banks in
relation to such covenants. To avoid possible acceleration from debtors, IRSA
obtained waivers to these financial covenants from the lenders
78
under the syndicated credit facility and several amendments were agreed on with
the holders of floating rate notes.
After months of negotiations, IRSA has finished the restructuring of
its debt under the US$ 80 million loan agreement and the outstanding US$ 41.2
million floating rate notes. IRSA signed on November 15, 2002 a "Refinancing
Framework Agreement" with its six bank creditors (Banca Nazionale del Lavoro
S.A., BankBoston N.A., Banco de la Ciudad de Buenos Aires, HSBC Bank Argentina
S.A., Banco Itau S.A., New York Branch and Banco de la Nacion Argentina, New
York Branch) to refinance its debt under the following scheme:
o US$ 13.6 million cash down payment reducing the principal;
o US$ 15.0 million of the 8% convertible notes due 2007 which were
recently offered by IRSA were subscribed by BankBoston which allowed
IRSA to cancel a portion of our old debt;
o US$ 37.4 million secured floating rate notes due 2009 with an
interest rate of 90-day LIBOR plus 200 basic points. These notes
will be secured with a first priority mortgage on some of its real
estate properties for a total value of US$ 18.7 million; and
o US$ 51.0 million unsecured credit facility due 2009. 69% of the
Facility will bear an interest rate of 90-day LIBOR plus 200 basic
points while the remaining will bear a fixed step up rate ranging
from 5.5% to 6.5%.
Loan from Goldman Sachs. On January 31, 2002, and on April 30, 2002
IRSA did not pay to "Goldman Sachs" two equal installments of US$ 6.6 million
plus reasonable costs and interest. On October 7, 2002, Goldman Sachs sent IRSA
a letter claiming that since January 31, 2002, IRSA has been in default under
its obligations under the amended shareholders agreement dated November 9, 2001.
On November 21, 2002, together with Goldman Sachs, IRSA signed a Letter
Agreement in which IRSA agrees to cancel the US$ 16.3 million debt before
November 29, 2002. The payment was done with US$ 9.0 million cash and US$ 3.1
million face amount of APSA's convertible notes previously owned by Inversora
Bolivar.
Subordinated Intercompany Loan to APSA. On February 8, 2002 IRSA and
Parque Arauco, principal shareholders of APSA, subordinated the collection of
loan receivables granted by IRSA to APSA to the repayment of principal and
interest on APSA's US$ 120 million Senior Notes and on its short-term debt. If
APSA defaults on its indebtedness, due to cross-default provisions in the
agreements that govern IRSA's syndicated credit facility and floating rate
notes, any event of default under any of their Senior Notes, Notes or their swap
agreement would also constitute an event of default under IRSA's financial
agreements. If IRSA and APSA are unable to reach a satisfactory agreement with
creditors and they accelerate APSA's and/or IRSA's financial debt or otherwise
exercise remedies, IRSA and APSA will not be able to honor payment obligations
and will likely be forced to restructure their liabilities and seek the
protection of the bankruptcy courts. As of June 30, 2002, APSA's debt to IRSA
was Ps. 40.6 million. The loan was used to suscribe the convertible notes that
APSA issued on July 19, 2002.
Loan to Hoteles Argentinos. In January 2001, IRSA's subsidiary Hoteles
Argentinos S.A., owner of 100% of Hotel Sheraton Libertador, obtained a US$ 12.0
million loan from BankBoston N.A. The maturity date is January 2006 and the loan
bears interest on a quarterly basis at the LIBO rate plus a spread ranging
between 401 and 476 basis points, depending on the value of certain financial
ratios. This loan was not pesified and remains in U.S. dollars due to the fact
it is governed by New York law. As a result of the current economic situation,
the lack of credit and the crisis of the Argentine financial system Hoteles
Argentinos did not pay for the principal installments of US$ 300.000 each, that
were due on January 26, April 29, July 29 and October 26 , 2002, and the
interest installment due on July 29 and October 26, 2002, for a total amount of
US$ 315.000, under the US$ 12.0 million loan.. Although Hoteles Argentinos'
Management is currently seeking to renegotiate its debt with its creditors, IRSA
cannot assure you that an agreement will be reached.
79
Unsecured Short-term Debt. As of June 30, 2002, IRSA had outstanding
short-term uncollateralized loans totaling Ps. 3.5 million, including accrued
interest. Generally, IRSA's short-term uncollateralized borrowings are in the
form of overdraft facilities and bank loans with an original maturity of less
than one year. The weighted average interest rates on uncollateralized
short-term debt were 8.0 % plus CER and 10.2% as of June 30, 2002 and 2001,
respectively. All these loans were paid by June 30, 2002. IRSA generally uses
the proceeds from these borrowings for working capital needs and other general
corporate purposes.
Collateralized Loans. As of June 30, 2002, IRSA also had outstanding
collateralized loans totaling Ps. 100.2 million, including accrued interest at
period-end. IRSA's collateralized loans are comprised of several loans which
accrue interest at fixed/variable rates ranging from 6.56% to 25.00% due at
various dates through October 2006. Loans amounting Ps. 42.8 million are
collateralized with a mortgage over the Sheraton Libertador Hotel which has a
book value of Ps. 31.7 million. The remaining loans, amounting to Ps. 57.4
million and are collateralized with Palermo Invest shares, representing the
company's ownership of Alto Palermo Plaza and Alto Palermo Park with a net book
value of Ps. 120.7 million. Also, certain of these collateralized loans require
IRSA to meet certain financial tests and to comply with certain other customary
covenants, including restrictions on incurrence of debt and liens, restrictions
on mergers, acquisitions, asset dispositions, capital contributions and others.
Other Loans Recently Repaid. On October 11, 2001, Banco Galicia granted
us a Ps. 7.0 million loan with a one-year maturity. The loan accrued interest at
Encuesta corregida rate (rate reported daily by Argentine Central Bank which
represents the average paid by banks on 30-35 day dollar denominated deposits of
over Ps. 1,000,000) plus 500 basis points. According to Decree No. 214, this
loan was pesified. In May 2002 IRSA repaid this loan in full at a discount to
its Peso value by tendering rescheduled time deposits in payment.
Cyrela Loan. On August 29, 2001 IRSA obtained a loan from Cyrela
Capital Management Ltd. for US$ 10.0 million. This loan was payable on June 5,
2002 and accrued interest at 12% annually. This loan was secured by pledging
8,089,800 shares and 591,020 ADSs of Brazil Realty. IRSA repaid this loan in
full upon the sale of its interest in Brazil Realty in February 2002.
Notes convertible into common shares of IRSA. On October 15, 2002, IRSA
initiated a preemptive rights offering to subscribe for 100,000,000 units
consisting of US$ 100.0 million of its 8% convertible notes due 2007 and
non-detachable warrants to purchase additional shares of its common stock. The
convertible notes may be converted into shares of its common stock after
December 13, 2002, and until maturity on November 14, 2007, at the initial
conversion price of US$ 0.5571 per common share. Each warrant will be
exercisable on or after conversion of the convertible note to which it is
attached at the same conversion price plus a 20% premium (US$ 0.6686). The
rights offering to holders of its common shares and GDSs expired on November 13,
2002. Existing shareholders have subscribed through the exercise of their
preemptive rights for US$ 66.7 million and they have exercised their accretion
rights for US$ 10.7 million, adding together US$ 77.4 million. During the
allocation of the remainder new investors have subscribed the remaining 22.6
million units completing the US$ 100 million offering. The offering was fully
subscribed and the funds have already been received by IRSA. IRSA intends to use
and it was partially used, the proceeds of the offering to facilitate the
renegotiation or partial payment of its outstanding debt, to finance its working
capital and other general corporate purposes, and to acquire APSA's second
tranche of convertible notes, if offered.
IRSA'S CAPITAL EXPENDITURES
During the fiscal year ended June 30, 2002 IRSA had capital
expenditures of Ps. 43.3 million. IRSA made investments in fixed assets for Ps.
24.0 million primarily to the acquisition of Costeros Dique IV in the office
segment for Ps. 18.3 million and in undeveloped parcels of land for Ps. 3.0
million primarily in Dique III for Ps. 2.2 million and in IRSA's subsidiaries
and equity investees for Ps. 19.3 million.
During fiscal year ended June 30, 2001, IRSA had capital expenditures
of Ps. 61.3 million. IRSA made investments in related companies of Ps. 52.3
million primarily in Brazil Realty for Ps. 13.8 million, APSA for Ps. 11.9
million and Latin American Econetworks for Ps. 10.2 million. IRSA also made
80
investments in fixed assets for Ps. 6.8 million primarily to the acquisition of
a property in the office segment for Ps. 2.4 million and in the hotels segment
for Ps. 2.5 million. IRSA also invested Ps. 2.2 million in undeveloped parcels
of land.
During fiscal year ended June 30, 2000, IRSA had capital expenditures
of Ps. 37.3 million. They made investments of Ps. 16.3 million, primarily to
acquire 8.0% of Banco de Credito y Securitizacion S.A. for Ps. 9.8 million and
to acquire Red Alternativa and Alternativa Gratis for Ps. 5.9 million. IRSA also
made investments of Ps. 8.0 million in fixed assets, consisting primarily of Ps.
4.4 million in the hotel segment and investments of Ps. 12.9 million in
undeveloped parcels of land, consisting primarily of Ps. 10.5 million in Puerto
Madero Dock 3 and Ps. 2.2 million in Puerto Retiro.
IRSA believes that the restructuring of its existing debt, the issuance
of the convertible notes and the sale of non-core assets, together with its cash
generating activities, will provide IRSA with the working capital necessary to
cover its needs and invest as opportunities may rise.
In September 2002, IRSA purchased the Piscis Hotel in Valle de Las Lenas
for US$ 1.4 million and during the first quarter of fiscal year 2003, IRSA
acquired 30.955% of the share ownership of and US$ 3.7 million convertible notes
due October 31, 2005 of Valle de Las Lenas S.A. for US$ 2.4 million.
IRSA'S U.S. GAAP RECONCILIATION
The accounting principles applied in Argentina vary in certain
significant respects from accounting principles applied in the United States.
Application of accounting principles generally accepted in the United States
(U.S. GAAP) would have affected the determination of amounts shown as net (loss)
income for each of the three years in the period ended June 30, 2002, and the
amount of total shareholders' equity as of June 30, 2002 and 2001 to the extent
summarized in Note 19 to the Financial Statements.
The principal differences, other than inflation accounting, between
Argentine GAAP and U.S. GAAP are the following:
(i) the impact of certain U.S. GAAP adjustments on equity
investees;
(ii) the accounting for derivatives and hedging activities;
(iii) the accounting for options to acquire marketable securities;
(iv) the accounting for the management ownership plan;
(v) the application of different useful lives for depreciation
purposes;
(vi) the deferral of certain preoperating and organization expenses
under Argentine GAAP which are expensed as incurred under U.S.
GAAP;
(vii) the application of certain U.S. GAAP adjustments to the
estimation of the fair value of net assets acquired;
(viii) the accounting for securitization programs;
(ix) the accounting for available for sale securities;
(x) the recognition of deferred income taxes; and
(xi) the effect on minority interest of the foregoing reconciling
items.
In addition, certain other disclosures required under U.S. GAAP have been
included in the U.S. GAAP
81
reconciliation. See Note 19 to IRSA's annual financial statements as of June 30,
2002, 2001 and 2000, included elsewhere in this annual report for details.
Net income (loss) under Argentine GAAP for the years ended June 30, 2002,
2001 and 2000 was approximately Ps. (499.6) million, Ps. (60.0) million and Ps.
11.6 million, respectively, as compared to approximately Ps. (650.9) million,
Ps. 20.0 million and Ps. (16.9) million, respectively, under U.S. GAAP.
Shareholders' equity under Argentine GAAP as of June 30, 2002, 2001 and 2000,
was Ps.460.4, Ps. 960.0 million and Ps. 1,100.4 million, respectively, as
compared to Ps. 329.5 million, Ps. 877.9 million and Ps. 1,026.4 million,
respectively, under U.S. GAAP.
D. RESEARCH AND DEVELOPMENTS, PATENTS AND LICENSES
Investments in technology amounted to Ps. 1.1 million, Ps. 3.91 million
and Ps. 5.67 million for the fiscal years 2002, 2001 and 2000 respectively.
Total technology investments aimed at increasing the productivity of purchased
land amounted to Ps. 11.2 million for such three fiscal years ended in 2002.
We do not have any patents or licenses that are material for the
conduct of our business.
BUSINESS ACQUISITIONS
YEAR ENDED JUNE 30, 2000
In May 2000, we acquired a 70% equity interest in Futuros y
Opciones.Com S.A., a private owned Argentine corporation for Ps. 3.1 million, of
which Ps. 1.6 million was paid in cash in May 2000 and Ps. 1.17 million within a
six-month period as from acquisition date. The remaining Ps. 0.4 million was
placed into an escrow account and will be released in May 2003 provided that no
contingencies arise.
The acquisition was accounted for using the purchase method. The
purchase price was allocated to the net assets acquired, based upon their
respective fair market values. The excess of the purchase price over the fair
market value of the assets acquired of Ps. 2.9 million has been allocated to
goodwill and is being amortized over 5 years using the straight-line method.
Under the shareholders agreement, we will provide short term funding to
Futuros y Opciones.Com S.A. in the amount of approximately Ps. 2.7 million for
future development. On April 16, 2002 an agreement was signed whereas Cresud
completed the abovementioned contribution.
YEAR ENDED JUNE 30, 1999
On May 20, 1999 we acquired an additional 29.99% equity interest in
Agro Riego, becoming the owner of almost 100% of its capital stock, for US$ 1.9
million, US$ 0.9 million of which was seller financed. In connection with the
acquisition, we recorded a gain of Ps. 1.2 million, representing the excess of
the book value of the minority interest over the purchase price.
FARM SALES
YEAR ENDED JUNE 30, 2002
On August 30, 2002 the Company's Board of Directors approved the
signing of a final merger agreement with the Absorbed Companies Agro Riego San
Luis S.A. and Colonizadora Argentina S.A.
During May 2002, we sold a 3,240 hectares plot of El Coro farm, for Ps.
2.29 million and in a subsequent sale a 1,432 hectare plot for Ps. 1.0 million.
The total sale of El Coro generated a profit of Ps. 3.03 million.
On May 8, 2002, we signed the deeds of sale for two plots of the 6,149
hectare La Sofia farm. The two plots of the farm were purchased in 1997, and
since then, they had undergone an extensive transformation
82
due to the implementation of the no tillage system. At the date of sale, 100% of
the farm's surface was devoted to agriculture. The sale price was US$ 10 million
which was paid at the date of the signing of the deeds and the taking possession
of the plots. Crops for the 2001/2002 season, which will be harvested during May
and June, will remain our property. We believe that the sale of La Sofia was an
attractive opportunity for us, because the sale price was higher than the farm's
book value, and the sale generated a Ps. 11.5 million profit.
On August 3, 2001, a bill of sale was signed for the farm El Silencio,
of 397 hectares, located in the district of Rojas, Buenos Aires. The price for
the sale of the farm was of US$ 1.03 million. This sale generated a profit of
Ps. 0.2 million.
In December 2001, we sold a 5,649 plot of El Coro farm, in the district
of Rio Seco, Province of Cordoba, for US$4.5 million.
YEAR ENDED JUNE 30, 2001
On September 11, 2000 we signed a bill of sale for El Banadito,
covering 1,789 hectares in the district of Ines Indart, Salto, Province of
Buenos Aires. The price arranged for this sale was US$6.2 million and included
the sale of the dairy farm, silo plants and other chattels. This transaction
represented a profit of roughly Ps. 5.5 million.
On December 4, 2000 a bill of sale was signed for the farm Tourne, of
19,614 hectares, in the district of Vera, Province of Santa Fe. The sale price
amounted to US$ 2.8 million, and included the sale of the farm and other real
estates. This sale generated an approximate loss of Ps. 0.4 million.
YEAR ENDED JUNE 30, 1999
On September 29, 1998 we sold El Meridiano farm, covering 6,302
hectares, in the Province of Buenos Aires, for total consideration of US$ 11.0
million, resulting in a gain of Ps. 6.6 million.
On May 26, 1999 we sold Runciman farm, covering 3,128 hectares, in the
Province of Santa Fe, for total consideration of US$16.8 million and
included the sale of facilities, the dairy farm, the silo plant and other
movable property, resulting in a gain of Ps. 11.7 million.
D.TREND INFORMATION
FACTORS AFFECTING THE FUTURE DEVELOPMENT OF THE COMPANY
Our future operating results may be affected by variations in some
factors, such as adverse changes in the price of commodities or the yield of
crops. Accordingly, historical tendencies may not be used to forecast future
results. Our past results must not be considered indicative of our future
performance. For purposes of minimizing such risks associated with weather and
price factors, we apply hedging by means of futures and option agreements in the
grain market, and the geographic diversification of production.
PRODUCTION AND SALES
We conduct our business on owned and leased land. Rental payments
increase our production costs, as the amounts paid as rent are accounted for as
operating expenses. As a result, production costs per hectare of leased land are
higher than for the land owned by us.
The following table shows the breakdown of owned and leased land used
for each of our principal production activities:
83
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------------
1999(1) 2000(1) 2001(1) 2002(1)
------------------------- ---------------------- --------------------- -----------------------
LEASED OWNED (2) LEASED OWNED (2) LEASED OWNED LEASED OWNED (2)
--------- ----------- -------- ---------- --------- --------- --------- -----------
Crops...... 16,281 44,162 13,455 30,977 16,734 20,139 19,524 28,913
Cattle..... 166,386 8,770 175,767 1,500 169,941 -- 145,066 2,500
Milk ...... 2,555 -- 2,926 -- 2,492 -- 3,049 --
- ------------------
(1) Does not include the production of Agro-Uranga S.A.
(2) The land assigned to crops may differ from sown land, as some hectares are
sown twice and therefore are counted twice as sown land.
In relation to past years, the land leased by us has decreased as a
result of the smaller margins resulting from lower prices that we have been able
to obtain for our agricultural products since the peak prices recorded in 1997.
The price of leased land has followed a declining trend similar to agricultural
prices.
The agricultural commodity market had reached its maximum prices during
the 1996-1997 season and then decreased in the course of subsequent years. At
present prices are stable and currently show a rising tendency. Net sales in the
crop segment increased notwithstanding a decrease in the price of commodities
and in the area of sown land, as a result of the use of advanced technology and
a more extended area sown with corn which has a relatively high yield per
hectare.
In the beef-cattle segment, prices increased during 1999, decreased
during 2000, which tendency was reverted during 2001. Net sales in the
beef-cattle segment decreased primarily as a result of the decreased sales
volume arising from our strategy of reducing cattle stock and concentrating our
efforts in the more profitable crop segment.
Milk sales, which in recent years had shown a decreasing tendency
derived from the sale of a portion of the milking cow stock and low prices, are
currently stable.
Notwithstanding decreased net sales, gross revenues increased due to
the efficient adjustments made in production costs.
The following table presents data for different business segments:
NET SALES
-----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------
1999(1) 2000(1) 2001(1) 2002(1)
------------------------ --------------------- --------------------- -----------------------
(PS. 000) % (PS. 000) % (PS. 000) % (PS. 000) %
------------ --------- --------- ------- --------- ------- --------- ---------
Crops:
Wheat .......... 7,826 9.2 5,968 8.7 5,029 7.4 8,368 11.8
Corn ........... 7,548 8.9 5,583 8.1 14,589 21.4 11,411 16.1
Sunflower (seeds
and oil)...... 8,062 9.5 7,409 10.8 5,250 7.7 2,958 4.2
Soybean ........ 5,170 6.1 13,406 19.5 9,885 14.5 18,514 26.1
Other .......... 7,027 8.2 3,802 5.5 2,835 4.2 1,943 2.7
Total crops .... 35,633 41.8 36,168 52.7 37,588 55.2 43,194 61.0
Beef-cattle..... 40,047 47.0 26,156 38.1 26,115 38.4 24,581 34.7
Milk ........... 7,224 8.5 3,331 4.9 2,328 3.4 2,011 2.8
Other........... 3,091 3.6 3,501 5.1 2,431 3.6 1,666 2.4
Total sales .... 85,995 100.9 69,156 100.7 68,462 100.6 71,452 100.9
Gross sales tax (727) (0.9) (464) (0.7) (423) (0.6) (651) (0.9)
Net sales ...... 85,268 100.0 68,692 100.0 68,039 100.0 70,801 100.0
- -------------------
(1) Does not include the production of Agro-Uranga S.A.
84
SALES VOLUME
---------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999(1) 2000(1) 2001(1) 2002(1)
--------------- ------------- -------------- --------------
Crops (tons):
Wheat .................................... 35,857 26,975 22,879 26,101
Corn ..................................... 40,986 32,907 95,263 42,739
Sunflower (seeds and oil)................. 16,770 19,363 18,168 2,909
Soybean................................... 15,340 43,177 30,720 42,629
Other..................................... 11,302 3,646 5,570 2,404
Total crops............................... 120,255 126,068 172,600 121,782
Beef-cattle (tons)........................ 24,334 18,520 17,455 17,969
Milk (thousand liters).................... 18,192 10,763 6,967 6,783
(1) Does not include the production of Agro-Uranga S.A.
AVERAGE SELLING PRICE
---------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999(1) 2000(1) 2001(1) 2002(1)
--------------- ------------- -------------- --------------
Crops per ton:
Wheat ................................... 218 221 220 321
Corn .................................... 184 170 153 267
Sunflower (seeds and oil)............... 481 383 289 1,017
Soybean ................................. 337 310 322 434
Beef-cattle (per ton).................... 1,646 1,412 1,496 1,368
Milk (thousand liters)................... 397 319 334 296
GROSS REVENUES & MARGIN(1)
-----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------
1999(1) 2000(1) 2001(1) 2002(1)
--------------------- --------------------- --------------------- -----------------------
(PS. 000) (%) (PS. 000) (%) (PS. 000) (%) (PS. 000) (%)
Crops .......... (2,888) (8.1) 9,247 25.6 10,327 27.5 29,341 67.9
Cattle ......... 4,055 10.1 2,850 10.9 4,401 16.9 4,302 17.5
Milk ........... 52 0.7 (1,650) (49.5) 310 13.3 (1,161) (57.7)
Other........... 5 0.1 1,055 30.1 312 12.8 (224) (13.4)
TOTAL........... 1,224 1.4 11,502 16.6 15,350 22.4 32,258 45.1
- --------------------
(1) This table does not contemplate the gross sales tax on the different
segments.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS
BOARD OF DIRECTORS
We are managed by a board of directors, which consists of six directors
and four alternate directors. Each director and alternate director is elected by
our shareholders at an annual regular meeting of shareholders for a three-year
term, provided, however, that only one third of the board of directors is
elected each year. The directors and alternate directors may be re-elected to
serve on the board any number of times.
Our current board of directors was elected at a shareholders' meeting
held in November 5, 2002 for a term expiring in the years 2003, 2004 and 2005,
as the case may be. Our current directors are as follows:
85
DIRECTORS(1) DATE OF BIRTH POSITION IN CRESUD TERM DATE OF CURRENT
- --------- -------------- ------------------ ----- -------- -------
(M/D/Y) EXPIRES CURRENT POSITION
------- ------- -------- --------
APPOINTMENT HELD SINCE
----------- ----------
Eduardo S. Elsztain ...... 01/26/1960 Chairman of the 06/30/05 11/05/02 1994
Board
M. Marcelo Mindlin ....... 01/19/1964 First Vice 06/30/05 11/05/02 1994
Chairman of the
Board
Saul Zang................. 12/30/1945 Second Vice 06/30/05 11/05/02 1994
Chairman of the
Board
Alejandro G. Elsztain..... 03/31/1966 Director 06/30/04 10/19/01 1994
Clarisa D. Lifsic......... 07/28/1962 Director 06/30/04 10/19/01 1994
Ernesto M. Vines.......... 02/05/1942 Director 06/30/03 10/30/00 1994
Juan C. Quintana Teran.... 06/11/1937 Alternate Director 06/30/05 11/05/02 1994
Salvador D. Bergel........ 04/17/1932 Alternate Director 06/30/05 11/05/02 1996
Jorge Oscar Fernandez ... 01/08/1939 Alternate Director 06/30/03 10/30/00 1997
Gaston Armando Lernoud.... 06/04/1968 Alternate Director 06/30/05 11/05/02 1999
- --------------------
(1) The business address of our management is Cresud S.A.C.I.F.I. y A., Av.
Hipolito Yrigoyen 440, 3rd Floor, (C1066AAB) Buenos Aires, Argentina.
The following is a brief biographical description of each member of our Board of
Directors:
EDUARDO S. ELSZTAIN. Mr. Elsztain studied accounting at the
Universidad de Buenos Aires. He has been engaged in the real estate business for
more than twenty years. He founded Dolphin Fund Management. He is Chairman of
the Board of Directors of IRSA, Alto Palermo S.A. (APSA), Shopping Alto Palermo
S.A., and Dolphin Fund Management; Vice-Chairman of Banco Hipotecario S.A.,
among others. Mr. Eduardo S. Elsztain is the brother of our director, Alejandro
G. Elsztain.
M. MARCELO MINDLIN. Mr. Mindlin obtained a degree in economics from the
Universidad de Buenos Aires and a Master's Degree in business management at the
Centro de Estudios Macroeconomicos de Buenos Aires. He is also the Vice-Chairman
of the Board of Directors of IRSA, Alto Palermo S.A. (APSA) and Dolphin Fund
Management; and director of Banco Hipotecario S.A., among others.
SAUL ZANG. Mr. Zang obtained a degree in law from the Universidad de
Buenos Aires. He is a founding partner of Zang, Bergel & Vines law firm. He is
also the Second Vice-Chairman of IRSA and Vice-Chairman of Puerto Retiro and
Fibesa; director of Alto Palermo S.A. (APSA), Banco Hipotecario S.A., Nuevas
Fronteras S.A., Tarshop and Palermo Invest S.A.; and alternate director of
Shopping Alto Palermo S.A.
ALEJANDRO G. ELSZTAIN. Mr. Elsztain obtained a degree in agricultural
engineering from the Universidad de Buenos Aires. He is Chairman of Inversiones
Ganaderas S.A. He is also a director of IRSA and Alto Palermo S.A. (APSA). Mr.
Alejandro G. Elsztain is the brother of our Chairman Eduardo S. Elsztain.
CLARISA D. LIFSIC. Mrs. Lifsic obtained a degree in Economics from the
Universidad de Buenos Aires and a Master degree in Sciences with management
expertise at Massachusetts Institute of Technology. She has held offices of
research and financial analysis in the private sector since 1987. She is
presently Managing Director of Dolphin Fund Management and a director of Banco
Hipotecario S.A., among others.
86
ERNESTO M. VINES. Mr. Vines obtained a degree in law from the
Universidad de Buenos Aires. He is a founding partner of Zang, Bergel & Vines
law firm and General Counsel of Banco Hipotecario S.A. He is also a director of
IRSA and alternate director or Alto Palermo S.A. (APSA).
JUAN CARLOS QUINTANA TERAN. Mr. Quintana Teran obtained a degree in law
from the Universidad de Buenos Aires. He is a consultant of Zang, Bergel & Vines
law firm. He has been Chairman and Judge of the National Court of Appeals of the
city of Buenos Aires dealing in Commercial Matters. He is an alternate director
of Alto Palermo S.A. (APSA).
SALVADOR D. BERGEL. Mr. Bergel obtained a degree in law and a Ph.D. in
law from the Universidad del Litoral. He is a founding partner of the Zang,
Bergel & Vines law firm and a consultant for Repsol YPF S.A. He is also an
alternate director of Alto Palermo S.A. (APSA).
JORGE OSCAR FERNANDEZ. Mr. Fernandez obtained a degree in accounting
from the Universidad de Buenos Aires. He has been conducting business activities
as General Accountant of Banco del Este, Administrative Officer, Director and
Second Vice President of Banco Rio de la Plata. He also has been a member of the
Board of Directors in several companies: Banelco, La Patagonia, Cia Previsional
Rio Citi, Siembra AFJP, Siembra Cia de Seguros, Rio Valores, Sur Seguros, Inter
Rio Holdings Establishment, Rio Bank, and Sur Seguros. He also participates as a
member of ADEBA (Argentina Bank Association).
GASTON ARMANDO LERNOUD. Mr. Lernoud obtained a degree in law from the
University of the Salvador, Buenos Aires in 1992. He obtained a Masters Degree
in Corporate Law in 1996 from the Universidad de Palermo, Buenos Aires. He was a
senior associate of Zang, Bergel & Vines and is currently an employee of Alto
Palermo S.A. (APSA).
We do not have employment contracts with our directors.
B. SENIOR MANAGEMENT
APPOINTMENT OF THE SENIOR MANAGEMENT
Our board of directors appoints and removes the senior management.
Senior management performs its duties in accordance with the instructions of our
board of directors.
The following table shows information about our current senior
management:
NAME DATE OF BIRTH POSITION CURRENT POSITION
- ---- (M/D/Y) -------- HELD SINCE
------- ----------
Alejandro G. Elsztain..... 03/31/1966 Chief Executive Officer 1994
Clarisa D. Lifsic......... 07/28/1962 Chief Financial Officer 1994
Alejandro Bartolome....... 12/09/1954 Production Officer 1996
David A. Perednik......... 11/15/1957 Administrative Officer 1997
Jose Luis Rinaldini....... 08/14/1963 Subsidiaries Supervisor 1995
Alejandro Casaretto....... 10/15/1952 Production Officer 2000
Carlos Blousson........... 09/21/1963 Sales Officer 2000
The following is a biographical description of each of our senior
managers who are not directors:
ALEJANDRO BARTOLOME. Mr. Bartolome obtained a degree in agriculture
from the Universidad de Buenos Aires and a Master of Science degree in Animal
Production from the University of Reading in England. He was treasurer of CREA
Monte Buey Inriville and coordinator of the Dairy Group Santa Emilia from 1993
until 1996. He also worked as Farm Manager and was associated to a farm
management company called Administracion Abelenda, Magrane, Anchorena.
87
DAVID A. PEREDNIK. Mr. Perednik obtained a degree in accounting from
the Universidad de Buenos Aires. He has worked for several companies such as
Marifran Internacional S.A., a subsidiary of Louis Dreyfus Amateurs where he
worked as Financial Manager from 1986 to 1997. He also worked as a Senior
Consultant in the administration and systems department of Deloitte & Touche
from 1983 to 1986.
JOSE LUIS RINALDINI. Mr. Rinaldini obtained a degree in agriculture
from the Universidad de Buenos Aires. He has worked for Inversiones Ganaderas
S.A. and for an agriculture and forestry company in the production and marketing
areas.
ALEJANDRO CASARETTO. Mr. Casaretto obtained a degree in agriculture
from the Universidad de Buenos Aires. He has been working as our Technical
Manager, Farm Manager and Technical Coordinator since 1975.
CARLOS BLOUSSON. Mr. Blousson obtained a degree in agriculture from
the Universidad de Buenos Aires. He has been working as our Sales Officer since
1996. Prior to joining Cresud, he worked as futures and options operator at
Vanexva Bursatil -Sociedad de Bolsa-. Previously, he worked as farm manager and
technical advisor at Leucon S.A.
C. SUPERVISORY COMMITEE
COMPOSITION OF THE SUPERVISORY COMMITTEE
Our supervisory committee (Comision Fiscalizadora) is responsible for
reviewing and supervising our administration and affairs, and verifying
compliance with the bylaws and the resolutions adopted at shareholders'
meetings. The members of the supervisory committee are appointed at the annual
general ordinary shareholders' meeting for a term of one year. The supervisory
committee is composed of three members and three alternate members.
INFORMATION ABOUT MEMBERS OF THE SUPERVISORY COMMITTEE
The following table shows information about the members of our
supervisory committee, who were elected in the annual general ordinary
shareholders' meeting which was held on November 5, 2002:
MEMBER DATE OF BIRTH POSITION
- ------ (M/D/Y) ---------
-------
Martin Barbafina................. 09/03/1965 Member
Corina I. Pando.................. 12/26/1952 Member
Carlos A. Rebay 05/06/1949 Member
Carlos H. Rivarola............... 08/01/1954 Alternate Member
Gabriel Martini.................. 02/21/1963 Alternate Member
Diego Niebuhr.................... 02/10/1953 Alternate Member
Set forth below is a brief biographical description of each member of
our supervisory committee:
MARTIN BARBAFINA. Mr. Barbafina obtained a degree in accounting from
the Universidad Catolica Argentina. He is a partner of PricewaterhouseCoopers.
He is also a member of the Supervisory Committee of Alto Palermo S.A. (APSA) and
IRSA.
CORINA I. PANDO. Ms. Pando obtained a degree in accounting from the
Universidad de Buenos Aires and is a partner of PricewaterhouseCoopers. She is
also a member of the Supervisory Committees of Ford Credit Holding Argentina
S.A. and Frimetal S.A.
CARLOS A. REBAY. Mr. Rebay obtained a degree in accounting and a degree
in administration from the Universidad Argentina de la Empresa. He is a partner
of PricewaterhouseCoopers. He is also a member of the supervisory committees of
Massalin Particulares S.A., Hart S.A., Tapiales S.A. and AT&T Argentina S.A.
88
CARLOS H. RIVAROLA. Mr. Rivarola obtained a degree in accounting from
the Universidad de Buenos Aires and is a partner of PricewaterhouseCoopers. He
is also a member of the Supervisory Committees of Tornquist Asesores de Seguros
S.A. and Toyota Argentina S.A.
GABRIEL MARTINI. Mr. Martini obtained a degree in accounting from the
Universidad de Buenos Aires and is a partner of PricewaterhouseCoopers. He is a
member of the Professional Council of Economics of the City of Buenos Aires. Mr.
Martini is also a member of the Supervisory Committee of Valeo Neiman S.A.,
Valeo Embragues Argentina S.A., Cibie Argentina S.A., and Emelar S.A.
DIEGO NIEBUHR. Mr. Niebuhr obtained a degree in accounting and a degree
in administration from the Universidad de Buenos Aires. He is a partner of
PricewaterhouseCoopers. He is also a member of the Supervisory Committees of
Cresud, Commercial Union S.A., Ford Credir Cia Financiera S.A., Nutricia Bago
S.A., Ace Seguros, Epson Argentina S.A..
D. KEY EMPLOYEES
There are no key employees.
E. COMPENSATION
COMPENSATION OF DIRECTORS
Under Argentine law, if the compensation of the members of the board of
directors is not established in the bylaws of the company, it should be
determined by the shareholders' meeting. The maximum amount of total
compensation to the members of the board of directors, including compensation
for technical or administrative permanent activities, cannot exceed 25% of the
earnings of the company. That amount should be limited to 5% when there is no
distribution of dividends to shareholders, and will be increased proportionally
to the distribution. When one or more directors perform special commissions or
technical or administrative activities, and there are no earnings to distribute,
or they are reduced, the shareholders' meeting may approve compensation in
excess of the above-mentioned limits.
The compensation of our directors for each fiscal year is determined
pursuant to Argentine law, and taking into consideration if the directors
perform technical or administrative activities and our fiscal year's results.
Once the amount is determined, they are considered by the shareholders' meeting.
For the year ended June 30, 2002, our shareholders meeting held on
November 5, 2002 approved an aggregate amount of compensation of Ps. 894,491 to
all of our directors.
The members of the Supervisory Committee renounced their right to
receive fees for the fiscal year 2002.
COMPENSATION OF SENIOR MANAGEMENT
Our senior management is paid a fixed amount established by taking into
consideration their background, capacity and experience and an annual bonus
which varies according to their individual performance and our results.
The total and aggregate compensation of our senior management for the
fiscal year ended June 30, 2002 was Ps. 1,255,843.
STOCK OPTION PLAN
On November 19, 2001, our shareholders, at an extraordinary
shareholders' meeting, authorized us to enter into a stock option plan relating
to the shares remaining after the shareholders' exercise of their preemptive
rights to acquire treasury shares. Our shareholders decided that two thirds of
the options under this stock option plan would be allocated to Messrs. Alejandro
G. Elsztain, Alejandro Cassaretto, Alejandro
89
Bartolome, Jose L. Rinaldini, Carlos Blousson and David A. Perednik as
beneficiaries, and that one third of the options would be allocated by our board
of directors in a period beginning six months after the initial allocation and
ending three months before the expiration of the term of the exercise of
options.
In accordance with Argentine law, we established a special purpose
trust for equal term to the option period, so that the beneficiaries may
exercise the option, among any of our employees, officers or senior managers. In
accordance to such extraordinary shareholders' meeting, on February 13, 2002, we
entered into an agreement with Messrs. Alejandro G. Elsztain, Alejandro
Cassaretto, Alejandro Bartolome, Jose L. Rinaldini, Carlos Blousson and David A.
Perednik granting the beneficiaries, a purchase option for the acquisition of an
aggregate of 3,073,437 book entry common shares of Cresud, for a face value of
Ps. 1.0 each. The option was granted to the beneficiaries as follows:
NAME SHARES
- ---- ------
Alejandro G. Elsztain...................... 2,073,437
Alejandro Cassaretto....................... 200,000
Alejandro Bartolome........................ 200,000
Carlos Blousson............................ 200,000
Jose L. Rinaldini.......................... 200,000
David A. Perednik.......................... 200,000
Pursuant to this agreement, the beneficiaries are entitled to exercise
the option by January 15, 2005 and the amount to be paid for the exercise of the
option shall be Ps. 1 for each share plus an annual interest calculated on the
basis of six-month LIBO rates. According to the trust, dividends distributed on
the shares subject to the option shall automatically add to the trust property.
At October 31, 2002 options to acquire 550,000 shares were exercised.
BENEFIT PLANS
We do not currently have any plans providing for pension, retirement or
other similar benefits, other than those related to our senior management.
AUDIT COMMITTEE AND REMUNERATION COMMITTEE
We do not have an audit committee.
F. BOARD PRACTICES
BENEFITS UPON TERMINATION OF EMPLOYMENT
There are no contracts providing for benefits to Directors upon
termination of employment.
AUDIT COMMITTEE AND REMUNERATION COMMITTEE
There is no Audit or Remuneration Committee.
G. EMPLOYEES
At June 30, 2002, we had 261 employees, including the employees of all
our subsidiaries but not those of Agro-Uranga S.A. and Cactus Argentina S.A..
Our employees are not represented by any union or other collective bargaining
organization. We have never experienced a work stoppage. We believe that our
relations with our employees are good. We offer below a breakdown of the number
of employees for our three more recent fiscal years ended in June.
90
AT JUNE 30, 2002 AT JUNE 30, 2001 AT JUNE 30, 2000
-----------------------------------------------------------------------------
PROVINCE REGULAR, REGULAR, REGULAR,
SALARIED TEMPORARY SALARIED TEMPORARY SALARIED TEMPORARY
-----------------------------------------------------------------------------
Buenos Aires.................... 63 15 66 -- 71 1
Corrientes...................... -- -- -- -- -- --
Cordoba......................... 38 6 39 13 42 17
Santa Fe........................ 43 10 52 -- 70 3
Chaco........................... 38 11 53 1 55 1
Catamarca....................... 10 7 25 -- 16 --
Salta........................... 5 7 5 9 8 7
San Luis........................ 3 5 4 5 4 6
--- --- --- --- --- ---
TOTAL EMPLOYEES................. 200 61 244 28 266 35
=== == === == === ==
H. SHARE OWNERSHIP
SHARE OWNERSHIP OF DIRECTORS, MEMBERS OF THE SUPERVISORY COMMITTEE AND
SENIOR MANAGEMENT AS OF OCTOBER 31, 2002.
DIRECTORS AMOUNT PERCENTAGE
Eduardo S. Elsztain (1)................ 66,751,511 53.7%
Marcos M. Mindlin...................... - -
Saul Zang.............................. - -
Gary S. Gladstein...................... - -
Alejandro G. Elsztain.................. 50,000 0.04%
Clarisa Lifsic......................... 245,797 0.20%
Ernesto M. Vines....................... 10,000 0.01%
Jorge Oscar Fernandez.................. 2,700,000 2.20%
Juan C. Quintana Teran................. - -
Salvador D. Bergel..................... - -
SENIOR MANAGEMENT......................
Alejandro Bartolome.................... - -
David A. Perednik...................... - -
Jose Luis Rinaldini.................... - -
Alejandro Casaretto.................... 11,650 0.01%
1) The number of shares beneficially owned by Mr. Eduardo S. Elsztain is
161,276,915, assuming full conversion of the notes and warrants
issued pursuant to the 24,000,000 units owned by Mr. Elsztain. In
addition, the number of shares beneficially owned by Mr. Eduardo S.
Elsztain will increase by 3,938,559, assuming full conversion of the
notes and warrants represented by 1,000,000 units which Mr. Elsztain
has an option to purchase from Leucadia National Corporation.
EMPLOYEES' PARTICIPATION IN OUR CAPITAL STOCK
The Extraordinary Shareholders' Meeting held on November 19th, 2001
approved a Stock Option Plan relating to the shares remaining after the
shareholders exercised their pre-emptive rights to acquire treasury shares (the
"Shares of the Plan"). The Shares of the Plan could be acquired at a purchase
price of Ps. 1 plus the interest accrued since the adjudication, at an annual
rate of LIBO for deposits at 180 days. The option can be exercised at any time
within a period of 3 years since the expiration of the pre-emptive rights. Two
thirds of the options corresponding to the Shares of the Plan will be allocated
by the Board of Directors among Messrs. Alejandro G. Elsztain, Alejandro
Cassaretto, Alejandro Bartolome, Carlos Blousson, Jose
91
Luis Rinaldini and David A. Perednik. The remaining one third of the options
will be allocated by the Board of Directors in a period of time beginning six
months after the initial allocation and ending three months before the
expiration of the term of the exercise of the options, among any of our
employees or executive officers.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
SHARE OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of our outstanding common stock as of October 31, 2002 by:
o each person known to us to be the beneficial owner of more than 5%
of our common stock;
o each of our named senior managers;
o each director; and
o all current directors and senior managers as a group.
SHAREHOLDER(S) (1) NUMBER OF SHARES % OF SHARES OF COMMON
BENEFICIALLY OWNED STOCK(2)
------------------ ---------------------
Eduardo S. Elsztain(3)....................................... 66,751,511 53.7%
Directors and senior managers in the aggregate(4)............ 72,292,395 58.9%
- ------------------
1) Leucadia National Corporation acquired 10,000,000 units in our offering.
Assuming full conversion of the 10,000,000 units acquired by Leucadia, it
will own 39,385,585 shares of our stock.
2) The percentages have been calculated as of October 31, 2002 in accordance
to an outstanding common stock of 122,745,539 shares because 1,538,853
shares were treasury shares.
3) Includes 64,397,457 shares owned by Inversiones Financieras del Sur S.A.,
for which Mr. Eduardo S. Elsztain may be deemed beneficial owner by virtue
of his voting power to control Inversiones Financieras del Sur S.A.
Additionally, it also includes 2,354,054 shares owned by Dolphin Fund, plc
(formerly Quantum Dolphin, plc) for which Mr. Eduardo S. Elsztain may be
deemed the beneficial owner by virtue of his position with Dolphin Fund
Management S.A., the investment manager of Dolphin Fund, plc, based on
publicly available reports filed as of October 31, 2002. The number of
shares beneficially owned is 161,276,915, assuming full conversion of the
notes and warrants issued pursuant to 24,000,000 units. In addition, the
number of shares beneficially owned by Mr. Eduardo S. Elsztain will
increase by 3,938,559, assuming full conversion of the notes and warrants
represented by 1,000,000 units which Mr. Elsztain has an option to
purchase from Leucadia National Corporation.
4) Includes 66,751,511 shares beneficially owned by Mr. Eduardo S. Elsztain
as of October 31, 2002 based on publicly available reports filed as of
October 31, 2002; 2,523,437 shares owned by Dolphin Fund Management S.A.;
50,000 shares owned by Alejandro Elsztain; 245,797 shares owned by Clarisa
Lifsic; 2,700,000 shares owned by Jorge O. Fernandez; 10,000 shares owned
by Ernesto Mauel Vines; and 11,650 shares owned by Alejandro Casaretto in
each case as of October 31, 2002.
As of October 31, 2002, there were approximately 3,726,951 american
depositary shares (representing 37,269,510 of our common shares, or
approximately 30% of all of our outstanding shares) held in the United States.
Additionally, as of such date, there were approximately six registered holders
represented by american depositary shares in the United States.
Except as set forth in the preceding table, we are not aware of the
existence of other shareholders owning more than 5% of our capital stock. Our
principal shareholders' voting rights are similar to those of our other
shareholders.
92
CHANGE IN CAPITAL STOCK OWNERSHIP (1)
AT OCTOBER 31, 2002 AT JUNE 30, 2001 AT JUNE 30, 2000
---------------------------------------------------------------------
NUMBER OF % NUMBER OF % NUMBER OF %
SHARES SHARES SHARES
---------------------------------------------------------------------
Eduardo S. Elsztain (2)................... 66,751,511 53.7% 42,743,291 35.7% 47,072,640 39.3%
Pension Funds in the aggregate............ 15,832,535 12.9% 33,926,049 28.3% 36,938,627 30.9%
JP Morgan Whitefriars Inc................. -- -- 12,500,000 10.4% -- --
Directors and senior managers in the 72,292,395 58.9 48,501,530 40.5% 53,869,735 45.0%
aggregate...............................
1) Leucadia National Corporation acquired 10,000,000 units in our offering.
Assuming full conversion of the 10,000,000 units acquired by Leucadia, it
will own 39,385,585 shares of our stock and a 12.3% of percentage of
outstanding shares.
2) The number of shares beneficially owned by Mr. Eduardo S. Elsztain is
161,276,915, assuming full conversion of the notes and warrants issued
pursuant to the 24,000,000 units owned by Mr. Elsztain. In addition, the
number of shares beneficially owned by Mr. Eduardo S. Elsztain will
increase by 3,938,559, assuming full conversion of the notes and warrants
represented by 1,000,000 units which Mr. Elsztain has an option to
purchase from Leucadia National Corporation.
On October 15, 2002, we initiated a preemptive rights offering of
rights to subscribe for 50,000,000 units consisting of US$50.0 million of 8%
convertible notes due 2007 and warrants to purchase shares of common stock. The
convertible notes may be converted into shares of our common stock after
December 13, 2002 and the rights offering to holders of our common shares and
ADSs expired on November 13, 2002. Existing shareholders have subscribed through
the exercise of their preemptive rights for US$ 20.5 million and they have
exercised their accretion rights for US$ 1.7 million, adding together US$ 22.2
million. During the allocation of the remainder new investors have subscribed
the remaining US$ 27.8 million units completing the US$ 50 million offering.
At October 31, 2002 our directors and senior managers controlled,
directly or indirectly, approximately 58.9% of our common shares. As a result,
these shareholders have, and will continue to have, significant influence on the
election of our directors and the outcome of any action requiring shareholder
approval. Moreover, certain of our directors and senior managers have exercised
their preemptive rights and accretion rights to subscribe for 25,251,000 units
offered by us. If our directors and senior managers convert all convertible
notes and exercise all warrants so acquired and none of our other shareholders
convert their notes, they will control, directly or indirectly, 77.3% of our
common stock.
B. RELATED PARTY TRANSACTIONS
HEADQUARTERS
Until November 2001, we leased our headquarters office space from IRSA
Inversiones y Representaciones Sociedad Anonima ("IRSA"). Eduardo S. Elsztain,
M. Marcelo Mindlin and Saul Zang are the President, First Vice President and
Second Vice President, respectively, of the Board of Directors of IRSA. Total
monthly rent was Ps. 14,000. In December 2001, we started to sublease our
headquarters from Alto Palermo S.A. (APSA) ("APSA"). Eduardo S. Elsztain, M.
Marcelo Mindlin and Saul Zang are the President, First Vice President and Second
Vice President, respectively, of the Board of Directors of APSA. We pay monthly
rent of Ps. 3,294.
CONSULTING AGREEMENT
Pursuant to the agreement with Dolphin Fund Management S.A., we pay an
annual fee equivalent to 10% of our net income for certain agriculture advice
and other administration services. As a result
93
management fees totaled Ps. 0.8 million in fiscal year 2001, and we are not
reporting management fees for fiscal year 2002. Eduardo S. Elsztain and M.
Marcelo Mindlin are President and Vice President, respectively, of the Board of
Directors of Dolphin Fund Management.
Dolphin Fund Management S.A. (formerly known as Consultores Asset
Management S.A.) is an Argentine company incorporated in 1989, primarily engaged
in investment, investment advisory and fund administration services. It provides
agricultural advice exclusively to us pursuant to a Consulting Agreement, which
became effective as of November 7, 1994 (the "Consulting Agreement").
Pursuant to the terms of the Consulting Agreement, as agreed by our
board of directors, Dolphin Fund Management provides us with the following
services:
o advises with respect to the investment of its capital in all aspects
of agricultural operations, including, among others, sales,
marketing, distribution, financing, investments, technology and
business proposals;
o acts on our behalf in such transactions, negotiating the prices,
conditions, and other terms of each operation; and
o gives advice regarding securities investments with respect to such
operations.
The Consulting Agreement expressly provides that Dolphin Fund
Management may not advise us with respect to transactions that are related to
real estate.
Under the Consulting Agreement, we pay Dolphin Fund Management for its
services, an annual fee equal to 10% of our annual after-tax net income. We also
reimburse Dolphin Fund Management the administrative expenses incurred by it in
performing its duties under the Consulting Agreement and: (i) remuneration to
the directors, trustees and certifying accountants; (ii) remuneration of legal
consultants; (iii) remuneration of auditors; (iv) representation costs; and (v)
all other costs incurred by it in performing its services.
In fiscal years 2002, 2001 and 2000, Dolphin Fund Management's fees
were Ps. nil, Ps. 833,104 and Ps. 294,285 respectively. During those years, we
have not been charged for any administrative expenses by Dolphin Fund
Management. However, no assurances can be given that Dolphin Fund Management
will not request reimbursement for such expenses in the future.
The Consulting Agreement is subject to termination by either party upon
not less than 60 days prior written notice. If we terminate the Consulting
Agreement without cause, we will be liable to Dolphin Fund Management for twice
the average of the amounts of the management fee paid to Dolphin Fund Management
for the two fiscal years prior to such termination.
Eduardo S. Elsztain and M. Marcelo Mindlin are President and
Vice-President, respectively, of the board of Directors of Dolphin Fund
Management, and President and First Vice-President, respectively, of our board
of Directors. Additionally, Eduardo S. Elsztain and M. Marcelo Mindlin hold 80%
and 20% respectively of the capital stock of Dolphin Fund Management. All of the
compensation that we pay to Eduardo S. Elsztain and M. Marcelo Mindlin are
included in the fee that we pay Dolphin Fund Management under the Consulting
Agreement.
IRSA
Beginning in the second quarter of fiscal year 2001, we started
acquiring IRSA shares in the open market, which resulted in 19.85% ownership at
June 30, 2002. IRSA is one of the leading Argentine real estate companies
engaged directly or indirectly through subsidiaries, joint ventures and
international strategic alliances in real estate activities in Argentina. These
investments are carried at the equity method of valuation totaling Ps. 91.4
million as of June 30, 2002. Eduardo S. Elsztain, M. Marcelo Mindlin and Saul
Zang are the President, First Vice President and Second Vice President,
respectively, of the Board of Directors of IRSA.
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MUTUAL INVESTMENT FUND
We had investments in Dolphin Fund Plc, a foreign open-ended investment
fund that is related to our principal shareholders and directors. These
investments were carried at market value totaling Ps. 9.78 million and Ps. 21.8
million as of June 30, 2001 and 2000, respectively. During the second quarter of
fiscal year 2002, we sold our investment in Dolphin Fund Plc. Our holding was
300,306 shares and the sale price was Ps. 21.92 per share.
DONATIONS TO FUNDACION IRSA
From time to time, we donate money to Fundacion IRSA, a charitable,
non-profit organization of which our Shareholder and President Eduardo S.
Elsztain is the President and his wife is the Secretary. We paid Ps. 0.03
million, Ps. 0.15 million and Ps. 0.07 million for the fiscal year ended June
30, 2002, 2001 and 2000, respectively.
SHARING OF CORPORATE SERVICES
In order to reduce administrative expenses, and to achieve a more
efficient allocation of corporate resources, as of June 30, 2002 Cresud, IRSA
and APSA share corporate services in the areas of institutional relations,
finance, human resources, technology, systems and insurance.
In the future, and in order to continue with our policy of achieving a
more efficient allocation of corporate resources, we may extend the areas in
which we share corporate services with IRSA.
LEGAL SERVICES
During the year ended on June 30, 2002 and 2001, we paid the firm Zang,
Bergel & Vines a total amount of approximately Ps. 0.27 million and Ps. 0.20
million for their legal services. Our directors Saul Zang, Salvador D. Bergel
and Ernesto M. Vines are partners of such firm.
ACQUISITION OF IRSA UNITS
On October 15, 2002, we initiated a preemptive rights offering of
rights to subscribe for 50,000,000 units consisting of US$50.0 million of 8%
convertible notes due 2007 and warrants to purchase shares of common stock. The
convertible notes may be converted into shares of our common stock after
December 13, 2002 and the rights offering to holders of our common shares and
ADSs expired on November 13, 2002. The offering was fully subscribed and the
funds have already been received by the Company. Proceeds of the offering were
applied to subscribe IRSA's convertible notes.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18 for our Consolidated Financial Statements.
B. LEGAL OR ARBITRATION PROCEEDINGS
We are not engaged in any material litigation or arbitration and no
material litigation or claim is known to us to be pending or threatened against
us or our subsidiaries.
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C. DIVIDEND POLICY
Pursuant to Argentine law, the distribution and payment of dividends to
shareholders is valid only if they result from realized and net earnings of the
company pursuant to annual financial statements approved by the shareholders.
The approval, amount and payment of dividends are subject to the approval by our
shareholders at our annual ordinary shareholders meeting. The approval of
dividends requires the affirmative vote of a majority of the shares entitled to
vote at the meeting.
In accordance with Argentine law and our bylaws, net and realized
profits for each fiscal year shall be distributed as follows:
o 5% of such net profits to our legal reserve, until such reserve
amounts to 20% of our capital stock;
o a certain amount determined at a shareholders' meeting is allocated
to compensation of our directors and the members of our supervisory
committee; and
o dividends, additional dividends to preferred shares if any, or to
optional reserve funds or contingency reserves or to a new account,
or for whatever purpose the shareholders' meeting determines.
In the past, we paid dividends in cash with an average of Ps. 0.024 per
share. At our shareholders' meeting held on October 23, 1998, our shareholders
approved the distribution of 7,997,577 treasury shares to be distributed pro
rata among our shareholders indicated in the table below as cash dividends.
The following table sets forth the dividend payout ratio and the
amounts of total dividends paid on each fully paid share of common stock each
year since 1995. Amounts in Pesos are presented in historical Pesos as of the
respective payment dates. See "Exchange Rates".
PAYMENTS (1)
- -----------------------------------------------------------------------------------------------------------------
YEAR DECLARED CASH DIVIDENDS STOCK DIVIDENDS TOTAL PER SHARE
- -------------------------------------- ------------------- ------------------- --------------------
(Pesos) (Pesos) (Pesos)
1997.................................. -- -- --
1998.................................. 0.099 -- 0.099
1999.................................. 0.092 -- 0.092
2000.................................. 0.011 -- 0.011
2001.................................. 0.030 -- 0.030
(1) Corresponds to per share payments. To calculate the dividends paid per ADS,
the payment per share should be multiplied by ten. Amounts in Pesos are
presented in historical Pesos as of the respective payment date. See
"Exchange Rates".
Although we hope to distribute cash dividends in the future, we cannot
assure you that we will be able to do it.
D. SIGNIFICANT CHANGES
On October 15, 2002, a bill of sale was signed for the farm Los
Maizales, of 618 hectares, located in the District of Villa Canas, Santa Fe. The
price for the sale of the farm was US$ 1.9 million. This sale generated an
approximate Ps. 5.1 million profit.
On August 30, 2002 our Company's Board of Directors approved the
signing of a final merger agreement with the Absorbed Companies Agro Riego San
Luis S.A. and Colonizadora Argentina S.A.
On October 15, 2002, we initiated a preemptive rights offering to
subscribe for 50,000,000 units consisting of US$ 50.0 million of 8% convertible
notes due 2007 and non-detachable warrants to purchase additional shares of our
common stock. The convertible notes may be converted into shares of our common
stock after December 13, 2002, and until maturity on November 14, 2007, at the
initial conversion price of
96
US$ 0.5078 per common share. Each warrant will be exercisable on or after
conversion of the convertible note to which it is attached at the same
conversion price plus a 20% premium (US$ 0.6093). The rights offering to holders
of our common shares and ADSs expired on November 13, 2002. Existing
shareholders have subscribed through the exercise of their preemptive rights for
US$ 20.5 million and they have exercised their accretion rights for US$ 1.7
million, adding together US$ 22.2 million. During the allocation of the
remainder new investors have subscribed the remaining US$ 27.8 million units
completing the US$ 50 million offering. The offering was fully subscribed and
the funds have already been received by the Company. Proceeds of the offering
were applied to subscribe IRSA's convertible notes.
ITEM 9. THE OFFER AND LISTING DETAILS
A. INFORMATION ON THE LISTING OF OUT STOCK
The following summary provides information concerning our share capital
and briefly describes all material provisions of our bylaws and the Argentine
Law of Corporations.Our Common Stock
STOCK EXCHANGES IN WHICH OUR SECURITIES ARE LISTED
Our common shares are listed on the Bolsa de Comercio de Buenos Aires
and NASDAQ.
Our authorized capital stock consists of 124,284,392 shares of common
stock, Ps. 1 par value per share.
As of September 30, 2002, our outstanding capital stock consisted of
122,745,539 shares of common stock. As of September 30, 2002, (1) we had no
other shares of any class or series issued and outstanding and (2) we had no
outstanding warrants, rights or convertible securities.
The common stock has one vote per share. All outstanding shares of the
common stock are validly issued, fully paid and non assessable. As of September
30, 2002, there were 167 holders of all of our common stock.
The following description of the material terms of our capital stock is
subject to our certificate of incorporation and bylaws, which are included as
exhibits to the registration statement of which this Form 20-F forms a part, and
the provisions of applicable Argentine law.
PRICE HISTORY OF OUR STOCK ON THE BUENOS AIRES STOCK EXCHANGE
Our common shares are listed and traded on the Buenos Aires Stock
Exchange under the trading symbol "CRES". Our shares began trading on the Buenos
Aires Stock Exchange on December 12, 1960. The following table shows, for the
calendar periods indicated, the high and low closing sales price of our common
shares on the Buenos Aires Stock Exchange. On November 19, 2002, the closing
price for our common shares on the Buenos Aires Stock Exchange was,
approximately, Ps. 1.97 per share.
SHARE PRICE IN PESOS
------------------------
HIGH LOW
--------- -------
1996.................................... 2.25 1.38
1997.................................... 2.47 1.67
1998.................................... 2.14 1.07
1999
1st quarter........................... 1.20 0.95
97
SHARE PRICE IN PESOS
------------------------
HIGH LOW
--------- -------
2nd quarter........................... 1.30 1.03
3rd quarter........................... 1.09 1.09
4th quarter........................... 0.99 0.89
2000
1st quarter........................... 1.03 0.81
2nd quarter .......................... 0.96 0.81
3rd quarter........................... 0.90 0.79
4th quarter........................... 0.85 0.75
2001
1st quarter........................... 0.93 0.76
2nd quarter .......................... 1.05 0.80
3rd quarter........................... 1.02 0.90
4th quarter........................... 0.89 0.63
2002
January............................... 1.54 0.75
February ............................. 1.65 1.40
March................................. 1.90 1.43
April................................. 2.15 1.88
May................................... 2.35 1.99
June.................................. 2.20 2.00
July.................................. 2.50 2.30
August................................ 2.40 1.52
September............................. 2.05 1.60
October............................... 2.42 1.80
Source: Bloomberg.
PRICE HISTORY OF OUR STOCK ON NASDAQ NATIONAL MARKET
Each of our american depositary shares represents 10 ordinary shares.
Our American depositary shares are listed and traded on the Nasdaq National
Market under the trading symbol "CRESY". Our ADSs began trading on the Nasdaq in
March 1997 and were issued by the Bank of New York Inc., acting as ADS
Depositary. The following table sets forth, for the calendar periods indicated,
the high and low closing sale prices of our ADSs on the Nasdaq. On November 19,
2002, the closing price for our ADSs on the Nasdaq was, approximately US$ 5.20
per ADS.
U.S. DOLLARS PER ADS
------------------------
HIGH LOW
--------- --------
1997 (FROM MARCH 27, 1997)................. 24.5 16.8
1998....................................... 21.4 10.6
1999
1st quarter............................ 12.3 10.0
2nd quarter............................ 12.9 10.2
3rd quarter............................ 10.9 10.7
4th quarter............................ 10.6 8.8
2000
1st quarter............................ 10.4 8.3
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U.S. DOLLARS PER ADS
------------------------
HIGH LOW
--------- --------
2nd quarter............................ 10.1 7.9
3rd quarter............................ 9.3 8.0
4th quarter............................ 8.6 7.4
2001
1st quarter............................ 9.4 7.5
2nd quarter............................ 10.5 8.0
3rd quarter............................ 10.1 9.0
4th quarter............................ 9.0 6.1
2002
January................................ 6.7 5.7
February............................... 6.9 6.2
March.................................. 6.6 5.9
April.................................. 6.7 6.0
May.................................... 6.5 5.9
June................................... 6.2 5.1
July................................... 6.7 5.3
August................................. 6.0 4.5
September.............................. 5.8 4.1
October................................ 6.2 4.6
B. PLAN OF DISTRIBUTION
Not Applicable
C. MARKETS
ARGENTINE SECURITIES MARKETS
The Comision Nacional de Valores is a separate governmental entity with
jurisdiction covering the territory of the Argentine Republic. Its main purpose
is to ensure transparency of Argentina's securities markets, to watch over the
market price formation process and to protect investors. The Comision Nacional
de Valores supervises corporations authorized to issue securities to the public,
the secondary markets where these securities are traded, and all persons and
corporations involved in any capacity in the public offering and trading of
these securities. Pension funds and insurance companies are regulated by
separate government agencies. The Argentine markets are governed generally by
Law No. 17,811, as amended, which created the Comision Nacional de Valores and
regulates stock exchanges, stockbrokers, market operations and the public
offerings of securities.
There is a relatively low level of regulation of the market for
Argentine securities and investors' activities in such market, and enforcement
of existing regulatory provisions has been extremely limited. Furthermore, there
may be less publicly available information about Argentine companies than is
regularly published by or about companies in the United States and certain other
countries. However, the Argentine government and the Comision Nacional de
Valores, taking into consideration the deeper global awareness of the importance
of having adequate corporate governance practices and a legal framework to
enforce principles such as "full information," and "transparency," have recently
issued decree N(degree) 677/2001. This decree has the objective of determining
the rights of the "financial consumer", increasing market transparency and an
adequate legal framework to increase the investor's protection within the
capital market. Most of its reforms are in line with world trends pertaining to
corporate governance practices that have already been adopted by many emerging
markets.
99
In order to offer securities to the public in Argentina, an issuer must
meet certain requirements of the Comision Nacional de Valores regarding assets,
operating history, management and other matters, and only securities for which
an application for a public offering has been approved by the Comision Nacional
de Valores may be listed on the Bolsa de Comercio de Buenos Aires. This approval
does not imply any kind of certification or assurance related to the merits or
the quality of the securities, or the solvency of the issuer. Issuers of listed
securities are required to file unaudited quarterly financial statements and
audited annual financial statements, as well as various other periodic reports,
with the Comision Nacional de Valores and the Bolsa de Comercio de Buenos Aires.
There are 11 securities exchanges in Argentina, the principal exchange
for the Argentine securities market is the Bolsa de Comercio de Buenos Aires,
which handles approximately 95% of all equity trading in the country.
The Bolsa de Comercio de Buenos Aires is a complex, non-profit and
self-regulated organization. Various markets require different
self-organizations of brokers within the Bolsa de Comercio de Buenos Aires,
which is one of its particular characteristics. The most important and
traditional of such markets is Mercado de Valores.
The Mercado de Valores is a self-regulated incorporated business
organization. Its capital stock is divided into 228 stocks, the holders of which
(natural or artificial persons) are entitled to act as individual brokers or
brokerage firms; i.e. to execute securities purchase and sale transactions in
their own name and on behalf of third parties. Brokers receive a commission for
their services.
The primary functions of the Mercado de Valores are concerned with the
settlement, surveillance and guarantee of market trades. This entity is also
qualified to take disciplinary actions against individual brokers or brokerage
firms who might violate the statutory rules in vigor, and/or the rules and
regulations governing the Argentine Stock Market System.
Furthermore, the Mercado de Valores regulates, coordinates and
implements each and every aspect connected with stock exchange trading, types of
securities, market mechanisms, terms and conditions of payment, and the like.
Jointly with the Bolsa de Comercio de Buenos Aires is has implemented
stock-watch mechanisms.
OVER THE COUNTER MARKET, MERCADO ABIERTO ELECTRONICO
The Mercado Abierto Electronico is an exchange organized under the laws
of the Argentine Republic, which operates as a self-regulatory organization
under the supervision of the Comision Nacional de Valores.
The Mercado Abierto Electronico works as an electronic environment to
process Over The Counter transactions. It is an electronic exchange where both
government securities and corporate bonds are traded through spot and forward
contracts.
Mercado Abierto Electronico has 90 brokers/dealers members, which
include national banks, provincial banks, municipal banks, private national
banks, foreign banks, cooperative banks, financial institutions, foreign
exchange entities and pure brokers/dealers (exclusively engaged in brokerage
activities). Both Argentine or foreign capital banks and financial institutions
may be Mercado Abierto Electronico's brokers/dealers.
Securities to be traded must be registered with the pertinent
supervising authorities and may be traded in Mercado Abierto Electronico, in
other exchanges or in both of them concurrently.
The Argentine securities markets are substantially more volatile than
the securities markets in the United States and certain other developed
countries. The Mercado de Valores experienced a 13% increase in 1995, a 25%
increase in 1996, a 6% increase in 1997, a 37% decrease in 1998, a 27% increase
in 1999, a 24% decrease in 2000, a 30% decrease in 2001, and a 18% increase
through June 30, 2002. To control volatility, the Bolsa de Comercio de Buenos
Aires operates a system in which trades of an issuer's stock are suspended
100
for one-half hour when such issuer's share price changes by more than 10% from
its opening price.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
OUR COMMON STOCK
Our authorized capital stock consists of 124,284,392 shares of common
stock, Ps. 1 par value per share. As of October 31, 2002, our outstanding
capital stock consisted of 122,745,539 shares of common stock. In addition, we
issued 50,000,000 registered units consisting of US$ 50.0 million of 8%
convertible notes due 2007 and warrants to purchase shares of common stock on
November 21, 2002.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
OUR PURPOSES
Our legal name is Cresud Sociedad Anonima Comercial, Inmobiliaria,
Financiera y Agropecuaria. We were incorporated under the laws of Argentina on
December 31, 1936 as a sociedad anonima (stock corporation) and were registered
with the Inspeccion General de Justicia (Public Registry of Commerce of the City
of Buenos Aires) on February 19, 1937 under number 26, on page 2, book 45 of
national bylaws volume.
Pursuant to our Bylaws, our term of duration expires on July 6, 2082.
Pursuant to article 4 of our Bylaws our purpose is to perform the
following actvities:
o Commercial activities with respect to cattle and products pertaining
to farming and animal husbandry;
o Real estate activities with respect to urban and rural properties;
o Financial activities, except for those regulated by Law 21,526 of
financial entities;
o Farming and animal husbandry activities, for properties owned by us
or by third parties; and
101
o Agency and advice activities for which there is not required a
specific qualifying title.
BOARD OF DIRECTORS
VOTING OF PROPOSALS IN WHICH DIRECTORS HAVE MATERIAL INTEREST
The Argentine Law of Corporations N(degree) 19,550 establishes in
Section 271 that directors may contract with the company when the contract is
related to the regular activities of the company and its terms and conditions
are established on market terms. All other contracts with directors must be
approved by the shareholders.
Notwithstanding that, Section 272 of the Law of Corporations N(degree)
19,550 provides that when a director has a conflict of interest with the
company, he should notify the board of directors and the supervisory committee
and refrain to vote on that matter. The violation of this provision results in
the director being jointly and severally unlimitedly liable.
APPROVAL OF COMPENSATION OF DIRECTORS AND SUPERVISORY COMMITTEE
Our bylaws do not establish the compensation to be paid to members of
the Board of Directors and the Supervisory Committee. Therefore pursuant to
Section 261 of the Law of Corporations N(degree) 19,550, it must be approved by
the shareholders. The maximum amount that may be paid as compensation to members
of the Board of Directors, may not exceed 25% of the realized and net earnings
of the company and 5% when there is no distribution of dividends. If the company
does not distribute the total earnings, the amount of the compensation should be
proportional to that distribution and within the mentioned limits. These limits
may only be surpassed by express approval of the shareholders.
BORROWING POWERS OF DIRECTORS
Our bylaws establish, in Section 18, that the board of directors have
full and broad powers to organize, manage and direct Cresud, aimed at fulfilling
the corporate purpose.
RETIREMENT OF DIRECTORS
Our bylaws do not establish any requirements or provisions regarding
age limits for directors' retirement.
RIGHTS, PREFERENCES AND RESTRICTIONS ATTACHING TO OUR SHARES
DIVIDEND RIGHTS
The Law of Corporations No. 19,550 establishes that the distribution
and payment of dividends to shareholders is valid only if dividends result from
realized and net earnings of the company pursuant to the annual financial
statements approved by the shareholders. The approval, amount and payment of
dividends are subject to the approval of the Annual Ordinary Shareholders'
Meeting. That approval requires the affirmative vote of the majority of the
shares present at the meeting with right to vote.
Dividends are paid pro rata according to the interests held by
shareholders.
102
Under applicable CNV regulations, cash dividends must be paid to
shareholders within 30 days of the decision approving their distribution. In the
case of stock dividends, shares are required to be delivered within three months
of the shareholders' meeting approving the dividend. The right to collect
dividends expires three years after the dividends were made available to
shareholders.
To the extent that we declare and pay dividends on our stock, owners of
ADSs on the relevant record date will be entitled to receive any dividends
payable in respect of the common stock underlying the ADSs. Cash dividends will
be paid in Pesos and, except in certain circumstances, will be converted by the
Depositary into U.S. dollars at the prevailing exchange rate on the date of
conversion and paid to the owners of the ADSs net of any applicable dividend
distribution fees, costs, and expenses of conversion, taxes and governmental
charges.
The shareholders' meeting may authorize payment of dividends on a
quarterly basis provided no applicable regulations are violated. In that case,
all and each of the members of the Board of Directors and the Supervisory
Committee will be jointly and severally unlimitedly liable for the refund of
those dividends if, as of the end of the respective fiscal year, the realized
and net earnings of the company are not sufficient to allow the payment of
dividends.
VOTING RIGHTS AND STAGGERED ELECTIONS
Our capital stock is composed of book-entry common shares with par
value of Ps. 1 per share and entitled to one vote each.
All directors and alternate directors are elected for a three-year
term.
Our bylaws do not consider staggered elections.
RIGHTS TO SHARE IN OUR PROFITS
The holders of our common shares have the right to participate in our
net and realized profits on a pro rata basis.
Pursuant to the Law of Corporations No. 19,550 and Section 29 of our
bylaws, liquid and realized profits of each fiscal year shall be distributed as
follows:
o allocate 5% of such net profits to legal reserve, until the amount
of such reserve equals 20% of the capital stock;
o the amount established by the shareholders' meeting as remuneration
of the Board of Directors and the supervisory committee;
o dividends, additional dividends to preferred shares if any, or to
optional reserve funds or contingency reserves or to a new account,
or for whatever purpose the shareholders' meeting determines.
RIGHTS TO SHARE IN ANY SURPLUS IN THE EVENT OF LIQUIDATION
Section 30 of our bylaws determine that, in the event of our
liquidation, dissolution or winding-up, the assets (i) will be applied to
satisfy liabilities and (ii) will be proportionally distributed among holders of
preferred stock if there are any and in accordance with the terms of the
preferred stock. If any surplus remains, the holders of common shares are
entitled to receive and share on a pro rata basis in all net assets remaining
for distribution.
103
PROCEDURE TO CHANGE THE RIGHTS OF HOLDERS OF OUR STOCK
The rights of holders of our stock are established in the Law of
Corporations No. 19,550 and in our bylaws. The rights of shareholders provided
for by the Law of Corporations No. 19,550 may not be diminished by the bylaws.
Section 235 of the Law of Corporations No. 19,550 establishes that the amendment
of the bylaws should be approved by the shareholders of the company at an
Extraordinary Shareholders' Meeting.
ORDINARY AND EXTRAORDINARY SHAREHOLDERS' MEETING
Our bylaws establish that any meeting must be called by the Board of
Directors or by the Supervisory Committee in the assumptions provided for by law
or at the request of the holders of shares representing no less than 5% of the
share capital. Any meetings requested by shareholders must be held within 30
days after the request is made. Annual meetings may be called simultaneously for
the first and second call as set forth in section 236 of the Law of Corporations
No. 19,550, regardless of the provisions contained therein for the case of
unanimous meetings. Upon failure to give simultaneous call, the meeting on
second call, due to failure to constitute quorum on first call, must be held
within 30 days after such meeting, complying with all notices required by
applicable regulations.
Any shareholder may appoint any person as his duly authorized
representative at whatever meeting, by granting a proxy with duly certified
signature. Co-owners of shares must have single representation.
In order to attend a shareholders' meeting, shareholders should deposit
with the company the share certificate issued by the registrar agent, at least 3
business days prior to the date of the respective shareholders' meeting. We
will deliver the respective receipt which will be required for admission to the
shareholders' meeting. On the day of the meeting, the shareholders or their
representatives will have to fill in their addresses, identity document and
number of votes and will sign the Shareholders' Meetings' Attendance Book.
The meetings shall be presided over by the Chairman of the Board of
Directors.
The first call of the ordinary shareholders' meeting requires the
attendance of shareholders representing a majority of the shares with voting
rights. The second call does not require a minimum of shares with right to vote.
In both cases, resolutions shall be adopted by the absolute majority of the
votes that may be cast in the relevant decision.
The first call of the extraordinary shareholders' meeting requires the
attendance of shareholders representing 60% of the shares with voting rights.
The second call does not require a minimum of shares with right to vote. In both
cases, resolutions shall be adopted by the absolute majority of the votes that
may be cast in the relevant decision.
LIMITATIONS TO OWN SECURITIES BY NON-RESIDENT OR FOREIGN SHAREHOLDERS
There are no legal limitations an ownership of securities or exercise
of voting rights, by non-resident or foreign shareholders.
OWNERSHIP THRESHOLD ABOVE WHICH OWNERSHIP SHOULD BE DISCLOSED
The Comision Nacional de Valores regulations require that transactions
which cause a person's holdings of capital stock of a registered Argentine
company, to be 5% or more of the voting power, must be immediately reported to
the Comision Nacional de Valores. Thereafter, every change in the holdings that
represents a multiple of 5% of the voting power must also be reported.
104
Directors, senior managers, executive officers, members of the
supervisory committee, and controlling shareholders of an Argentine company
whose securities are publicly offered, must notify the Comision Nacional de
Valores on a monthly basis, their beneficial ownership of shares, debt
securities, and call and put options related to securities of such companies and
their controlling, controlled or affiliated companies.
Further, the Comision Nacional de Valores must be immediately notified
of transactions which cause a person's holdings of capital stock of an Argentine
company whose securities are publicly offered to be 5% or more of the voting
power and every change in the holdings that represents a multiple of 5% of the
voting power. Holders of more than 50% of the common shares or who otherwise
control decision making in shareholders' meetings, as well as directors,
officers and members of the supervisory committee, must provide the Comision
Nacional de Valores with annual reports of their holdings in the capital stock
of such companies and monthly reports of any change in their holdings.
C. MATERIAL CONTRACTS
We do not have any material contract entered into outside the ordinary
course of business.
D. EXCHANGE CONTROLS
CURRENCY EXCHANGE REGULATION
Pursuant to Executive Order No. 260/2002 enacted by the Executive Power
on February 8th, 2002, the dual exchange rate system in force since January 2002
has been eliminated. This dual system established an "official" exchange rate of
Ps.1.40 equal to 1 US dollar and a free exchange rate, and was replaced by a
unique and free exchange market. All foreign currency exchange transactions must
be carried out in the free exchange market, in which the Argentine Central Bank
participates by purchasing and selling foreign currency.
IMPORT AND EXPORT OF CAPITAL
IMPORT OF CAPITAL
At present, there are no laws, executive orders or regulations nor any
exchange controls in force in Argentina limiting the import of capital.
Pursuant to the Argentine Foreign Investment Law No. 21.832, and
amendments thereto and Decree No. 1853, enacted in 1993, the purchase by foreign
investors (any natural or legal person domiciled out of Argentina or an
Argentine company of "foreign capital") of capital participation in a company
existing in Argentina (according to the Foreign Investment Act) shall constitute
a foreign investment.
At present there are no restrictions on foreign investment in
industries other than public broadcasting media, and no prior authorization is
required to make foreign investments.
Therefore, no prior authorization is required for the purpose of
purchasing securities of our Company.
See Item 3: "Key Information - B. Exchange Rates"
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EXPORT OF CAPITAL, INCLUDING THE AVAILABILITY OF CASH OR CASH
EQUIVALENTS
In compliance with the economic measures set forth by the Government by means of
Decree No. 1570/2001 dated December 1, 2001 and subsequent amendments thereto,
aimed at protecting the integrity of the Argentine financial system, money
cannot be transferred abroad, unless expressly authorized by the Argentine
Central Bank.
REMISSION OF DIVIDENDS, INTERESTS OR OTHER PAYMENTS TO HOLDERS OF
SECURITIES IN OUR COMPANY, TO NON RESIDENTS
In compliance with the economic measures set forth by the Argentine
Government by means of Decree No. 1570/2001 dated December 1st, 2001, as amended
by Decree No. 1606/2001, aimed at protecting the integrity of the Argentine
financial system, some limitations have been imposed on export of capital. See:
"Export of Capital, including the availability of cash or cash equivalents."
E. TAXATION
UNITED STATES TAXATION
The following summary describes the material United States federal
income tax consequences of the ownership of shares and ADSs as of the date
hereof. The discussion set forth below is applicable to U.S. Holders (as defined
below). Except where noted, this discussion deals only with U.S. Holders (as
defined below) that purchase the shares or ADSs as capital assets and that do
not have a permanent establishment in Argentina, are not residents of Argentina,
are not domiciled in Argentina, are not organized in Argentina, do not have a
local branch in Argentina, do not carry on certain commercial activities, do not
fall within the legal presumption for non-Argentine legal entities with respect
to the Argentine Personal Assets Tax, do not own an Argentine bank account and
are not physically present in Argentina for 183 days or more within a calendar
year. This summary does not represent a detailed description of the United
States federal income tax consequences applicable to you if you are subject to
special treatment under the United States federal income tax laws, including if
you are:
o a bank;
o a dealer in securities or currencies;
o a financial institution;
o a regulated investment company;
o a real estate investment trust;
o an insurance company;
o a tax exempt organization;
o a person holding the shares or ADSs as part of a hedging, integrated
or conversion transaction, constructive sale or straddle;
o a trader in securities that has elected the mark-to-market method of
accounting for your securities;
o a person liable for alternative minimum tax;
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o a person who owns more than 10% of the voting stock of our company;
o an investor in a pass-through entity; or
o a United States person whose "functional currency" is not the
United States dollar.
Furthermore, the discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings
and judicial decisions thereunder as of the date hereof, and such authorities
may be replaced, revoked or modified so as to result in federal income tax
consequences different from those discussed below. In addition, this summary is
based, in part, upon representations made by the depositary (the "Depositary")
to us and assumes that the deposit agreement governing the ADSs, and all other
related agreements, will be performed in accordance with their terms. IF YOU ARE
CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF SHARES OR ADSS YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO YOU AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
"U.S. Holder" means a beneficial owner of a share, or ADS that is for
United States federal income tax purposes:
o a citizen or resident of the United States;
o a corporation created or organized in or under the laws of the
United States or any political subdivision of the United States;
o an estate the income of which is subject to United States federal
income taxation regardless of its source;
o a trust if it (1) is subject to the primary supervision of a court
within the United States and one or more United States persons has
authority to control all substantial decisions of the trust or (2)
has a valid election in effect under applicable United States
Treasury regulations to be treated as a United States person.
If a partnership holds shares or ADSs, the tax treatment of a partner
will generally depend on the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding shares or ADSs, you
should consult your tax advisors.
ADSs
In general, for United States federal income tax purposes, U.S. Holders
of ADSs will be treated as the owners of the underlying shares that are
represented by the ADSs. However, the United States Treasury has expressed
concerns that parties to whom depositary shares are pre-released may be taking
actions that are inconsistent with the claiming of foreign tax credits by the
holders of ADSs. Accordingly, the analysis of the creditability of Argentine
taxes described herein could be affected by future actions that may be taken by
the United States Treasury. Deposits or withdrawals of shares by U.S. Holders
for ADSs will not be subject to United States federal income tax.
DISTRIBUTIONS ON SHARES OR ADSs
Subject to the discussion under "Passive Foreign Investment Company
Rules" below, distributions on the shares or ADSs, (including net amounts
withheld to reflect Argentine withholding taxes, if any) will be taxable as
dividends to the extent of our current and accumulated earnings and profits (as
determined under United States federal income tax principles). Such income will
be includable in your gross income as ordinary income on the day actually or
constructively received by you, in the case of shares, or by the ADS depositary,
in the case of ADSs. Such dividends will not be eligible for the
dividends-received deduction.
107
The amount of any dividend paid in Pesos will equal the United States
dollar value of the Pesos received calculated by reference to the exchange rate
in effect on the date the dividend is actually or constructively received by you
in the case of shares, or by the ADS depositary, in the case of ADSs, regardless
of whether the Pesos are converted into United States dollars. If the Pesos
received are not converted into United States dollars on the day of receipt, you
will have a basis in the Pesos equal to their United States dollar value on the
date of receipt. Any gain or loss you realize on a subsequent conversion or
other disposition of the Pesos will be treated as United States source ordinary
income or loss.
Subject to certain significant conditions and limitations, Argentine
tax withheld from dividends, if any, may be treated as foreign income tax
eligible for credit or deduction against your United States federal income tax
liability. For purposes of the foreign tax credit, dividends paid on the shares
will be treated as income from sources outside the United States and will
generally constitute "passive income" or, in the case of certain United States
Holders, "financial services income." The rules governing the foreign tax credit
are complex. Investors are urged to consult their tax advisors regarding the
availability of the foreign tax credit under their particular circumstances.
TAXATION OF CAPITAL GAINS
Subject to the discussion under "Passive Foreign Investment Company
Rules" below, upon the sale, exchange or other disposition of shares or ADSs,
you generally will recognize capital gain or loss equal to the difference
between the United States dollar value of the amount realized upon the sale,
exchange or other disposition and the adjusted tax basis of the shares or ADSs,
determined in United States dollars. The capital gain or loss will be long-term
capital gain or loss if at the time of sale, exchange or other disposition you
have held the shares or ADSs for more than one year. Capital gains of
individuals derived with respect to capital assets held for more than one year
are eligible for reduced rates of taxation depending upon the holding period of
such capital assets. The deductibility of capital losses is subject to
limitations. Any gain or loss you recognize will generally be treated as United
States source gain or loss.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Although it is an inherently uncertain factual issue, we may be a
passive foreign investment company ("PFIC") for the current or future taxable
years.
In general, we will be a PFIC for any taxable year in which, either (i)
at least 75% of the gross income of our company for the taxable year is passive
income or (ii) at least 50% of the value (determined on the basis of a quarterly
average) of our assets is attributable to assets that produce or are held for
the production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income. If
we own at least 25% by value of the stock of another corporation, we will be
treated for purposes of the PFIC tests as owning a proportionate share of the
assets of the other corporation, and as receiving directly a proportionate share
of the other corporation's income.
The determination of whether we are a PFIC is made annually. If we are
a PFIC for any taxable year during which you hold shares or ADSs in our company,
unless you make the mark-to-market election discussed below, you will be subject
to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our shares
or ADSs, you will be subject to special tax rules with respect to any "excess
distribution" received and any gain realized from a sale or other disposition,
including a pledge, of such shares or ADSs. Distributions received in a taxable
year that are greater than 125% of the average annual distributions received
during the shorter of the three preceding taxable years or your holding period
for the equity interests will be treated as excess distributions. Under these
special tax rules (i) the excess distribution or gain will be allocated ratably
over your holding period for the equity interests, (ii) the amount allocated to
the current taxable year, and any taxable year prior to the first taxable year
in which we were a PFIC, will be treated as ordinary income, and (iii) the
amount allocated to each other year will be subject to tax at the highest tax
rate in effect for that year and the interest charge
108
generally applicable to underpayments of tax will be imposed on the resulting
tax attributable to each such year.
In certain circumstances, in lieu of being subject to the excess
distribution rules discussed above, you may make an election to include gain on
the stock of a PFIC as ordinary income under a mark-to-market method provided
that such stock is regularly traded on a qualified exchange. Under current law,
the mark-to-market election is only available for stock traded on certain
designated United States exchanges and foreign exchanges which meet certain
trading, listing, financial disclosure and other requirements to be treated as a
qualified exchange under applicable United States Treasury regulations.
Consequently, the mark-to-market election may be available to you with respect
to the ADSs because the ADSs will be listed on the Nasdaq, which constitutes a
qualified exchange under the regulations, although there can be no assurance
that the ADSs will be regularly traded. You should note that only the ADSs and
not the shares are listed on the Nasdaq. The shares are listed on the Buenos
Aires Stock Exchange. Consequently, the Buenos Aires Stock Exchange would need
to meet the trading, listing, financial disclosure and other requirements of the
United States Treasury regulations. The ADSs or shares would need to be
regularly traded on such exchanges in order for the ADSs or shares to be
potentially eligible for the mark-to-market election.
If we are a PFIC in any taxable year in which you hold our shares or
ADSs, but you do not make a mark-to-market election until a subsequent taxable
year, you will be subject to special rules in the taxable year of the election.
You should consult your own tax advisors regarding the application of the
mark-to-market election in your particular situation.
If you make an effective mark-to-market election, you will include in
income each year as ordinary income, rather than capital gain, the excess, if
any, of the fair market value of your PFIC shares or ADSs at the end of the
taxable year over your adjusted tax basis in the shares or ADSs and will be
permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of such shares or ADSs over their fair market value at the end of the
taxable year, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election. Your basis in the shares or
ADSs will be adjusted to reflect any such income or loss amounts. Any gain or
loss on the sale of the shares or ADSs will be ordinary income or loss, except
that such loss will be ordinary loss only to the extent of the previously
included net mark-to-market gain.
If you make a mark-to-market election it will be effective for the
taxable year for which the election is made and all subsequent taxable years
unless the shares or ADSs are no longer regularly traded on a qualified
securities exchange or the IRS consents to the revocation of the election. Under
proposed Treasury regulations, mark-to-market inclusions and deductions will be
suspended during taxable years in which are not a PFIC, but would resume if they
subsequently become a PFIC. You are urged to consult your own tax advisor about
the availability of making such a mark-to-market election.
Alternatively, a United States Holder of shares or ADSs in a PFIC can
sometimes avoid the rules described above by electing to treat the company as a
"qualified electing fund" under section 1295 of the Code. This option is not
available to you because we do not intend to comply with the requirements
necessary to permit you to make this election.
A United States Holder who owns shares or ADSs during any year that we
are a PFIC must file IRS Form 8621.
You should consult your own tax advisors concerning the United States
federal income tax consequences of holding the shares or ADSs if we are
considered a PFIC in any taxable year.
ARGENTINE PERSONAL ASSETS TAXES
Amounts paid on account of the Argentine Personal Assets Taxes, if any,
will not be eligible as a credit against your United States federal income tax
liability, but may be deductible subject to applicable limitations in the Code.
109
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to
distributions on shares or ADSs and to the proceeds of sale of a share or ADS
paid to United States Holders other than certain exempt recipients (such as
corporations). Backup withholding may apply to such payments if you fail to
provide a correct taxpayer identification number or certification of foreign or
other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed
as a refund or a credit against your United States federal income tax liability
provided you furnish the required information to the IRS.
ARGENTINE TAXATION
The following discussion is a summary of certain Argentine tax
considerations associated with an investment in, ownership or disposition of,
the shares or the ADSs by an individual holder that is not domiciled or resident
in Argentina and a legal entity that is not organized under the laws of
Argentina and does not have a permanent establishment in Argentina or is not
otherwise doing business in Argentina on a regular basis (a "Foreign Holder").
The discussion is for general information only and is based on current Argentine
tax laws. Moreover, while this summary is considered to be a correct
interpretation of existing laws in force as of the date of this 20-F Form, no
assurance can be given that the courts or administrative authorities responsible
for the administration of such laws will agree with this interpretation or that
changes in such laws or interpretations will not occur. PROSPECTIVE INVESTORS
ARE URGED TO CONSULT THEIR OWN TAX ADVISOR REGARDING THE PARTICULAR TAX
CONSEQUENCES ARISING UNDER ANY TAXING JURISDICTION.
TAXATION OF DIVIDENDS
Dividends, either in cash, shares or kind approved by our shareholders
are currently exempt from Argentine withholding or other taxes.
Notwithstanding the foregoing, according to Argentine law, income tax
will be applied to the amount of dividends distributed in excess of a company's
net taxable income for the fiscal year preceeding the date of the distribution
of such dividends. The legislation requires that companies withhold 35% of the
amount of distributed dividends in excess of the net taxable income of such
distribution, as determined in accordance with the income tax law. The
withholding would not be applied to the payment of future dividends derived out
of retained earnings obtained in the fiscal years ended prior to December 30,
1998. Dividends distributed by an Argentine company are not subject to this tax
to the extent that those dividends arise from dividend income or other
distributions received by such company from other Argentine companies.
TAXATION OF CAPITAL GAINS
Gains on sales or other dispositions of shares or ADSs by non-resident
individuals and foreign entities without a permanent establishment in Argentina
are currently exempt from taxation. Notwithstanding, if the foreign entity
qualifies as an Offshore Taxable Entity and shares or ADS's are not listed,
sales or other dispositions of such shares or ADSs are taxable at the rate of
17,5%.
An Offshore Taxable Entity is a foreign entity without permanent
establishment in Argentina which (i) pursuant to its bylaws or to the applicable
regulatory framework has its principal investing activity outside the
jurisdiction of its incorporation and/or (ii) cannot perform in the jurisdiction
of its incorporation certain transactions and/or investments expressly indicated
in its bylaws or in the applicable regulatory framework.
Gains on sales or other dispositions of listed shares or ADSs by resident
individuals are currently exempt from taxation. In the case of non listed shares
or ADS's its sale or other dispositions are taxable at the rate of 9% up to
15%, but the losses generated by such transactions may only be offset against
income from the same type of transactions.
110
Gains on the sale or other dispositions of shares or ADSs by Argentine
entities are subject to Argentine income tax at the fixed rate of 35% but the
losses generated by such transaction may only be offset against income from the
same type of transactions.
VALUE ADDED TAX
The sale, exchange, disposition, or transfer of shares or ADSs is not
subject to Value Added Tax.
PERSONAL ASSETS TAX
Law No. 25,585 issued on April 24, 2002 and published in the Official
Gazette on May 15, 2002 (and applicable to personal assets held as of December
31, 2002) introduces amendments to Law No. 23,966 and imposes the personal
assets tax on shares and ADSs held by individuals and undivided estates
domiciled or located in Argentina or abroad and legal entities not domiciled in
Argentina, separately from other assets.
This amendment imposes the obligation to pay the personal assets tax on
the Argentine private issuer of the shares and ADSs, and authorizes it to seek
recovery of the amount so paid, without limitation, by way of withholding or by
foreclosing on the assets that gave rise to such payment. The tax is levied on
the shares proportional equity value of the shares as reflected in the most
recent balance sheet closed as of December 31 of the taxable year, at the rate
of 0.5% without any non-taxable minimum being applicable.
Currently there are no regulations issued by the Executive Branch
related to this amendment, and it has not been interpreted by any court or
government agency and no assurance can be given as to how such amendments may be
defined or interpreted in the future by any such court or government agency.
TAX ON MINIMUM NOTIONAL INCOME (IMPUESTO A LA GANANCIA MINIMA
PRESUNTA, IGMP)
Companies domiciled in Argentina, partnerships, foundations, sole
proprietorships, trusts, certain mutual funds organized in Argentina, and
permanent business establishments owned by foreign persons, among other
taxpayers, shall apply a 1% rate to the total value of assets held by such
persons, above an aggregate nominal amount of Ps. 200,000. Nevertheless, shares
and ADSs issued by entities subject to such tax, are exempt from paying the
IGMP.
The income tax payment determined for a particular fiscal year is
considered as a payment on account of the IGMP to be paid in the same fiscal
year. The IGMP will only be applicable when the income tax for the corresponding
fiscal period results lower than the amount specified for the IGMP. In such
case, the difference between the determined IGMP and the corresponding income
tax has to be paid. If in any specific fiscal year, the amount to be paid as
IGMP exceeds the income tax corresponding to that same fiscal year, the
resulting difference could be computed as an advance to be credited against the
income tax to be paid in excess of the IGMP during the following ten fiscal
years.
TAX ON DEBITS AND CREDITS ON BANKING ACCOUNTS
The Argentine Competition law, as amended, established a tax on debits
and credits, of any nature, made in all bank accounts, except for those
specifically excluded by the law and its regulations. Debits and credits on bank
accounts are subject to general tax rate of 0.6%.
The regulations of the Argentine Competition law taxes many other
transactions in which a bank account is not used but a financial entity
intervenes. The movements and deliveries of funds, by its own or on behalf of
third parties, carried out by any person, made through organized systems of
payments replacing the use of the bank accounts are also taxed at a rate of
1.2%.
Therefore, holders of shares that have one or more Argentine bank
accounts may be subject to this tax on the debits and credits to such bank
accounts at the rate of 0.6%, or at the rate of 1.2% on other transactions that
are used as a substitute for the use of such Argentine bank accounts.
111
GROSS INCOME TAX
The gross income tax is local in nature; therefore, the rules of the
relevant provincial jurisdiction should be considered, which may levy this tax
on the purchase and sale of shares and/or the collection of dividends. In the
particular case of the city of Buenos Aires, any transaction involving shares
and/or the collection of dividends and revaluations is exempt from this tax.
There is no gross income tax withholding system applicable to the
payments made to foreign beneficiaries. Those investors who customarily perform,
or who are deemed to perform, transactions in any jurisdiction in which they
obtain their income from the sale of shares and/or the collection of dividends
are subject to this tax at a rate of up to 15%, unless an exemption is
applicable to them.
STAMP TAX
The stamp tax is a local tax that is generally levied on the
instrumentation of onerous acts executed within a certain territorial
jurisdiction or outside a certain territorial jurisdiction but with effects in
such jurisdiction.
In the city of Buenos Aires, the stamp tax has been repealed for all
those acts that do not imply an onerous conveyance of real property. However,
most provincial tax authorities maintain this tax in effect for all acts in
general; therefore, the instruments which implement onerous transactions
(including issuance, subscription, placement and transfer) involving the shares
or ADSs, executed in other jurisdictions, or with effects in those
jurisdictions, could be deemed to be subject to this tax.
COURT AND OTHER TAXES
In the event that it becomes necessary to institute legal actions in
relation to the convertible notes in Argentina, a court tax (currently at a rate
of 3.0%) will be imposed on the amount of any claim brought before the Argentine
courts sitting in the city of Buenos Aires.
Argentina imposes neither an estate nor gift tax on a decedent, donor,
legatee or donee. No Argentine tax is imposed on the deposit or withdrawal of
shares in exchange for ADSs. Other than the taxes discussed above, no other
Argentine taxes are applicable to an investment in shares or ADSs. At present,
there is no national tax specifically applicable to the transfer of securities.
TAX TREATIES
Argentina has entered into tax treaties with several countries. There is
currently no tax treaty or convention in effect between Argentina and the United
States. Argentine Taxation.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We file annual, quarterly and other information with the SEC. You may
read and copy any document that we file at the public reference rooms of the SEC
at 450 Fifth Street, N.W., Washington, D.C.
112
20549 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain information on the operation of the public reference rooms by calling the
SEC at 1-800-SEC-0330. Our Internet address is http://www.cresud.com.ar. It
should be noted that nothing on our website should be considered part of this
annual report on Form 20-F. You may request a copy of these filings at no cost,
by writing or calling the office at +54 (11)-4814-7800.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to commodity price,
interest rate and exchange rates risks, primarily related to our integrated crop
production activities and changes in exchanges rates and interest rates. We
manage our exposure to these risks through the use of various financial
instruments, none of which are entered into for trading purposes. We have
established policies and procedures governing the use of financial instruments,
specifically as it relates to the type and volume of financial instruments
entered into. Financial instruments can only be used to hedge an economic
exposure, and speculation is prohibited.
The following discusses our exposure to these risks. This discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results could vary materially as a result of a number of factors
including those set forth in the risk factors section of this Form 20-F.
Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory, or credit risks, are not included in
the following assessment of our market risks.
Interest Rate Risk
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
both government and corporate obligations and money market funds. Under U.S.
GAAP, these securities are generally classified as available for sale and
consequently are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income, net of estimated tax.
Investments in both fixed rate and floating rate interest earning
instruments carry varying degrees of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates. In general, longer dated securities are subject to greater interest rate
risk than shorter dated securities. While floating rate securities are generally
subject to less interest rate risk than fixed rate securities, floating rate
securities may produce less income than expected if interest rates decrease. Due
in part to these factors, our investment income may fall short of expectations
or we may suffer losses in principal if securities that have declined in market
value due to changes in interest rates are sold. To date, we have not utilized
derivative financial instruments to hedge interest rate risk, however, there can
be no assurance as to the employment of hedging strategies in the future.
FOREIGN EXCHANGE EXPOSURE
From April 1, 1991, until the beginning of 2002, Convertibility Law No.
23,928 was applicable to Argentina. This law established a fixed exchange rate,
under which the Argentine Central Bank was obliged to sell U.S. dollars to any
person at a fixed rate of one Peso per U.S. dollar. Accordingly, the foreign
currency fluctuations were reduced to a minimum level, during this period.
The primary economic change implemented by the current Argentine
government in January 2002 was the announcement of the devaluation of the Peso.
Due to the end of the Convertibility Plan, our foreign exchange exposure has
increased considerably.
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Foreign currency exchange rate fluctuations could impact our cash flow
in Pesos, since some of our products and inputs are payable in U.S. dollars.
Although most of our liabilities are denominated in Pesos, a small percentage
are in U.S. dollars, and fluctuations in the foreign currency exchange rate may
affect us.
Foreign currency exchange restrictions imposed by the Argentine
government in the future could prevent or restrict our access to U.S. dollars,
thus affecting our ability to service our U.S. dollar-denominated liabilities.
Also, fluctuations in the exchange rate between the Peso and the U.S. dollar may
adversely affect the U.S. dollar equivalent of the Peso price of our common
shares on the Bolsa de Comercio de Buenos Aires, and as a result would likely
affect the market price of our ADSs in the United States.
Derivative Financial Instruments
We use a variety of commodity-based derivative instruments, as hedges
to manage our exposure to price volatility stemming from our integrated crop
production activities. These instruments consist mainly of crop futures
contracts and put and call option contracts. Contract positions are designed to
ensure that we will receive a defined minimum price for certain quantities of
our production. The counterparties to these instruments generally are major
financial institutions. We do not hold or issue these derivative instruments for
trading purposes and are not a party to any instruments with leverage or
prepayment features. In entering into these contracts, we have assumed the risk
that might arise from the possible inability of counterparties to meet the terms
of their contracts. We do not expect any losses as a result of counterparty
defaults.
Derivative financial instruments involve, to a varying degree, elements
of market and credit risk not recognized in the financial statements. The market
risk associated with these instruments resulting from price movements is
expected to offset the market risk of the underlying transactions, assets and
liabilities, being hedged. The counterparties to the agreements relating to our
futures and options contracts consist of a number of major institutions with
high credit ratings. We do not believe that there is a significant risk of
nonperformance by these counterparties because we continually monitor the credit
rating of such counterparties, and limit the financial exposure and the amounts
of agreements entered into with any one financial institution. While the
contract or notional amounts of derivative financial instruments provide one
measure of the volume of these transactions, they do not represent the amount of
our exposure to credit risk. The amounts potentially subject to credit risk
(arising from the possible inability of counterparties to meet the terms of
their contracts) are generally limited to the amounts, if any, by which the
counterparties' obligations under the contracts exceed our obligations to the
counterparties. At June 30, 2002, we had outstanding futures and options as
follows:
OPTION MARKET MARKET VALUE
DEPOSIT/COST PREMIUM PAID VALUE AS OF GAIN (LOSS) AS
CROP TONS (PS.) (COLLECTED) (PS.) 06/30/02 (PS.) OF 06/30/02 (PS.)
----------- ------------- ----------------- --------------- -------------------
FUTURES
- -------
PURCHASE
Wheat..................... 5,920 (30,388) 49,920
Soybean................... 2,720 (140,625) 140,546
Soybean oil............... 544 8,100 (8,098)
OPTIONS
- -------
CALL BUY
Soybean................... 6,800 93,697 192,079 98,382
CALL SALE
Soybean .................. 6,800 96,094 (67,930) (96,040) (28,109)
-------- -------- -------- -------- --------
TOTAL .................... 22,784 (66,819) 25,767 96,040 252,641
======== ======== ======== ======== ========
The deposits/cost on open futures and options as of June 30, 2002 were
Ps. (66,819), futures generated an unrealized gain of Ps. 182,368. The premiums
paid for open options as of June 30, 2002 amounted to Ps. 25,767, the market
value of such options was of Ps. 96,040. The options resulted in an
114
unrealized gain of Ps. 70,273. The total unrealized gain on open futures and
options was Ps. 252,641 as of June 30, 2002.
Set forth below is the information regarding changes in the fair market
value of future and option contracts during the nine-month period ended June 30,
2002:
Fair market value of contracts outstanding at the beginning of the year............ Ps. 2,571,891
Contracts realized or otherwise settled during the year............................ (2,571,891)
Fair value of contracts when entered into during the year.......................... (41,052)
Other changes in fair value........................................................ 252,641
Fair value of contracts outstanding at the end of the year(a)...................... 211,589
- ------------------
(a) As of June 30, 2002, the maturity dates of all futures and option contracts
are less than one year.
Our futures and option contracts are not exchange traded. We do not
hold or issue derivative instruments for trading purposes and are not a party to
any instruments with leverage or pre-payment features. The fair value of our
futures and options contracts is determined calculating the market value of
futures contracts, the market value of options acquired and sold and the margin
deposits of these contracts. We do not use valuation models and none of the
happened changes in fair market value is consequence of changes in valuation
method.
We enter into future contracts to manage our commodity price risk, with
the further objective of maintaining specified gross margins. In this regard,
the hypothetical loss in earnings is calculated considering a hypothetical 10%
increase in commodity prices. In order to calculate the hypothetical loss, the
relevant parameters of the future contracts are the type of commodities and the
delivery price; due to the short period before expiration, time value is
ignored. As set forth in the chart below, the hypothetical gain in earnings is
estimated to be Ps. 0.5 million.
We use the options operations to combine them with the futures
operations, only as a means to reduce the exposure towards the increase of the
prices, as the fact of being a producer implies the position of being bought, up
to the moment that the grains are harvested and sold.
FUTURES AND OPTIONS:
UNREALIZED UNREALIZED
TOTAL PREMIUM GAIN GAIN
FUTURE AMOUNT STRIKE COST INCREASE EARNINGS
CROP TONS PRICE (US$) (US$) PRICE (US$) (US$/TON) (PS.) (PS.)
- -------- ------- ------------ ------------ ------------ --------- ----------- ---------------
SOYBEAN
Futures
- --------
Buy............. 2,720 646.58 1,758,696 711.24 175,870
Options
Call Buy........ 6,800 744.07 13.78 768.08 (93,697)
Call Sale....... 6,800 826.74 (9.99) 768.08 67,930
WHEAT
- -----
Futures
Buy............. 5,920 384.22 2,274,609 422.65 227,461
SOYBEAN OIL
Futures
- -------
Buy............. 544 1,531.85 833,634 1,685.04 83,363
----------- ----------
4,866,939 460,927
=========== ==========
115
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
This item is not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
DEFAULTS AND PARTIAL WAIVERS AND DEBT AGREEMENTS WITH IRSA'S CREDITORS
On May 24, 2000, IRSA entered into a US$ 80 million syndicated credit
facility arranged by BankBoston N.A. Loans under this syndicated credit facility
bear interest at three-month LIBOR plus a margin of 500 basis points. Amounts
owing under the syndicated credit facility were payable in U.S. dollars.
Although final maturity on the loan agreement was on August 30, 2002, due to the
continuing effects of economic recession, the unavailability of financing
sources and the succession of recent governmental measures adversely affecting
the normal operations of the banking and payments system, IRSA could not make
the scheduled payment on that date.
On December 18, 2000, IRSA issued US$ 43.5 million class 2 floating
rate notes due December 24, 2001. Proceeds from this issuance were used to repay
certain outstanding short-term indebtedness. IRSA's floating rate notes
matured in December 2001, and IRSA was unable to pay the principal then due. As
a result of such non-payment, in December 2001, IRSA entered into negotiations
with the holders of its floating rate notes and to date have been able to obtain
short-term deferrals of its obligation to pay such matured notes. On February 8,
2002, IRSA agreed with its holders to replace the floating interest rate for an
annual fixed interest rate of 12%. Pursuant to the most recent deferral, granted
on October 31, 2002, the principal of and interest on its floating rate notes
were due in full on November 14, 2002 and were further renegotiated as explained
bellow. IRSA also agreed with its holders on a capitalization of the interest
due on October 31, 2002. On May 15, 2002, IRSA repurchased to Banco Sudameris
its participation in the mentiones convertible notes for US$ 6.8 million.
The floating rate notes and the syndicated credit facility include
various restrictive covenants, which among other things, require IRSA to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions and repurchases of stock
and investments.
As of June 30, 2002, IRSA was not in compliance with certain of the
financial covenants under the floating rate notes and syndicated credit
facility, and a waiver had been granted by the respective holders and banks in
relation to such covenants.
This situation has already been regularized and after months of
negotiations, IRSA has finished the restructuring of its debt under the US$ 80
million loan agreement and the outstanding US$ 41.2 million of its floating rate
notes. On November 15 IRSA has signed a "Refinancing Framework Agreement" with
its six bank creditors (Banca Nazionale del Lavoro S.A., BankBoston N.A., Banco
de la Ciudad de Buenos Aires, HSBC Bank Argentina S.A., Banco Itau S.A., New
York Branch and Banco de la Nacion Argentina, New York Branch) to refinance its
debt at a long term and lower interest rates.
Moreover, IRSA's subsidiary Hoteles Argentinos, owner of the Hotel
Sheraton Libertador, did not pay the principal installments of US$ 300.000 each,
that were due on January 26, April 29, July 29 and October 26, 2002, and the
interest installments due on July 29 and October 26, 2002, for a total amount of
US$ 315.000, under the US$ 12.0 million loan. Although Hoteles Argentinos'
Management is renegotiating its debt with its creditors, IRSA cannot assure you
that an agreement will be reached.
On January 31, 2002, and on April 30, 2002 IRSA did not pay to Goldman
Sachs two equal installments of US$ 6.6 million plus reasonable costs and
interest. On October 7, 2002, Goldman Sachs sent IRSA a letter claiming that
since January 31, 2002, IRSA has been in default under its obligations under the
amended shareholders agreement dated November 9, 2001. On November 21, 2002,
together with Goldman
116
Sachs, IRSA signed a Letter Agreement in which IRSA agrees to cancel the US$
16.3 million debt before November 29, 2002. The payment was done with US$ 9.0
million cash and US$ 3.1 million face amount of APSA's convertible notes
previously owned by Inversora Bolivar.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
PART III
ITEM 15. RESERVED
ITEM 16. RESERVED
PART IV
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of
this Form 20-F.
ITEM 19. INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1* Estatutos of the registrant, which serve as the registrant's
articles of incorporation and bylaws, and an English
translation thereof.
4.1** Unit Agreement between the registrant and the Bank of New
York.
4.2** Indenture between the registrant and the Bank of New York.
4.2** Warrant Agreement between the registrant and the Bank of New
York, as warrant agent.
4.3* Management Agreement among Cresud S.A.C.I.F. y A. and Dolphin
Fund Management S.A. (formerly Consultores Asset Management
S.A.) dated October 25, 1994.
12.1** Statement re computation of ratio of earnings to fixed charges
21.1** Subsidiaries of the registrant
- ---------------
* Incorporated herein by reference to the exhibit to the registrant's
registration statement on Form F-1 (File No. 333-06548)
** Incorporated herein by reference to the same-numbered exhibit to the
registrant's registration statement on Form F-3 (File No. 333-90476)
117
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA, FINANCIERA Y AGROPECUARIA
("CRESUD")
------------
Page
------------
Report of Independent Accountants................................................................. F-2
Consolidated Balance Sheets as of June 30, 2002 and 2001.......................................... F-3
Consolidated Statements of Income for the years ended June 30, 2002, 2001 and 2000................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 2002, 2001
and 2000.......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000............ F-6
Notes to the Consolidated Financial Statements.................................................. F-8
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA ("IRSA")
Report of Independent Accountants................................................................. F-60
Consolidated Balance Sheets as of June 30, 2002 and 2001.......................................... F-61
Consolidated Statements of Income for the years ended June 30, 2002, 2001 and 2000............... F-62
Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 2002, 2001
and 2000.......................................................................................... F-63
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000........... F-64
Notes to the Consolidated Financial Statements.................................................. F-66
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated financial statements and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y
Agropecuaria and its subsidiaries at June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002 in conformity with accounting principles generally accepted
in Argentina. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As mentioned in Note 5.b) (i) to the consolidated financial statements, the
Company has a 19.85% equity interest in IRSA Inversiones y Representaciones
Sociedad Anonima ("IRSA"). On September 9, 2002 IRSA 's independent
accountants issued a report stating that the company had undergone through a
negative impact by the continuous deterioration of the Argentine economy, the
Argentine government's adoption of various economic measures and the devaluation
of the Argentine peso which raise substantial doubt about IRSA's ability to
continue as a going concern. The financial statements of IRSA do not include any
adjustment that might result from the outcome of this uncertainty.
Accounting principles generally accepted in Argentina vary in certain
significant respects from the accounting principles generally accepted in the
United States and as allowed by Item 18 to Form 20-F. The application of the
latter would have affected the determination of consolidated net (loss) income
expressed in Argentine pesos for each of the three years in the period ended
June 30, 2002 and the determination of the consolidated shareholders' equity and
consolidated financial position also expressed in Argentine pesos at June 30,
2002 and 2001 to the extent summarized in Note 12 to the consolidated financial
statements.
PricewaterhouseCoopers
Buenos Aires, Argentina
September 9, 2002
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2002 2001
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and banks......................................... Ps. 39,473,338 Ps. 3,696,692
Investments ........................................... 84,100 111,591,719
Trade accounts receivable, net ........................ 17,038,986 10,440,669
Other receivables ..................................... 7,520,271 25,394,827
Inventories ........................................... 34,011,938 26,081,114
------------------ -----------------
98,128,633 177,205,021
------------------ -----------------
NON-CURRENT ASSETS
Other receivables ..................................... 2,202,097 3,622,185
Inventories ........................................... 26,188,183 48,737,064
Investments ........................................... 107,483,607 15,873,859
Property and equipment, net ........................... 114,166,943 150,902,637
Intangible assets, net................................. 2,511,292 3,517,166
------------------ -----------------
252,552,122 222,652,911
------------------ -----------------
Total Assets ................................... Ps. 350,680,755 Ps. 399,857,932
================== =================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable ................................ Ps. 17,336,042 Ps. 18,670,889
Short-term debt........................................ 6,649,068 26,607,834
Salaries and social security payable .................. 828,805 571,211
Taxes payable ......................................... 6,351,121 445,426
Other liabilities ..................................... 1,397,237 1,708,391
------------------ -----------------
32,562,273 48,003,751
------------------ -----------------
NON-CURRENT LIABILITIES
Other liabilities ..................................... 12,974,361 487,694
------------------ -----------------
12,974,361 487,694
------------------ -----------------
Total Liabilities............................... 45,536,634 . 48,491,445
------------------ -----------------
Minority interest............................................. 383,503 475,156
------------------ -----------------
SHAREHOLDERS' EQUITY.......................................... 304,760,618 350,891,331
------------------ -----------------
Total Liabilities and Shareholders' Equity...... Ps. 350,680,755 Ps. 399,857,932
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2002 2001 2000
---------------- ---------------- ----------------
Net sales
Crops........................................... Ps. 43,193,585 Ps. 37,588,101 Ps. 36,168,042
Beef cattle..................................... 24,581,122 26,115,044 26,156,379
Milk............................................ 2,010,515 2,327,798 3,331,217
Others.......................................... 1,666,149 2,430,875 3,500,991
Less:
Gross sales tax................................. (650,552) (423,078) (464,043)
---------------- ---------------- -----------------
Total net sales........................ 70,800,819 68,038,740 68,692,586
---------------- ---------------- -----------------
Cost of sales
Crops........................................... (13,852,898) (27,260,838) (26,921,429)
Beef cattle..................................... (20,279,656) (21,713,923) (23,306,404)
Milk............................................ (3,171,145) (2,018,241) (4,980,877)
Others.......................................... (1,889,666) (2,118,981) (2,445,740)
---------------- ---------------- -----------------
Total cost of sales.................... (39,193,365) (53,111,983) (57,654,450)
---------------- ---------------- -----------------
Gross profit........................... 31,607,454 14,926,757 11,038,136
---------------- ---------------- -----------------
Selling expenses ...................................... (8,705,718) (9,590,017) (9,141,428)
Administrative expenses ............................... (7,450,581) (7,511,464) (7,743,491)
Net gain on the sale of farms ......................... 14,755,923 5,101,150 -
Inventory holding (loss) gain.......................... (17,452,822) (1,325,916) 140,087
---------------- ---------------- -----------------
Operating income (loss)................ 12,754,256 1,600,510 (5,706,696)
---------------- ---------------- -----------------
Financial results, net:
Financial (expense) income generated by assets.. (13,390,523) 12,194,295 8,783,944
Financial income (expense) generated by
liabilities .................................... 5,842,882 (1,163,936) 95,592
---------------- ---------------- -----------------
Total financial results, net........... (7,547,641) 11,030,359 8,879,536
---------------- ---------------- -----------------
Loss from equity investments........................... (37,640,641) (336,831) (32,432)
---------------- ---------------- -----------------
Other income (expense), net:
Gain on sale of other property and equipment.... 27,085 84,507 31,436
Others.......................................... 119,883 (12,243) (127,542)
Donations....................................... - (374,897) (132,427)
---------------- ---------------- -----------------
Total other income (expense), net...... 146,968 (302,633) (228,533)
---------------- ---------------- -----------------
Management fee ........................................ - (833,104) (294,285)
---------------- ---------------- -----------------
(Loss) income before income tax and minority interest.. (32,287,058) 11,158,301 2,617,590
---------------- ---------------- -----------------
Income tax expense..................................... (7,579,886) (4,014,295) (43,746)
Minority interest...................................... 310,616 353,923 74,711
---------------- ---------------- -----------------
Net (loss) income for the year......................... Ps. (39,556,328) Ps. 7,497,929 Ps. 2,648,555
================ ================ =====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
SHAREHOLDERS' CONTRIBUTIONS
-----------------------------------------------------------------------------
INFLATION
ADJUSTMENT
OF COMMON
STOCK
AND
COMMON TREASURY TREASURY ADDITIONAL LEGAL
ITEMS STOCK STOCK STOCK PAID-IN-CAPITAL TOTAL RESERVE
- ------------------------------------ --------------- -------------- --------------- --------------- -------------- --------------
BALANCES AS OF JUNE 30, 1999..... Ps.119,669,749 Ps.4,614,643 Ps.134,353,886 Ps.79,936,678 Ps.338,574,956 Ps. 4,584,259
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 28, 1999
- Directors'fees............. - - - - - -
- Legal reserve............... - - - - - 101,759
- Cash dividends (Ps. 0.18 per
share)........................ - - - - - -
Net income for the year.......... - - - - - -
--------------- -------------- --------------- -------------- --------------- --------------
BALANCES AS OF JUNE 30, 2000..... Ps.119,669,749 Ps.4,614,643 Ps.134,353,886 Ps.79,936,678 Ps.338,574,956 Ps.4,686,018
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 30, 2000
- Legal reserve............... - - - - - 132,428
- Cash dividends (Ps. 0.02 per
share)........................ - - - - - -
Net income for the year.......... - - - - - -
--------------- -------------- --------------- -------------- --------------- --------------
BALANCES AS OF JUNE 30, 2001..... Ps.119,669,749 Ps.4,614,643 Ps.134,353,886 Ps.79,936,678 Ps.338,574,956 Ps.4,818,446
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 19, 2001
- Legal reserve............... - - - - - 374,897
- Cash dividends (Ps. 0.06 per
share)........................ - - - - - -
Subscription of treasury stock... 2,353 (2,353) - - - -
Transfer of shares to a trust
under the stock option plan...... 3,073,437 (3,073,437) - - - -
Net loss for the year........... - - - - - -
--------------- -------------- --------------- -------------- --------------- --------------
BALANCES AS OF JUNE 30, 2002..... Ps.122,745,539 Ps.1,538,853 Ps.134,353,886 Ps.79,936,678 Ps.338,574,956 Ps. 5,193,343
=============== ============== =============== ============== =============== ==============
ACCUMULATED
RETAINED
EARNINGS
ITEMS (DEFICIT) TOTAL
- ------------------------------------ --------------- --------------
BALANCES AS OF JUNE 30, 1999..... Ps.21,684,331 Ps.364,843,546
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 28, 1999
- Directors'fees............. (79,793) (79,793)
- Legal reserve............... (101,759) -
- Cash dividends (Ps. 0.18 per
share)........................ (21,502,779) (21,502,779)
Net income for the year.......... 2,648,555 2,648,555
--------------- --------------
BALANCES AS OF JUNE 30, 2000..... 2,648,555 345,909,529
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 30, 2000
- Legal reserve............... (132,428)
- Cash dividends (Ps. 0.02 per
share)........................ (2,516,127) (2,516,127)
Net income for the year.......... 7,497,929 7,497,929
--------------- --------------
BALANCES AS OF JUNE 30, 2001..... Ps. 7,497,929 Ps.350,891,331
Appropriation of profits
resolved by:
Shareholders' Meeting held on
October 19, 2001
- Legal reserve............... (374,897) -
- Cash dividends (Ps. 0.06 per
share)........................ (7,123,031) (7,123,031)
Subscription of treasury stock... 3,486 3,486
Transfer of shares to a trust
under the stock option plan...... 545,160 545,160
Net loss for the year........... (39,556,328) (39,556,328)
--------------- ---------------
BALANCES AS OF JUNE 30, 2002..... Ps.(39,007,681) Ps.304,760,618
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2002 2001 2000
----------------- ------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income for the year................................. Ps.(39,556,328) Ps. 7,497,929 Ps. 2,648,555
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH FLOW
PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................................... 3,117,387 3,195,705 3,304,418
Amortization of intangible assets.............................. 418,557 104,639 -
Minority interest.............................................. (310,616) (353,923) (74,711)
Loss from affiliated companies................................. 37,640,641 336,831 32,432
Recovery of provisions........................................ - - (73,909)
Unrealized loss (gain) on investments.......................... 13,290 (8,168,642) (5,426,941)
Inventory holding loss (gain).................................. 17,452,822 1,325,916 (140,087)
Gain on the sale of farms...................................... (14,755,923) (5,101,150) -
Gain (loss) on sale and withdraw from business of other
property and equipment......................................... (27,085) (84,507) (31,436)
Retirement of other property and equipment..................... 3,211,114 92,850 -
Accrual for management fees................................... - 833,104 294,285
Allowance for doubtful accounts................................ 232,324 127,101 248,361
Financial results.............................................. 942,723 - -
Gain on the sale of investments of available-for-sale
securities..................................................... - (2,842,112) 34,771
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in trade accounts receivable.............. (6,257,532) (5,922,354) 5,955,076
Decrease in other receivables................................. 13,938,441 4,692,952 1,656,420
Dividends received from equity investees....................... 1,078,210 354,386 329,066
(Increase) decrease in inventory............................... (3,292,113) 10,658,774 11,842,818
(Decrease) increase in trade accounts payable.................. (1,332,733) 9,067,917 (2,108,940)
Increase in salaries and social security payable.............. 257,594 65,113 74,959
Increase (decrease) in taxes payable........................... 5,905,695 (33,260) (845,801)
Decrease in provisions......................................... - - (266,036)
Increase of intangible assets.................................. - (939,861) (79,991)
Increase (decrease) in interest payable........................ 2,580,794 445,385 (11,986)
(Decrease) increase in other liabilities....................... (994,318) 59,987 (580,134)
----------------- ------------------ ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 20,262,944 15,412,780 16,781,189
----------------- ------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of other property and equipment........ 286,734 421,565 414,673
Net proceeds from sale of farms................................ 46,180,788 13,709,753 -
Collection of secured receivables from sale of farms........... 4,133,861 1,707,743 3,092,034
Acquisition of farms and other property and equipment.......... (822,088) (2,808,280) (5,230,156)
Acquisition of subsidiary, net of cash acquired................ - - (1,594,676)
Acquisition of investments..................................... (57,834,870) (137,022,353) (15,786,927)
Investments in affiliates...................................... (348,500) (604,500) -
Collateralized loans granted to third parties ................. - (990,106) -
Net proceeds from sale of investments.......................... 42,889,195 68,387,502 11,281,110
----------------- ------------------ ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .......... 34,485,120 (57,198,676) (7,823,942)
----------------- ------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in minority interest.................................. - 712,821 108,593
Capital contributions from minority interests in controlled
subsidiaries................................................... 218,962 - -
Cash dividends paid............................................ (7,123,031) (2,516,127) (21,502,779)
Subscription of treasury stock................................. 548,646 - -
Proceeds from short-term debt ................................. 32,132,169 41,673,690 -
Payments of short-term debt.................................... (44,719,213) (15,478,949) -
Payments of seller financing .................................. (95,919) (712,890) (1,807,549)
----------------- ------------------ ----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........... (19,038,386) 23,678,545 (23,201,735)
----------------- ------------------ ----------------
Net increase (decrease) in cash................................ 35,709,678 (18,107,351) (14,244,490)
----------------- ------------------ ----------------
Cash and cash equivalents as of the beginning of the year...... 3,770,430 21,877,781 36,122,271
----------------- ------------------ ----------------
Cash and cash equivalents as of year-end....................... Ps. 39,480,108 Ps. 3,770,430 21,877,781
================= ================== ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2002 2001 2000
----------------- ----------------- -------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest..................................... Ps. 2,557,860 Ps. 641,003 Ps. 195,311
Income tax................................... Ps. 156,103 Ps. - Ps. 12,524
NON-CASH TRANSACTIONS WERE AS FOLLOWS:
Conversion of other receivables balances into
irrevocable capital contributions in related
companies.................................... Ps. - - Ps. 263,980
Acquisition of subsidiary through issuance of
debt to the seller........................... Ps. - - Ps. 1,533,951
Inventory transferred to property and equipment Ps. 457,347 Ps. 362,718 Ps. 515,982
Dividends receivable from affiliated company. Ps. - - Ps. 78,335
Farms purchased with sellers financing....... Ps. - - Ps. -
Farms sold with financing.................... Ps. - 2,737,561 Ps. -
Property and equipment donations............. Ps. 2,114 21,188 Ps. -
ACQUISITION OF SUBSIDIARY COMPANY
Trade accounts receivable.................... Ps. 7,097
Other receivables............................ 66,885
Property and equipment....................... 47,049
Intangible assets............................ 252,679
-------------------
Total non-cash assets acquired .............. 373,710
-------------------
Trade accounts payable....................... (78,384)
Other liabilities............................ (20,986)
Loans........................................ -
Salaries and social security and taxes payable -
-------------------
Total liabilities assumed.................... (99,370)
-------------------
Value of net assets acquired................. 274,340
-------------------
Cash acquired................................ 13
-------------------
Minority interest............................ (82,307)
-------------------
Goodwill .................................... 2,936,594
-------------------
Purchase price of acquired subsidiary company Ps. 3,128,640
===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
1. DESCRIPTION OF BUSINESS
Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y
Agropecuaria ("Cresud") was incorporated in 1936 as a subsidiary of Credit
Foncier, a Belgian company engaged in, among other things, providing rural and
urban loans in Argentina and administering real estate holdings foreclosed by
Credit Foncier. Credit Foncier was liquidated in 1959, and as part of such
liquidation, the shares of Cresud were distributed to Credit Foncier's
shareholders. From the 1960s through the end of the 1970s, the business of the
Company shifted exclusively to primary agricultural activities. Currently, the
Company is involved in various operations and activities including crop
production, cattle raising and fattening, milk production and certain forestry
activities. The Company is not in the land sales and development business;
however, it does from time to time sell properties to profit from real estate
appreciation opportunities and which, in the judgment of management, are surplus
to the Company's primary operations.
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION
ECONOMIC CRISIS
Argentina is immersed in a critical economic climate. The main features
of the current economic context are a major public debt burden, high interest
rates, a significant decline in deposit levels, country risk indicators far
above normal average and an economic recession that has already lasted more than
three years. This situation has led to a significant decrease in the demand for
goods and services and a large rise in the level of unemployment. These
circumstances have affected the Government's ability to comply with existing
commitments and access to bank financing.
As from December 3, 2001 measures were issued to restrict the free
availability and circulation of cash and the transfer of foreign currency
abroad. Subsequently, the Government declared default on the external debt.
On January 6, 2002, after a political crisis that resulted in the
resignation of two presidents, the Government enacted Law 25,561 (Law of public
emergency and exchange system reform) that involved an in-depth change of the
prevailing economic model and the amendment of the Convertibility Law in force
since March 1991. In early February the Government announced new economic
measures through Decree 214 (Restructuring of the financial system) dated
February 3, 2002 and Decree 260 (Exchange Regime) dated February 8, 2002,
substantially modifying some of the measures implemented by the Public Emergency
Law. These decrees are being complemented by other regulations being issued by
the various control agencies, some of which are pending at the date of issuance
of these consolidated financial statements. In addition, on April 24, 2002 the
Government signed an agreement with provincial governors, which, together with
other changes to the National Administration, will lay down the basis for
further measures that have yet to be issued or fully implemented.
Listed below are some of the measures adopted by the Government that
are in force at the date of filing these consolidated financial statements and
the effect they have on the Company's economic and financial situation to date.
EXCHANGE SYSTEM
On February 8, 2002 the Government issued Decree 260 (Exchange Regime)
establishing a single free exchange market system as from February 11, 2002,
through which all transactions involving the exchange of currency are to be
traded at a rate of exchange to be freely agreed, observing the requirements to
be laid down by the Argentine Central Bank. At present certain transfers abroad
of a financial nature require the prior approval of the Central Bank.
F-8
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC
AND FINANCIAL POSITION (CONTINUED)
EXCHANGE SYSTEM (CONTINUED)
The new exchange regime replaces the previous convertibility
legislation, under which the previous exchange rate of Ps. 1 to US$ 1 existed
for a number of years. Also, during the year ended June 30, 2002, the Argentine
peso devalued significantly, and at June 30, 2002 the exchange rate was
approximately Ps. 3.8 per US$ 1.
DEPOSITS IN ARGENTINE FINANCIAL INSTITUTIONS
Under the terms of Decree No. 214, as from February 3, 2002 deposits in
U.S. dollars or other foreign currencies in Argentine financial institutions
were converted to pesos at the exchange rate of $ 1.4 per US$ 1 or its
equivalent in such other currency. Furthermore, there are restrictions on the
availability of certain balances in current accounts and savings accounts in
dollars and fixed term deposits in pesos or dollars, which will be returned to
their owners in installments and the amounts and due dates will depend on the
balances recorded. As from February 3, 2002 a reference stabilization index
(CER) and an interest rate will be applied to these rescheduled deposits. The
CER is an index that measures the daily rate of change derived from the monthly
change in the Consumer Price Index (CPI) published by the Argentine Statistics
and Census Institute (INDEC). The application of the CER for certain
transactions has met with substantial resistance in Argentina and its
application may change substantially in the future. In addition, the possibility
exists of transforming part or all of the rescheduled deposits into Government
Bonds.
FINANCIAL DEBTS IN FOREIGN CURRENCY WITH ARGENTINE FINANCIAL
INSTITUTIONS
Pursuant to Decree No. 214, debts in U.S. dollars or other foreign
currencies in the Argentine financial system were converted to pesos at the rate
of exchange of $ 1 per US$ 1 or its equivalent in another currency. As from
February 3, 2002 a reference stabilization index (CER) and an interest rate will
be applied to these debts.
RECEIVABLES AND DEBTS IN ARGENTINA NOT RELATED TO THE FINANCIAL SYSTEM
The obligation to pay money denominated in dollars or other foreign
currency that are not related to the Argentine financial system, whatever their
origin or nature, were converted to pesos at the exchange rate of $ 1 per US$ 1
or its equivalent in such other foreign currency. A reference stabilization
index must be applied to these balances as from February 3, 2002. If through
this provision, the resulting value of the item, good or service is higher or
lower at the time of payment, either of the parties can request a fair
readjustment of the price. If no agreement is reached, the case will be
submitted to the Courts.
DEFERMENT OF THE DEDUCTION OF THE EXCHANGE DIFFERENCE FOR INCOME TAX
PURPOSES
The net negative results caused by this devaluation will be deductible
for income tax purposes over the next five fiscal years.
F-9
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC
AND FINANCIAL POSITION (CONTINUED)
IMPACT OF THE CURRENT ECONOMIC CONDITIONS ON THE COMPANY
The crisis has not significantly affected the operations of the Company
except as regards the investment in IRSA.
The accompanying consolidated financial statements reflect management's
current assessment of the impact of the economic situation on the financial
position of the Company. Actual results could differ from current management
assessments and such differences could be material. Therefore, the Company's
consolidated financial statements may not include all adjustments that might
ultimately result from these adverse conditions.
3. PREPARATION OF FINANCIAL STATEMENTS
A) BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements of Cresud and subsidiaries
(collectively, the "Company") have been prepared in accordance with generally
accepted accounting principles in Argentina ("Argentine GAAP") and the
regulations of the Comision Nacional de Valores ("CNV"), the National Securities
Commission in Argentina, which differ in certain significant respects from
generally accepted accounting principles in the United States of America ("US
GAAP"). Such differences involve methods of measuring the amounts shown in the
consolidated financial statements as well as additional disclosures required by
US GAAP and Regulation S-X of the Securities and Exchange Commission (SEC). A
description of the significant differences between Argentine GAAP and US GAAP as
they relate to the Company are set forth in Note 12 to these consolidated
financial statements.
Under Argentine GAAP, financial statements are required to be restated
to reflect the effects of the inflation for any fiscal year, provided that the
change in Indice de Precios Mayorista Nivel General (General Wholesale Price
Index, or "WPI") for such year has exceeded eight percent. As the annualized
changes in that index has been less that such percentage from August 31, 1995 to
June 30, 2001, financial statements prepared in accordance with Argentine GAAP
did not need to be restated in constant pesos during that year. However, as
inflation accounting became applicable as from January 2002, the accompanying
consolidated financial statements have been restated in constant pesos of June
30, 2002. The conversion factor used to restate the Company's original financial
statements was approximately 1.96.
B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries over which the Company has effective control.
Investments in companies in which the Company exercises significant influence,
but not control, are accounted for under the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
F-10
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
3. PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
B) PRINCIPLES OF CONSOLIDATION (CONTINUED)
A description of the subsidiaries with their respective percentage of
capital stock owned is presented as follows:
PERCENTAGE OF CAPITAL STOCK
SUBSIDIARIES OWNED AS OF JUNE 30, (I)
----------------------------------- -------------------------------
2002 2001
-------------- -------------
Inversiones Ganaderas S.A.......... 99.99% 99.99%
Futuros y Opciones.Com S.A......... 70.00% 70.00%
(i) Percentage of equity interest owned has been rounded.
C) PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT PESOS
The consolidated financial statements have been prepared on the basis
of general price-level accounting (see Note 3.a)) which reflects the changes in
the purchasing power of the peso in the Company's historical financial
statements , as follows:
o Non-monetary items and consolidated statement of income amounts are
adjusted to reflect the then-current general purchasing power.
o Monetary items are not adjusted as such items are, by their nature,
stated in terms of current general purchasing power in the financial statements.
o Monetary gains or losses are recognized in the consolidated statement
of income, reflecting the effect of holding monetary items. This gain of loss on
exposure to inflation (monetary gain or loss) is included in the consolidated
statement of income within total financial results.
D) RECLASSIFICATIONS
Certain reclassifications of prior year information have been made to
conform with the current year presentation.
E) ACQUISITIONS
YEAR ENDED JUNE 30, 2000
In May 2000, Cresud acquired a 70% equity interest in Futuros y
Opciones.Com S.A. ("FYO.Com"), a privately owned Argentine corporation, for US$
1.6 million. Pursuant to the acquisition agreement between Cresud and the
previous owners, Cresud agreed to pay to the sellers US$ 0.8 million in cash and
US$ 0.6 million within a six-month period as from acquisition date. The
remaining purchase price of US$ 0.2 million was placed into an escrow account.
The total amount held in escrow will be released in May 2003 upon confirmation
that no contingencies arise during that three-year period.
F-11
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
3. PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
E) ACQUISITIONS (CONTINUED)
YEAR ENDED JUNE 30, 2000 (CONTINUED)
The acquisition was accounted for using the purchase method. The
purchase price was allocated to the net assets acquired, based upon their
respective fair market values. The excess of the purchase price over the fair
market value of the assets acquired of Ps. 2.9 million has been allocated to
goodwill and is being amortized over 5 years using the straight-line method.
FYO.Com is a Web-based provider of comprehensive, real-time, financial
instrument news and analytic tools. As of June 30, 2002, FYO.Com is in a
development stage. This company intends to provide e-commerce services related
to financial instrument activities, including derivatives and insurance. To
date, this company has generated no revenues. FYO.Com expects to derive its
revenues from the sale of advertising contracts and commerce revenues.
F) DISPOSITIONS
YEAR ENDED JUNE 30, 2002
On August 3, 2001 the Company sold El Silencio farm, covering 397
hectares, in the district of Rojas, Province of Buenos Aires, for a total
consideration of US$ 1.03 million, resulting in an approximate gain of Ps. 0.2
million.
During the current year the Company sold El Coro farm, covering 10,321
hectares, in the district of Rio Seco, Province of Cordoba, for a total
consideration of US$ 7.8 million, resulting in an approximate gain of Ps. 3.0
million.
On May 8, 2002 the Company sold La Sofia farm, covering 6,149 hectares,
in the district of Rio Cuarto, Province of Cordoba for the total consideration
of US$ 10 million, resulting in an approximate gain of Ps. 11.5 million.
YEAR ENDED JUNE 30, 2001
On September 11, 2000 Cresud sold El Banadito farm, covering 1,789
hectares, in the district of Ines Indart, Salto, Province of Buenos Aires, for a
total consideration of US$ 6.2 million (including the sale of the dairy farm,
silo plants and other chattels) resulting in an approximate gain of Ps. 5.5
million.
On December 4, 2000 Cresud sold Tourne farm, covering 19,614 hectares,
in the district of Vera, Province of Santa Fe, for a total consideration of US$
2.8 million (including the sale of the farm and other real estates) resulting in
an approximate loss of Ps. 0.4 million.
F-12
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
3. PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
G) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are used when accounting for the
allowance for doubtful accounts, depreciation, amortization, impairment of
long-lived assets, income taxes and contingencies. Actual results could differ
from those estimates.
4. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
by the Company in the preparation of these consolidated financial statements:
A) REVENUE RECOGNITION
The Company primarily derives its revenues from the sale of crops, milk
and live beef cattle and to a lesser extent, from the sale of charcoal and fence
posts. Revenue is recognized on sales of products when the customer receives
title to the goods, generally upon delivery.
The Company is not in the land sales and development business; however,
it does from time to time sell properties to profit from real estate
appreciation opportunities and which, in the judgment of management, are surplus
to the Company's primary operations. Farmland sales are recorded under the
accrual method of accounting. Farmland sales are not recognized until (i) the
sale is consummated, (ii) the Company has determined that the buyer's initial
and continuing investments are adequate to demonstrate a commitment to pay for
the property, (iii) the Company's receivable is not subject to future
subordination, and (iv) the Company has transferred to the buyer the risk of
ownership, and does not have a continuing involvement in the property. The
Company did not defer revenue related to farmland sales in any of the years
presented.
B) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments with original
maturities of three months or less, to be cash equivalents.
C) TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at estimated realizable values.
The Company provides for losses relating to trade accounts receivable. The
allowance for losses is based on management's evaluation of various factors,
including the credit risk of customers, historical trends and other information.
While management uses the information available to make evaluations, future
adjustments to the allowance may be necessary if future economic conditions
differ substantially from the assumptions used in making the evaluations.
Management has considered all events and/or transactions that are subject to
reasonable and normal methods of estimations, and the consolidated financial
statements reflect that consideration.
F-13
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D) INVESTMENTS
Current
Current investments include mutual funds which invest in time deposits
with original maturities of less than three months at purchase and government
bonds. These investments are carried at market value as of year-end. Unrealized
gains and losses on these investments are included in "Financial results, net",
in the consolidated statements of income, and are calculated using the specific
identification method.
Non-current
Investments in affiliates in which the Company has significant
influence (generally representing an equity interest of 20% to 50%) have been
accounted for under the equity method. Management periodically evaluates the
carrying value of its equity investments for impairment. The carrying value of
equity investees is considered impaired when an other than temporary decrease in
the value of the investments has occurred.
E) INVENTORIES
Livestock for raising and fattening are stated at their net realizable
value. Livestock for dairy production and other purposes, which are not intended
to be sold within the next twelve months, are stated at their replacement cost
as determined by agricultural appraisers. Inventory holding gains and losses are
segregated in a separate line to determine operating income (loss).
Inventories of harvested crops are stated at current sales price less
cost of disposal. Unharvested crop-growing costs are included as part of
inventory and represent costs incurred to plant and maintain seed crops which
will be harvested during the subsequent fiscal year. Inventories are
periodically reviewed and reserves established for deteriorated, excess and
obsolete items.
F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, adjusted for the inflation
from the date of acquisition through the end of the year as defined in note
3.c), less accumulated depreciation.
Depreciation expense has been determined using the straight-line method
over the estimated useful lives of the related assets as specified below:
Asset Estimated useful life
(years)
--------------------------------- ---------------------
Buildings and constructions ..... 50
Alfalfa fields and meadow........ 4
Vehicles......................... 5
Machinery........................ 10
Furniture and equipment.......... 10
Others........................... Between 4 and 10
The cost of maintenance and repairs is expensed as incurred. The cost
of significant renewals and improvements is added to the carrying amount of the
respective asset.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from accounts, and any resulting gain or
loss is reflected in the statement of income.
F-14
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
4 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G) INTANGIBLE ASSETS
(i) Goodwill
Goodwill, representing the excess of the cost over the fair value of
net identifiable assets acquired, is stated at cost, adjusted for the effects of
inflation from the date of acquisition through the end of the year as defined in
note 3.c), less accumulated amortization calculated on the straight-line basis
over its estimated economic life, not exceeding 5 years.
(ii) Web site development costs
The Company capitalizes certain costs incurred in the development of
the Company's web site. Such costs are amortized under the straight-line method
over a period of 3 years.
(iii) Other intangible assets
Other intangible assets are stated at cost, adjusted for the effects of
inflation as defined in note 3.c), and are being amortized over 3 years on a
straight-line basis as from April 1, 2001.
H) FOREIGN CURRENCY ASSETS AND LIABILITIES
Foreign currency transaction gains and losses are recorded within
"Financial results, net" in the consolidated statements of income.
I) INCOME TAX PROVISION
The Company and its subsidiaries calculate their income taxes on a
separate tax basis. The statutory income tax rate was 35% for all years
presented. The Company does not recognize deferred taxes.
As of June 30, 2002, the Company had an accumulated income tax loss
carryforward of approximately Ps. 1.5 million, pertaining to the aggregate
amount of income tax loss carryforwards of certain subsidiaries which, on an
individual entity basis, may be offset against future years' taxable income in
accordance with income tax law.
J) ASSET TAX PROVISION
The Company is subject to the Asset Tax Law ("Impuesto a la Ganancia
Minima Presunta") which became effective for fiscal years ending after December
30, 1998. The asset tax is calculated on an individual entity basis at the
statutory tax rate of 1%, and is based upon the taxable assets of each entity as
of the end of the year. Pursuant to this law, the Company is required to pay the
greater of the income tax or the asset tax. Any excess of the asset tax over the
income tax may be carried forward and recognized as a payment on account of
future income tax charges.
Originally asset tax carryforwards were available for utilization
within a four-year period. Pursuant to Law 25,360 effective December 2000, the
utilization period has been extended to ten years. Accordingly, the asset tax
liability for the year ended June 30, 2002 has been recognized as an asset
since in the opinion of management it is more likely than not that the Company
will utilize such asset against future income tax charges within the next ten
years.
F-15
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K) PROVISIONS FOR CONTINGENCIES
The Company has certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings arising in the
ordinary course of business. The Company accrues liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Such accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and its experience in contesting, litigating and
settling other matters. As the scope of the liabilities becomes better defined,
there will be changes in the estimates of future costs, which could have a
material effect on the Company's future results of operations and financial
condition or liquidity.
L) PENSION INFORMATION
The Company does not maintain any pension plans. Argentine laws provide
for pension benefits to be paid to retired employees from government pension
plans and/or private fund managed plans to which employees may elect to
contribute.
M) IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is considered
impaired by the Company when the expected cash flows, undiscounted and without
interest, from such asset is separately identifiable and less than its carrying
value. In that event, a loss would be recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved or based on independent
appraisals.
N) VACATION EXPENSES
Vacation expenses are fully accrued in the year the employee renders
services to earn such vacation.
O) COMMODITY CONTRACTS
The Company utilizes a variety of commodity-based derivative
instruments, as hedges to manage its exposure to price volatility stemming from
its integrated crop production activities. These instruments consist mainly of
crop futures contracts and put and call option contracts designed to reduce
exposure to changes in market prices. The Company does not engage in trading or
other speculative use of these financial instruments. Realized gains and losses
associated with futures contracts are recorded in cost of products sold on a
cash settlement basis. Deposits and premiums paid are recorded as other
receivables on the consolidated balance sheet.
P) ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising
expenses for the years ended June 30, 2002, 2001 and 2000 were Ps. 0.02 million,
Ps. 0.1 million and Ps. 0.2 million, respectively.
F-16
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
5. DETAILS OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS
a) Cash and banks
AS OF JUNE 30,
-----------------------------------
2002 2001
--------------- ----------------
Cash ............................................. Ps. 916,385 Ps. 255,340
Cash in banks..................................... 38,284,382 1,641,750
Collections to be deposited....................... 272,571 1,799,602
--------------- ----------------
Ps. 39,473,338 Ps. 3,696,692
=============== ================
b) Investments
AS OF JUNE 30,
-----------------------------------
2002 2001
--------------- ----------------
CURRENT
Investment mutual funds .......................... Ps. 6,770 Ps. 9,850,922
Government bonds.................................. 77,330 1,510,547
IRSA Inversiones y Representaciones ("IRSA")...... - 100,230,250
--------------- ----------------
Ps. 84,100 Ps. 111,591,719
=============== ================
NON-CURRENT
Equity investments (i)............................ Ps.107,483,607 Ps. 15,873,859
--------------- ----------------
Ps.107,483,607 Ps. 15,873,859
=============== ================
(i) As of June 30, 2002, the Company had a 35.72%, 50% and 19.85%
equity interest in Agro-Uranga S.A., Cactus Argentina S.A. and IRSA
Inversiones y Representaciones S.A. for the amounts of Ps. 13,791,516,
Ps. 2,292,638, Ps. 91,381,008, respectively, and others for Ps. 18,445.
Until March 31, 2002, the Company's investment in IRSA was classified
as a current investment and carried at market value as was held for
trading purposes. Unrealized (losses) gains recognized in earnings
during the years ended June 30, 2002 and 2001 amounted to Ps. (27.2)
million and Ps. 7.9 million, respectively. Effective March 31, 2002, as
a result of a change in the Company's strategy to hold such shares as
permanent investments, the Company changed the accounting method for
its investment in IRSA's shares from market value to the equity method
of accounting. As a result, at March 31, 2002 the Company recognized a
negative goodwill of Ps. 13.8 million, representing the excess of
equity value over market value at that date. Negative goodwill is being
amortized under the straight-line method over a period of 20 years and
the net carrying value as of June 30, 2002 amounts to Ps. 13.7 million
(See note 5.j).
c) Trade accounts receivable, net
AS OF JUNE 30,
---------------------------------------
2002 2001
------------------ -----------------
Trade accounts receivable......................... Ps. 17,570,376 Ps. 11,496,317
Related parties (Note 9).......................... 183,473
Less:
Allowance for doubtful accounts (Note 14.d)....... (714,863) (1,055,648)
------------------ -----------------
Ps. 17,038,986 Ps. 10,440,669
================== =================
F-17
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
5. DETAILS OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS (CONTINUED)
d) Other receivables
AS OF JUNE 30,
------------------------------------
2002 2001
---------------- ----------------
CURRENT
Receivables from the sale of farms (i)............ Ps. 471,922 Ps. 5,134,578
Collateralized loans granted to third parties (ii) 138,143 222,395
Asset tax credit (iii)........................... 2,368,941 5,437,461
Tax credits, excluding asset tax (iv) .......... - 3,467,564
Margin deposits receivable from brokers........... 64,530 1,514,457
Premiums paid in connection with derivative
instruments....................................... 25,424 387,449
Other deposits.................................... 643,626 1,681,540
Surety bonds received.............................
Prepaid leases.................................... 225,571 4,780,536
Related parties (Note 9).......................... 262,962 403,227
Prepaid expenses, excluding leases................ 418,196 1,209,464
Other............................................. 2,900,956 1,156,156
---------------- ----------------
Ps. 7,520,271 Ps. 25,394,827
================ ================
NON-CURRENT
Receivables from the sale of farms (i)............ Ps. 873,481 Ps. 2,053,170
Collateralized loans granted to third parties (ii) 494,942 850,599
Asset tax credit (iii)........................... 146,542 179,840
Prepaid leases.................................... 157,095 351,972
Related parties (Note 9).......................... 434,607 -
Other............................................. 95,430 186,604
---------------- ----------------
Ps. 2,202,097 Ps. 3,622,185
================ ================
(i) At June 30, 2002, receivables from the sale of farms include Ps.
1.3 million corresponding to the outstanding balance of a US$ 1.4
million receivable from the sale of the Tourne farm which accrues
interest at a fixed rate of 8% and is being collected in four equal
annual installments commencing January 15, 2002. The Company agreed
with the purchaser the payment in installments. As guarantee for the
payment, the Company and the purchasers signed a mortagage affecting
these newly sold properties starting that any termination of payment
would imply the Company taking over on the properties.
(ii) Collateralized loans granted to third parties include (a) Ps. 0.02
million corresponding to the outstanding balance of a US$ 0.10 million
receivable secured by pledge which accrues a monthly interest of 0.83%
and is being collected in eighteen instalments as from February 10,
2001 and (b) Ps. 0.62 million corresponding to the outstanding balance
of a US$ 0.44 million receivable secured by mortgage which accrues an
annual interest of 18% and will be collected in five annual instalments
due December 1st of each year commencing in 2002.
(iii) See Note 4.j).
(iv) Tax credits, excluding asset tax consist primarily of value added
tax ("VAT") to reduce future VAT debits.
F-18
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
5. DETAILS OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS (CONTINUED)
e) Inventories
AS OF JUNE 30,
-------------------------------------
2002 2001
----------------- ----------------
CURRENT
Livestock......................................... Ps. 6,675,800 Ps. 10,685,766
Crops............................................. 22,455,846 11,038,501
Unharvested crops................................. 743,668 1,367,914
Seeds and fodder.................................. 361,884 391,784
Materials and others.............................. 2,782,089 2,517,867
Advances to suppliers............................. 992,651 79,282
----------------- ----------------
Ps. 34,011,938 Ps. 26,081,114
================= ================
NON-CURRENT
Livestock......................................... Ps. 26,188,183 Ps. 48,731,075
Unharvested crops................................. - 5,989
----------------- ----------------
Ps. 26,188,183 Ps. 48,737,064
================= ================
f) Trade accounts payable
AS OF JUNE 30,
-------------------------------------
2002 2001
----------------- ----------------
Suppliers......................................... Ps. 12,185,970 Ps. 13,603,573
Related parties (Note 9).......................... 155,394 754,024
Accruals.......................................... 4,994,678 4,313,292
----------------- ----------------
Ps. 17,336,042 Ps. 18,670,889
================= ================
g) Short-term debt
AS OF JUNE 30,
-------------------------------------
2002 2001
----------------- ----------------
Local financial loans ............................ Ps. 6,649,068 Ps. 7,966,345
Foreign financial loans .......................... - 18,641,489
----------------- ----------------
Ps. 6,649,068 Ps. 26,607,834
================= ================
At June 30, 2002, the outstanding balance of local financial loans
relates to loans borrowed in March and April 2001 to finance exports of soybean
and corn to Europe by customers and for the acquisition of IRSA's shares,
and include: (a) a Ps. 2.6 million loan which matured in April, 2002 and accrues
interest at a fixed rate of 8% per annum plus CER, (b) a Ps. 2.0 million loan
which accrues interest at a fixed rate of 8% per annum plus CER, (c) a Ps. 1.3
million loan which accrues interest at a fixed rate of 8% per annum plus CER,
and (d) a Ps. 0.7 million loan, in guarantee of which 14,851,299 IRSA's
shares have been pledged. This loan has accrued an average interest rate of
approximately 14%. On August 1st 2002, the Company paid a total of Ps. 2.2
million corresponding to one loan, which matured during April, 2002.
F-19
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
5. DETAILS OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS (CONTINUED)
h) Salaries and social security payable
AS OF JUNE 30,
------------------------------------
2002 2001
---------------- ----------------
Social security payable............................ Ps. 192,410 Ps. 239,470
Salaries payable................................... 619,782 298,046
Other.............................................. 16,613 33,695
---------------- ----------------
Ps. 828,805 Ps. 571,211
================ ================
i) Taxes payable
AS OF JUNE 30,
------------------------------------
2002 2001
---------------- ----------------
Income tax.......................................... Ps. 4,792,430 Ps. -
Asset tax provision................................. - 45,033
Value added Tax..................................... 1,174,170 -
Property tax payable................................ 208,146 315,114
Gross sales tax payable............................. 11,072 12,862
Income tax withholdings ............................ 158,141 45,704
Tax on indebtedness................................. 3,322 20,704
Other............................................... 3,840 6,009
---------------- ----------------
Ps. 6,351,121 Ps. 445,426
================ ================
j) Other liabilities
AS OF JUNE 30,
------------------------------------
2002 2001
---------------- ----------------
CURRENT
Advances from the sale of farm .................... Ps. - Ps. 782,160
Negative goodwill ................................. 691,966 -
Seller financing .................................. - 365,609
Management fee payable (Note 9).................... 27,556 442,025
Related parties (Note 9) .......................... 134,196 -
Others............................................. 543,519 118,597
---------------- ----------------
Ps. 1,397,237 Ps. 1,708,391
================ ================
NON-CURRENT
Negative goodwill ................................. Ps. 12,974,361 Ps. -
Seller financing .................................. - 487,694
---------------- ----------------
Ps. 12,974,361 Ps. 487,694
================ ================
F-20
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
5. DETAILS OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS (CONTINUED)
k) Financial results, net
AS OF JUNE 30,
-------------------------------------------------------
2002 2001 2000
------------------- ----------------- -----------------
GENERATED BY ASSETS:
Exchange income (loss) and discounts............ Ps. 5,894,860 Ps. (298,462) Ps. (72,120)
Interest income................................. 1,946,863 1,513,194 2,604,642
Reference stabilization index (CER)............. 658,704 - -
Bank expenses................................... (3,208) - -
Tax on bank debits and credits.................. (773,141) (182,592)
Holding results from secured receivables and (3,039,659)
other........................................... - -
Loss on exposure to inflation................... (7,252,728) - -
Unrealized and realized holding (loss) gain on
current investments............................. (10,822,214) 11,162,155 6,251,422
------------------- ----------------- -----------------
Ps. (13,390,523) Ps. 12,194,295 Ps. 8,783,944
=================== ================= =================
GENERATED BY LIABILITIES:
Holding results ................................ Ps. 12,220,368 Ps. - -
Gain on exposure to inflation................... 2,475,775 - -
Interest expense:
Related parties (Note 9).................. (410,163) - -
Others..................................... (1,913,654) - -
Reference stabilization index (CER)............. (1,577,746) - -
Interest expense................................ (716) (1,086,350) (195,311)
Tax on indebtedness............................. - (80,118) -
Exchange loss and discounts..................... (4,950,982) 2,532 290,903
------------------- ----------------- -----------------
Ps. 5,842,882 Ps. (1,163,936) 95,592
=================== ================= =================
F-21
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
6. SHAREHOLDERS' CONTRIBUTIONS
a) Common stock
As of June 30, 2002, the Company had 122,745,539 outstanding shares of
common stock, having a par value of Ps. 1 per share. Holders of the common stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of shareholders. Following is a summary of the activity in the
Company's shares during the years presented:
COMMON STOCK APPROVED BY
-------------------------------- ----------------------------------
ADDITIONAL
SHARES ISSUED PAR VALUE PAID-IN-CAPITAL BODY DATE
--------------- ---------------- --------------- -------------------- -------------
BALANCES AS OF JUNE 30, 1999,
2000 AND 2001..................... 119,669,749 Ps. 119,669,749 Ps. 79,936,678
Ordinary and
Extraordinary
Shareholders' March 8,
Subscription of treasury stock.... 2,353 2,353 - Meeting 2002
Ordinary and March 8,
Extraordinary 2002 and
Shareholders' February
Transfer of shares to a trust Meeting and Board 12, 2002,
under the stock option plan....... 3,073,437 3,073,437 - of Directors respectively
--------------- ---------------- ---------------
BALANCE AS OF JUNE 30, 2002....... 122,745,539 Ps. 122,745,539 Ps. 79,936,678
-============== ================ ===============
b) Treasury stock
From time to time, the Company repurchases shares of common stock
outstanding when it believes it is undervalued in the marketplace.
During fiscal year 1999, the Company repurchased 12,612,220 of its own
shares for a total consideration of Ps. 22.4 million. The Company recorded this
acquisition as a reduction in retained earnings. Also, during fiscal year 1999,
the Company distributed 7,997,577 shares of common stock on a pro rata basis to
its shareholders.
In January 2002, the shareholders exercised their pre-emptive rights
and acquired 2,353 shares of treasury stock at a price of Ps. 1 per share. As
discussed in Note 10, the shareholders approved a stock option plan relating to
the remaining 4,612,290 treasury shares. At June 30, 2002, 3,073,437 of such
shares have been transferred to a trust.
c) Inflation adjustment of common stock
The Company's financial statements were prepared on the basis of
general price-level accounting to reflect the changes in the purchasing power of
the peso. Accordingly, the annual inflation adjustment related to common stock
was appropriated to an inflation adjustment reserve which forms part of
shareholders' equity. According to Argentine rules and regulations, the balance
of the inflation adjustment reserves may be applied only towards the issuance of
common stock to shareholders of the Company.
F-22
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
6. SHAREHOLDERS' CONTRIBUTIONS (CONTINUED)
d) Restrictions on distribution of profits
In accordance with the Argentine Corporations Law and the Company's
by-laws, 5% of the net and realized profit for the year calculated in accordance
with Argentine GAAP plus (less) prior year adjustments must be appropriated by
resolution of shareholders to a legal reserve until such reserve equals 20% of
the Company's outstanding capital. This legal reserve may be used only to absorb
losses.
7. COMMODITIES FUTURES AND OPTION CONTRACTS
The Company utilizes a variety of commodity-based derivative
instruments, as hedges to manage its exposure to price volatility stemming from
its integrated crop production activities. These instruments consist mainly of
crop futures contracts and put and call option contracts. Contract positions are
designed to ensure that the Company will receive a defined minimum price for
certain quantities of its production. The counterparties to these instruments
generally are major financial institutions. The Company does not hold or issue
derivative instruments for trading purposes and is not a party to any
instruments with leverage or prepayment features. In entering into these
contracts, the Company has assumed the risk that might arise from the possible
inability of counterparties to meet the terms of their contracts. The Company
does not expect any losses as a result of counterparty defaults.
Realized gains, losses and costs associated with the contracts are
recognized on a cash settlement basis. Margin deposits and premiums paid related
to outstanding future and option contracts are recorded as other receivables on
the consolidated balance sheet. The Company recognized net gains from
commodity-based contract activity of Ps. 1.9 million, Ps. 0.2 million and Ps.
1.4 million for the years ended June 30, 2002, 2001 and 2000, respectively. The
Company recognizes such gains as subtractions to cost of sales.
As of June 30, 2002 and 2001, the Company had open commodity futures
contracts amounting to US$ 1.3 million and US$ 16.8 million, respectively. At
June 30, 2002 and 2001, these contracts covered a notional volume of 9,184 and
139,130 tons, respectively, of various crops, including soybean, wheat, corn and
sunflower. Futures contracts are used in combination with put and call option
contracts principally to take advantage of market fluctuations, which provide
more favorable pricing opportunities. At June 30, 2002 and 2001, the Company had
open call and put options that strike at weighted average prices per ton of US$
209.4 and US$ 160.5 covering notional amounts of 13,600 and 72,300 tons of
various crops, including soybean, wheat and corn, respectively. The open options
at June 30, 2002 mature at various dates through January 2003.
Derivative financial instruments involve, to a varying degree, elements
of market and credit risk not recognized in the financial statements. The market
risk associated with these instruments resulting from price movements is
expected to offset the market risk of the underlying transactions, assets and
liabilities, being hedged. The counterparties to the agreements relating to the
Company's futures and options contracts consist of a number of major
institutions with high credit ratings. The Company does not believe that there
is a significant risk of nonperformance by these counterparties because the
Company continually monitors the credit rating of such counterparties, and
limits the financial exposure and the amounts of agreements entered into with
any one financial institution. While the contract or notional amounts of
derivative financial instruments provide one measure of the volume of these
transactions, they do not represent the amount of the Company's exposure to
credit risk. The amounts potentially subject to credit risk (arising from the
possible inability of counterparties to meet the terms of their contracts) are
generally limited to the amounts, if any, by which the counterparties'
obligations under the contracts exceed the obligations of the Company to the
counterparties.
F-23
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
8. ADDITIONAL INFORMATION ON ASSETS AND LIABILITIES
The breakdown of main assets and liabilities as of June 30, 2002 is as
follows:
To mature To mature To mature To mature in
To mature in between 4 between 7 between 10 greater than
3 months and 6 months and 9 months and 12 months 1 year Past due
--------------- -------------- ------------ --------------- --------------- -------------
ASSETS
Short-term
investments.......... Ps. - Ps. - Ps. - Ps. - Ps. - Ps. -
Trade accounts
receivables, net..... 17,038,986 - - - - -
Other receivables.... 4,073,562 20,162 47,851 436,737 1,514,965 -
--------------- -------------- ------------- --------------- ---------------- -------------
Ps.21,112,548 Ps. 20,162 Ps. 47,851 Ps. 436,737 Ps. 1,514,965 Ps. -
--------------- -------------- ------------- --------------- ---------------- -------------
LIABILITIES
Trade accounts
payable.............. Ps.17,318,830 Ps. - Ps. 13,669 Ps. - Ps. - Ps. -
Short-term debt...... 6,649,068 - - - - -
Salaries and social
security payable..... 828,805 - - - - -
Taxes payable........ 6,340,310 - - - - 10,811
Other liabilities ... 571,075 - - - - 134,196
--------------- -------------- ------------- --------------- ---------------- -------------
Ps.31,708,088 Ps. - Ps. 13,669 Ps. - Ps. - Ps. 145,007
--------------- -------------- ------------- --------------- ---------------- -------------
No fixed term Total
--------------- ----------------
ASSETS
Short-term
investments.......... Ps. 84,100 Ps. 84,100
Trade accounts
receivables, net..... - 17,038,986
Other receivables.... 3,629,091 9,722,368
--------------- ---------------
Ps. 3,713,191 Ps. 26,845,454
--------------- ---------------
LIABILITIES
Trade accounts
payable.............. Ps. 3,543 Ps. 17,336,042
Short-term debt...... - 6,649,068
Salaries and social
security payable..... - 828,805
Taxes payable........ - 6,351,121
Other liabilities ... - 705,271
--------------- ---------------
Ps. 3,543 Ps. 31,870,307
--------------- ---------------
Accruing interest at a Accruing interest at a
fixed rate variable rate Not accruing interest
----------------------------- --------------------------------------------------------
Current Non-Current Current Non-Current Current Non-Current Total
-------------- -------------- ------------- ------------- --------------- -------------- ---------------
ASSETS
Short-term
investments.......... Ps. - Ps. - Ps. 84,100 Ps. - Ps. - Ps. - Ps. 84,100
Trade accounts
receivable, net...... - - - 17,038,986 - 17,038,986
Other receivables.... 764,462 1,368,423 643,626 - 6,112,183 833,674 9,722,368
----------------------------- -------------- ------------ --------------- ------------- ---------------
Ps. 764,462 Ps. 1,368,423 Ps. 727,726 Ps. - Ps. 23,151,169 Ps. 833,674 Ps. 26,845,454
----------------------------- -------------- ------------ --------------- ------------- ---------------
LIABILITIES
Trade accounts
payable.............. Ps. - Ps. - Ps. - Ps. - Ps. 17,336,042 Ps. - Ps. 17,336,042
Short-term debt...... 6,448,302 - - - 200,766 - 6,649,068
Salaries and social
security payable..... - - - - 828,805 - 828,805
Taxes payable........ - - - - 6,351,121 - 6,351,121
Other liabilities.... - - - 705,271 - 705,271
----------------------------- -------------- ------------ -------------- ------------- ---------------
Ps. 6,448,302 Ps. - Ps. - Ps. - Ps25,422,005 Ps. - Ps. 31,870,307
----------------------------- -------------- ------------ -------------- ------------- ---------------
F-24
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
9. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
In November 1994, the Company entered into an agreement (the
"Management Agreement") with Dolphin Fund Management, pursuant to which Dolphin
Fund Management provides agricultural advisory services and certain other
administration services. Eduardo S. Elsztain, a shareholder and director of the
Company, and Marcelo Mindlin, a director of the Company, are President and
Vice-President, respectively, of the Board of Directors of Dolphin Fund
Management. In addition, certain executives, employees, shareholders and/or
directors of Dolphin Fund Management are also executives, employees,
shareholders and or directors of the Company. The Management Agreement has no
preestablished expiration date; however, it may be terminated by either party
upon not less than 60 days written notice. Nevertheless, if the Company
terminates the agreement without cause, the Company is liable to Dolphin Fund
Management for twice the average of the fees paid to Dolphin Fund Management
for the two fiscal years preceding the termination.
Pursuant to the terms of the Management Agreement, Dolphin Fund
Management provides the Company advisory services on matters related to capital
investments in all aspects of the agriculture business. The Company pays Dolphin
Fund Management an annual fee equivalent to 10% of the after-tax net income for
these services. Fees totaled Ps. nil, Ps. 0.8 million and Ps. 0.3 million for
the years ended June 30, 2002, 2001 and 2000, respectively. Fees are fully paid
subsequent to year-end.
During the years ended June 30, 2002 and 2001 the Company has invested
in shares of IRSA. IRSA is one of the leading Argentine real estate companies
engaged directly or indirectly through subsidiaries, joint ventures and
international strategic alliances in real estate activities in Argentina and
Brazil. Eduardo Elsztain, a shareholder and director of the Company, Marcelo
Mindlin and Saul Zang, directors of the Company, are Chairman, First
Vice-Chairman and Second Vice-Chairman, respectively, of the Board of Directors
of IRSA, as well as shareholders of IRSA. This investment was classified as
current investment and carried at market value at June 30, 2001 amounting to Ps.
100.2 million as was held for trading purposes. Since April 1, 2002, as a result
of a change in the Company's strategy to hold such shares as a permanent
investment, the Company is accounting for this investment under the equity
method totaling Ps. 91.4 million at June 30, 2002.
In order to reduce administrative expenses, and to achieve a more
efficient allocation of corporate resources, during the years ended June 30,
2002 and 2001 IRSA provided the Company corporate services in the areas of
institutional relations, finance and human resources, amounting to Ps. 0.1
million and Ps. 0.3 million, respectively.
Until November 2001, the Company leased office space under a cancelable
operating lease from IRSA. Rent expense was recognized ratably over the lease
term. Rent expense for the years ended June 30, 2002, 2001 and 2000 amounted to
Ps. 0.15 million, Ps. 0.3 million and Ps. 0.3 million, respectively.
From time to time, the Company donates money to Fundacion IRSA, a
charitable, not-for-profit organization of which Eduardo S. Elsztain, a
shareholder of the Company, is a Director, and his wife is the President. The
Company paid Ps. 15,000, Ps. 276,362 and Ps. 8,799 during the years ended June
30, 2002, 2001 and 2000, respectively.
In December 1994, the Company purchased a piece of land from Mario
Elsztain, father of Eduardo Elsztain, a shareholder of the Company, for Ps. 1.76
million. As of June 30, 2001, the Company owed the seller approximately Ps.
97,772.
F-25
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
9. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
During the years ended June 30, 2002, 2001 and 2000, the law firm Zang,
Bergel & Vines provided the Company legal services amounting Ps. 0.3 million,
Ps. 0.1 million and Ps. 0.1 million, respectively. Saul Zang, Salvador D.
Bergel, Ernesto M. Vines, Juan C. Quintana Teran and Juan M. Quintana, directors
of the Company, are partners of the law firm.
10. STOCK OPTION PLAN
On November 19, 2001, the shareholders approved a Stock Option Plan
(the "Plan") relating to the shares that would remain after the shareholders
exercised their pre-emptive rights to acquire treasury stock (the "Shares"). The
Shares could be acquired at an exercise price of Ps. 1 plus interest accrued at
an annual rate of LIBO for deposits at 180 days. The option could be exercised
at any time within a period of 3 years since the expiration of the pre-emptive
rights. Two thirds of the options corresponding to the Shares would be allocated
by the Board of Directors among Messrs. Alejandro G. Elsztain, Alejandro
Cassaretto, Alejandro Bartolome, Carlos Blousson, Jose Luis Rinaldini and David
A. Perednik, members of the management of the Company (the "Initial
Beneficiaries"). The remaining one third of the options would be allocated by
the Board of Directors in a period of time beginning six months after the
initial allocation and ending three months before the expiration of the term of
the exercise of the options, among any of the Company's employees or executive
officers. After the exercise of the pre-emptive rights by the shareholders that
subscribed 2,353 shares during the third quarter of fiscal year 2002, 4,612,290
shares of treasury stock have been reserved for the Plan.
On February 12 2002, the Board of Directors approved the subscription
of the Stock Option Agreement between the Company and the Initial Beneficiaries
(the "Agreement"), pursuant to which the Company granted the Initial
Beneficiaries the option to acquire 3,073,437 shares. Dividends distributed on
such shares, if any, will be accumulated and paid to the beneficiaries on the
date of exercise. The exercise price should be paid in cash and the Company is
precluded to provide financing. The beneficiaries will not lose the right to
exercise the option in the case of resignation or involuntary termination in
their charges. Pursuant to an agreement dated February 13, 2002, the shares were
transferred to a trust. In April and June 2002, the beneficiaries acquired
480,000 shares for a total consideration of Ps. 482,716 (Ps. 545,160 in constant
argentine pesos of June 30, 2002).
11. ISSUANCE OF DEBT SECURITIES
The Shareholders meeting held on March 8, 2002 approved: (i) the
issuance of up to US$ 50.0 million debt securities for up to a five-year term at
a fixed annual interest rate not exceeding 12% with semi-annual payments, and,
(ii) the issuance of up to US$ 50.0 million convertible debt securities for a
five-year term at a fixed annual interest rate not exceeding 12% or a variable
rate with semi-annual payments. At the option of the holders, convertible debt
securities can be converted into shares of common stock of the Company. The
conversion price will be calculated based on the average quotation of the shares
on the Buenos Aires Stock Exchange during the twenty stock exchange business
days prior to the 72 hours before commencement of the preferred subscription
period, with a premium of up to 10% of that average value. In this connection
the Shareholders' meeting held on March 8, 2002 approved the issuance to the
convertible debt holders of warrants to purchase the Company's common stock.
Each warrant entitles the holder to purchase one share of common stock at an
exercise price of Ps. 1 per share. These warrants are to be exercisable within
15 days after the finalization of the conversion period.
Proceeds from the issuance of debt securities will be utilized to repay
outstanding indebtedness and to subscribe upon the exercise of preemptive rights
to acquire convertible securities to be issued by IRSA. No securities were
issued in connection with this approval as of June 30, 2002.
F-26
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP
The Company's financial statements are prepared in accordance with
Argentine GAAP, which differs in certain significant respects from US GAAP. Such
differences involve methods of measuring the amounts shown in the financial
statements, as well as additional disclosures required by US GAAP and Regulation
S-X of the SEC.
I. DIFFERENCES IN MEASUREMENT METHODS
The following reconciliation to US GAAP does not include the reversal
of the adjustments to the financial statements for the effects of inflation
required under Argentine Technical Resolution N(0) 6, with the modifications
established by Argentine Technical Resolution N(0) 19, because the application
of this Resolution represents a comprehensive measure of the effects of price
level changes in the Argentine economy.
The principal differences, other than inflation accounting, between
Argentine GAAP and US GAAP are described below, together with an explanation,
where appropriate, of the method used in the determination of the necessary
adjustments.
YEAR ENDED JUNE 30,
-------------------------------------------------------------
2001
2002 (RESTATED) 2000
-------------------- ------------------ ---------------------
RECONCILIATION OF NET (LOSS) INCOME:
Net (loss) income as reported under Argentine GAAP.... Ps. (39,556,328) Ps. 7,497,929 Ps. 2,648,555
US GAAP adjustments:
Change to equity method of accounting (Note
12.I.a)) ............................................ (60,559,881) (9,907,356) -
Valuation of inventories (Note 12.I.b))........... 13,746,443 1,237,330 (1,397,788)
Deferred income tax (Note 12.I.c))................ (31,064,693) 1,370,672 1,487,350
Accounting for futures and options contracts
(Note 12.I.d)).................................... 1,551,432 (1,326,717) (1,280,343)
Website development costs (Note 12.I.e)).......... 418,557 (834,684) (105,023)
Amortization expense (Note 12.I.g))............... (29,585) (29,585) (82,254)
Elimination of gain on acquisition of minority
interest (Note 12.I.h))........................... 28,819 28,819 28,819
Available-for-sale securities (Note 12.I.i))...... 223,233 5,203,706 (4,816,880)
Non-current investments in unconsolidated
affiliated companies (Note 12.I.j))............... 75,584 71,869 (433,250)
Accounting for stock options (Note 12.I.k))....... (3,618,245) - -
Effect of US GAAP adjustments on management fee
(Note 12.I.l)).................................... 7,935,390 393,553 664,766
Director's fees (Note 12.I.m)) ................... - - (79,793)
Minority interest (Note 12.I.n)).................. (125,567) 250,405 31,507
-------------------- ------------------ ----------------------
Net (loss) income in accordance with US GAAP.......... Ps. (110,974,841) Ps. 3,955,941 Ps. (3,334,334)
==================== ================== ======================
BASIC AND DILUTED EARNINGS PER SHARE UNDER US GAAP:
(Loss) income before accounting change................ Ps. (0.9267) Ps. 0.0336 Ps. (0.0279)
Accounting change..................................... - (0.0005) -
-------------------- ------------------ ---------------------
Net (loss) income per share........................... Ps. (0.9267) Ps. 0.0331 Ps. (0.0279)
F-27
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
AS OF JUNE 30,
-----------------------------------------
2001
2002 (RESTATED)
----------------- ----------------------
RECONCILIATION OF SHAREHOLDERS' EQUITY:
Total shareholders' equity under Argentine GAAP............ Ps. 304,760,618 Ps. 350,891,331
US GAAP adjustments:
Change to equity method of accounting (Note 12.I.a))... (70,955,480) (9,905,506)
Valuation of inventories (Note 12.I.b))................ (13,118,954) (26,865,397)
Deferred income tax (Note 12.I.c))..................... (37,751,671) (6,765,110)
Accounting for futures and options contracts (Note
12.I.d))............................................... 252,642 (1,298,790)
Web site development costs (Note 12.I.e)).............. (732,474) (1,151,031)
Differences in basis relating to purchase accounting
(Note 12.I.f))......................................... 147,926 147,926
Amortization expense (Note 12.I.g)).................... (141,424) (111,839)
Elimination of gain on acquisition of minority interest
(Note 12.I.h))......................................... (1,128,594) (1,157,413)
Non-current investments in unconsolidated affiliated
companies (Note 12.I.j))............................... (1,088,542) (1,164,126)
Effect of US GAAP adjustments on management fee (Note
12.I.l))............................................... 12,243,399 4,308,009
Minority interest (Note 12.I.n))....................... 219,743 345,310
-------------------- ---------------------
Shareholders' equity under US GAAP......................... Ps. 192,707,189 Ps. 307,273,364
==================== =====================
YEAR ENDED JUNE 30,
------------------------------------------
2001
2002 (RESTATED)
----------------- ----------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY UNDER US GAAP:
Shareholders' equity as of the beginning of the year......... Ps. 307,273,364 Ps. 309,214,109
Distribution of cash dividends................................ (7,123,031) (2,516,127)
Subscription of treasury stock................................ 3,486 -
Additional paid-in-capital.................................... 4,163,405 -
Change in other comprehensive income of equity investees ..... (490,093) 1,850
Realized holding gain on available-for-sale securities
outstanding at the beginning of the year...................... (145,101) (3,527,510)
Unrealized holding gain on available-for-sale securities
outstanding at the end of the year............................ - 145,101
Net (loss) income under US GAAP............................... (110,974,841) 3,955,941
-------------------- ---------------------
Shareholders' equity as of the end of the year............... Ps. 192,707,189 Ps. 307,273,364
==================== =====================
F-28
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
DESCRIPTION OF RECONCILING ITEMS:
a) Restatement of 2001 US GAAP reconciliation
Change to equity method of accounting
As stated in Note 5.b)(i), until March 31, 2002, under Argentine GAAP
the Company recognized its investments in IRSA's shares at market value,
with unrealized gains and losses recorded in income. Under US GAAP, these
investments were originally classified as available-for-sale securities in
accordance with Statements of Financial Accounting Standards N(degree) 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities", and accordingly unrealized gains and losses were excluded from
income and reported as a separate component of shareholders' equity.
Effective March 31, 2002, as a result of a change in the Company's
strategy to hold such shares as permanent investments, under Argentine GAAP the
Company changed the accounting method for its investment in IRSA's shares from
market value to the equity method of accounting. As a result, at March 31, 2002
the Company recognized a negative goodwill of Ps. 13.8 million, representing the
excess of equity value over market value at that date. Negative goodwill is
being amortized under the straight-line method over a period of 20 years and the
net carrying value as of June 30, 2002 amounts to Ps. 13.7 million. Under US
GAAP, the financial statements of prior periods would be retroactively adjusted
as required by APB 18 (APB Opinion N(degree) 18 ("APB 18"), "The Equity Method
of Accounting for Investments in Common Stock"), to reflect the investment under
the equity method of accounting in a manner consistent with the accounting for a
step acquisition of a subsidiary. The amounts previously reported in accordance
with SFAS No. 115 in other comprehensive income would be reversed. As a result,
as the sum of the amounts assigned to the assets acquired and liabilities
assumed exceeded the cost of the acquired entity, the Company reduced the
amounts that otherwise would have been assigned to the acquired long-lived
assets on a pro-rata basis.
The effect of this restatement on US GAAP net income, comprehensive
income and basic and diluted net income per share for the year ended June 30,
2001 are as follows:
AS PREVIOUSLY
REPORTED (I) AS RESTATED
------------------ ----------------
Net income under US GAAP..................................... Ps. 5,785,742 Ps. 3,955,941
Comprehensive income under US GAAP........................... 7,567,848 575,382
Basic and diluted net income per share under US GAAP......... Ps. 0.05 Ps. 0.03
(i) Amounts adjusted for price-level changes and expressed in constant
Argentine Pesos of June 30, 2002.
F-29
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
b) Valuation of inventories (continued)
Under Argentine GAAP, livestock is recorded at market value, net of
expenses, or replacement cost as determined by agricultural appraisers.
Under US GAAP, the Company records breeding and developing livestock at
the lower of cost or market, with costs removed from inventory on a
first-in/first-out basis. All direct and indirect costs of developing livestock,
such as the purchase price, labor costs, feed, vaccines and veterinary fees are
accumulated until the livestock reaches maturity and is either sold or
transferred to a productive function. Breeding herd are depreciated using the
straight-line method over the estimated useful life of five years.
Under Argentine GAAP, the Company has classified the livestock for
dairy production and other purposes not related to its sale as non-current
inventory. Under US GAAP, this amount would be recorded as property and
equipment on the consolidated balance sheet.
Under Argentine GAAP and US GAAP, inventories of harvested crops are
stated at current sales price less cost of disposal. Unharvested crop-growing
costs are included as part of inventory and represent costs incurred to plant
and maintain seed crops which will be harvested during the subsequent fiscal
year. However, under Argentine GAAP, gains or losses on holding inventories are
segregated and shown in a separate line within operating income. Under US GAAP,
these amounts would be included as part of cost of sales.
c) Deferred income taxes
Under Argentine GAAP, income taxes are recognized on the basis of
amounts currently due in accordance with Argentine tax regulations. Temporary
differences between the financial reporting and income tax bases of accounting
are therefore not considered in recognizing income taxes.
Under US GAAP, the Company records income taxes using the method
required by Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes". Accordingly, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. SFAS No. 109 requires companies
to set up a valuation allowance for that component of net deferred tax assets
which does not meet the more likely than not criterion for realization. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The primary components of temporary differences at June 30, 2002 and
2001, which give rise to deferred taxes are as follows:
F-30
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
c) Deferred income tax (continued)
2001
2002 (RESTATED)
-------------------------------------------------- ---------------------------------------------------
SFAS 109 SFAS 109 SFAS 109 SFAS 109
APPLIED TO APPLIED TO US APPLIED TO APPLIED TO
ARGENTINE GAAP GAAP ARGENTINE GAAP US GAAP
BALANCES ADJUSTMENTS SFAS 109 BALANCES ADJUSTMENTS SFAS 109
---------------- --------------- ---------------- ----------------- -------------- ---------------
Deferred tax assets:
Tax loss
carryforwards.... Ps. 516,741 - 516,741 Ps. 770,473 Ps. - Ps. 770,473
Less: Valuation
allowance......... (343,129) - (343,129) (581,092) - (581,092)
----------------- -------------- --------------- ---------------- --------------- ----------------
Net tax loss
carryforwards..... 173,612 - 173,612 189,381 - 189,381
Provisions........ 101,554 - 101,554 506,048 - 506,048
Investments....... - - - (2,892,841) 2,780,891 (111,950)
Accounting for
futures and
options contracts. - (88,425) (88,425) - 454,576 454,576
Intangible assets. (128,143) 231,902 103,759 - 368,042 368,042
---------------- --------------- ---------------- ----------------- -------------- ---------------
Total deferred tax
asset................. 147,023 143,477 290,500 (2,197,412) 3,603,509 1,406,097
---------------- --------------- ---------------- ----------------- -------------- ---------------
Deferred tax
liabilities:
Other receivables. (103,183) - (103,183) - - -
Inventories....... (7,745,540) 4,591,634 (3,153,906) (10,188,388) 9,402,889 (785,499)
Property
and
equipment......... (30,894,900) 395,008 (30,499,892) (6,283,000) 405,095 (5,877,905)
Management fee.... - (4,285,190) (4,285,190) - (1,507,803) (1,507,803)
---------------- --------------- ---------------- ----------------- -------------- ---------------
Total deferred tax
liabilities........... (38,743,623) 701,452 (38,042,171) (16,471,388) 8,300,181 (8,171,207)
---------------- --------------- ---------------- ----------------- -------------- ---------------
Net deferred income
tax liability......... Ps. (38,596,600) 844,929 (37,751,671) Ps. (18,668,800) Ps.11,903,690 Ps. (6,765,110)
================ =============== ================ ================= ============== ===============
As of June 30, 2002 and 2001, Ps. 64,135 and Ps. 1,038,055,
respectively, were classified as current liabilities and current assets and Ps.
37,687,536 and Ps. 7,803,165, respectively, were classified as non-current
liabilities.
In assessing the realizability of deferred income tax assets, the
Company considers whether it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. The Company has provided a
valuation allowance for a portion of its deferred tax assets as the future
realization of the tax benefit is not considered by management to be
more-likely-than-not. The Company will continue to monitor the need for the
valuation allowance that has been provided.
At June 30, 2002, the Company had approximately Ps. 1.5 million of tax
loss carryforwards. These carryforwards are available to offset future taxable
income and expire at various dates beginning in 2003 and ending in 2007.
F-31
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
c) Deferred income tax (continued)
Income tax expense (benefit) for the years ended June 30, 2002, 2001
and 2000 consists of the following:
2001
2002 (RESTATED) 2000
--------------------- --------------------- ---------------------
Current income tax expense................... Ps 7,579,886 Ps. 4,014,295 Ps. 43,746
Deferred income tax expense (benefit) ....... 31,064,693 (1,370,672) (1,487,350)
--------------------- --------------------- ---------------------
Income tax expense (benefit)................. Ps. 38,644,579 Ps. 2,643,623 Ps. (1,443,604)
====================== ===================== =====================
A reconciliation of income taxes computed at the statutory rate to the
income tax amounts recorded for the years ended June 30, 2002, 2001 and 2000 is
as follows:
2001
2002 (RESTATED) 2000
--------------------- --------------------- ---------------------
Income tax expense (benefit) at statutory
tax rate on pretax income (loss) in
accordance with US GAAP..................... Ps. (25,380,359) Ps. 2,098,336 Ps. (1,709,454)
Change in valuation allowance............... 170,176 119,633 436,872
Donations................................... 45,603 13,090 40,491
Inflation adjustment........................ 26,639,722 - -
Loss from affiliated companies.............. 35,800,014 - -
Other, net.................................. 1,369,423 412,564 (211,513)
--------------------- --------------------- ---------------------
Income tax expense (benefit)................ Ps. 38,644,579 Ps. 2,643,623 Ps. (1,443,604)
===================== ===================== =====================
d) Accounting for futures and options contracts
As discussed in Note 4.o), the Company utilizes a variety of
commodity-based derivative instruments, as hedges to manage its exposure to
price volatility stemming from its integrated crop production activities. These
instruments consist mainly of crop futures contracts and put and call option
contracts. Contract positions are designated to ensure that the Company will
receive a defined minimum price for certain quantities of its production.
Under Argentine GAAP, realized gains, losses and costs associated with
the contracts are recognized on a cash settlement basis. Margin deposits and
premiums paid related to outstanding future and option contracts are recorded as
other receivables on the balance sheet.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument 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's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
F-32
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
d) Accounting for futures and options contracts (continued)
SFAS No. 133 was subsequently amended by Statement of Financial
Accounting Standards N(degree) 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
("SFAS No. 137"), and is now effective for fiscal years beginning after June 15,
2000, but may be implemented as of the beginning of any fiscal quarter after
issuance. Retroactive application is not permitted. SFAS No. 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997. Changes in accounting methods will be required for derivative
instruments utilized by the Company to hedge foreign currency exchange rate and
interest rate risks. Such derivatives include foreign currency forward contracts
and interest rate swaps. In June 2000, the FASB issued Statement 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
which addresses a limited number of implementation issues arising from SFAS No.
133.
Under US GAAP, the Company adopted SFAS No. 133, and its corresponding
amendments under SFAS No. 138, on July 1, 2000. While management believes each
of their instruments manage various market risks, these instruments are not
designated and accounted for as hedges under SFAS 133 as a result of the
extensive record keeping requirements of the provision. Accordingly, these
derivatives are marked to market on a current basis with gains and losses
recognized in earnings. In accordance with the transition provisions of SFAS No.
133, the Company recorded a net-of-tax cumulative-effect-type adjustment of Ps.
58,748 (loss) in earnings to reflect the effect of the adoption at the beginning
of the year ended June 30, 2001.
e) Web site development costs
Under Argentine GAAP, the Company capitalizes certain costs incurred in
the development of the Company's web sites. Such costs are amortized under the
straight-line method over a period of 3 years.
Under US GAAP, the Company adopted EITF No. 00-02, "Accounting for Web
Site Development Costs" for the fiscal year ended June 30, 2000. As such, the
Company expensed certain costs incurred during the planning stage as well as
costs related to training, administration and other maintenance activities.
f) Differences in basis relating to purchase accounting
Under Argentine GAAP and US GAAP, the Company applies the purchase
method of accounting to its acquisitions. Accordingly, the fair market value of
the assets acquired was estimated and the excess of the purchase price over the
fair value is considered goodwill. The US GAAP adjustment for "Differences in
basis relating to purchase accounting" reflects the application of certain US
GAAP adjustments when estimating the fair value of such assets and liabilities.
g) Amortization expense
The differences in the carrying amount of goodwill between Argentine
GAAP and US GAAP as described in Note 12.I.f) give rise to differences in
amortization expense.
F-33
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
h) Elimination of gain on acquisition of minority interest
Under Argentine GAAP, the Company recorded, during fiscal year 1999, a
gain on the acquisition of the minority interest of Agro Riego, representing the
excess of book value over the purchase price. Under US GAAP, such excess was
recorded as a reduction in the values of the underlying non-current assets of
Agro Riego and is being amortized over the estimated useful lives of such
assets.
i) Available-for-sale securities
Under Argentine GAAP, investments in money market, investment mutual
funds, commercial notes and shares are carried at market value, with unrealized
gains and losses recorded in income. Under US GAAP, pursuant to Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115"), part of the Company's investments
in mutual funds as well as those in commercial notes and shares are classified
as available-for-sale investments and, accordingly, unrealized gains and losses
are excluded from income and reported as a separate component of shareholders'
equity. SFAS No. 115 also states that for individual securities classified as
available-for-sale an enterprise shall determine whether a decline in fair value
below the amortized cost basis is other than temporary. In such event,
accumulated unrealized losses included in other comprehensive income shall be
reclassified into the statement of income. As such, during the year ended June
30, 2002 the Company recognized in earnings the accumulated balance of
unrealized holding losses on commercial notes amounting to Ps. 13,290.
Specific identification was used to determine cost in computing
realized gain or loss. The majority of the Company's investments are considered
available-for-sale as these securities could potentially be sold in response to
needs for liquidity, changes in the availability of and the yield on alternative
instruments or changes in funding sources or terms. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
j) Non-current investments in unconsolidated affiliated companies
The Company has assessed the impact of US GAAP adjustments for equity
investees. As a consequence of this assessment, the Company has recognized a net
gain (loss) of Ps. 75,584, Ps. 71,869 and Ps. (433,250) for the years ended June
30, 2002, 2001 and 2000, respectively. The principal US GAAP adjustments
affecting the Company's equity investees are related to valuation of
inventories, organization expenses, accounting for futures and options contracts
and deferred income taxes.
This adjustment does not include the impact of US GAAP adjustments on
IRSA, which is included in the line item "Change to equity method of
accounting".
F-34
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
k) Accounting for stock options
As discussed in Note 10, on November 19, 2001 the shareholders approved
a Stock Option Plan relating to the shares that would remain after the
shareholders exercised their pre-emptive rights to acquire treasury stock (the
"Shares"). Two thirds of the options corresponding to the Shares would be
allocated by the Board of Directors among the Initial Beneficiaries. The
remaining one third of the options would be allocated by the Board of Directors
in a specific period of time among any of the Company's employees or executive
officers. After the exercise of the pre-emptive rights by the shareholders that
subscribed 2,353 shares during the third quarter of fiscal year 2002, 4,612,290
shares of treasury stock have been reserved for the Plan.
On February 12, 2002, the Board of Directors approved the subscription
of the Stock Option Agreement between the Company and the Initial Beneficiaries
(the "Agreement"), pursuant to which the Company granted the Initial
Beneficiaries the option to acquire 3,073,437 shares at an exercise price of Ps.
1 per share plus accrued interest at an annual rate of LIBO for deposits at 180
days. The option can be exercised at any time until January 15, 2005. Dividends
distributed on such shares, if any, will be accumulated and paid to the
beneficiaries on the date of exercise. The exercise price should be paid in cash
and the Company is precluded to provide financing. The beneficiaries will not
lose the right to exercise the option in the case of resignation or involuntary
termination in their charges. Pursuant to an agreement dated February 13, 2002,
the shares were transferred to a trust. In April and June 2002, the
beneficiaries acquired 480,000 shares for a total consideration of Ps. 482,716
(Ps. 545,160 in constant argentine pesos of June 30, 2002).
Under Argentine GAAP, the Company has not recognized any compensation
expense related to this agreement. The Company recorded the transfer of treasury
shares to common stock at their par value and recognized an increase in retained
earnings for the proceeds received from the exercise of the option.
Under US GAAP, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".
This Statement gave the Company the option of either (1) continuing to account
for stock-based employee compensation plans in accordance with the guidelines
established by Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and related interpretations (APB No.25) while providing the
disclosures required under SFAS No. 123, or (2) adopting SFAS No. 123 accounting
for all employee and non-employee stock compensation arrangements. The Company
opted to continue to account for its stock-based awards using the intrinsic
value method in accordance with APB No. 25. As such, compensation expense for
compensatory plans is measured as the quoted market price of the stock on the
measurement date less the amount, if any, the employee is required to pay. The
measurement date is the first date at which both (a) the number of shares the
employee is entitled to receive and (b) the option or purchase price, if any,
are known.
The Company has determined that the stock options were granted, in
substance, to compensate the management of the Company. As the exercise price
increases for a fixed amount (i.e. interest) and dividends distributed on such
shares, if any, will be accumulated and paid in cash to the beneficiaries, the
ultimate option price is not known until the date of exercise. Therefore, the
Agreement is considered to be a variable plan and the measurement date is the
date of the exercise of the option.
F-35
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
k) Accounting for stock options (continued)
FASB Interpretation No.28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans" states that compensation shall
be accrued as a charge to expense over the period or periods the employee
performs the related services. If stock appreciation rights or other variable
plans are granted for past services, compensation should be accrued as a charge
to expense of the period in which the rights or awards are granted. When it is
not clear that the award is for current or future services and/or in situations
where the shares or rights vest immediately, it should be presumed that the
rights represent compensation for the current period or for prior periods.
Accordingly, any compensation expense measured as of the grant date should be
expensed in the period such rights are granted. Compensation accrued during the
service period shall be adjusted in subsequent periods up to the measurement
date for changes in the quoted market value of the shares but shall not be
adjusted below zero.
As the options vested immediately at the grant date, the Company
charged to expense the total amount of compensation during the year ended June
30, 2002. Compensation expense amounted to Ps. 529,150 relating to the options
exercised in April and June 2002 and Ps. 3,089,095 relating to the remaining
options. Quoted market prices of the Company's shares traded in the Buenos Aires
Stock Exchange were used in measuring compensation.
Following is a summary of the stock option activity during fiscal year
2002:
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
-------------- -------------
Outstanding as of June 30, 2001....... - Ps. -
Granted............................... 3,073,437 1.01
Exercised............................. (480,000) 1.01
Terminated / forfeited................ - -
-------------- -------------
Outstanding as of June 30, 2002......... 2,593,437 Ps. 1.01
============== =============
The weighted average fair value of options granted during fiscal year
2002 was Ps. 1.26.
The following table summarizes information concerning currently
outstanding and exercisable stock options:
F-36
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
k) Accounting for stock options (continued)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Ps. 1.01 2,593,437 2.5 years Ps. 1.01 2,593,437 Ps. 1.01
Had compensation cost for the awards under the Agreement been
determined based on the grant date fair values consistent with the method
required under SFAS No 123, the Company's net loss and net loss per share would
have been reduced to the pro forma amounts indicated below:
YEAR ENDED
JUNE 30, 2002
--------------------
Net loss:
As reported................................ Ps. 110,974,841
Pro forma.................................. 111,241,517
Basic and diluted net loss per share:
As reported................................ Ps. 0.9267
Pro forma.................................. 0.9290
The fair value of each option grant is estimated on the date of grant
using the minimum value model with the following weighted average assumptions
used: no dividend yields; volatility of 58.7 % and risk free interest rates of
2.06%.
l) Effect of US GAAP adjustments on management fee
As discussed in Note 9, the Company entered into a Management Agreement
with Dolphin Fund Management, pursuant to which Dolphin Fund Management provides
agricultural advisory services and certain other administration services to the
Company. The Company pays Dolphin Fund Management an annual fee equivalent to
10% of the net income of the Company for these services. The reconciliation to
US GAAP includes the effects of the US GAAP adjustments on management fee.
F-37
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
I. DIFFERENCES IN MEASUREMENT METHODS (CONTINUED)
m) Director's fees
Under Argentine GAAP, during fiscal year 2000 the Company charged
certain fees paid to directors as a charge against retained earnings. Under US
GAAP, such fees were expensed as incurred.
n) Minority interest
This adjustment represents the effect on minority interest of certain
of the foregoing reconciling items.
II. ADDITIONAL DISCLOSURE REQUIREMENTS
a) Statement of income classification differences
Operating loss
Under Argentine GAAP, the Company reflected gains on the sale of farms
as a separate line within operating income; under US GAAP, such gains would be
included as other income. Operating loss under US GAAP would have been Ps. 2.0
million, Ps. 3.5 million and Ps. 5.7 million for the years ended June 30, 2002,
2001 and 2000, respectively.
Gross profit
Under Argentine GAAP, gains or losses on holding inventories are
segregated and shown in a separate line within operating income. Under US GAAP,
these amounts would be included as part of cost of sales. Gross profit under US
GAAP would have been Ps. 14.2 million, Ps. 13.6 million and Ps. 11.2 million for
the years ended June 30, 2002, 2001 and 2000, respectively.
b) Statement of changes in shareholders'equity classification
differences
During the year ended June 30, 1999, the Company acquired 12,612,220
treasury shares for a total consideration of Ps. 29.5 million, of which
7,997,577 were subsequently distributed to the Company's shareholders on a
pro-rata basis. As discussed in Note 10, during the year ended June 30, 2002,
the shareholders subscribed 2,353 treasury shares for a total consideration of
Ps. 3,486. In addition, the Company transferred 3,073,437 treasury shares to a
trust under the stock option plan, of which 480,000 shares were exercised by the
beneficiaries for a total consideration of Ps. 545,160.
Under Argentine GAAP, the Company recorded the acquisition of treasury
stock as a reduction in retained earnings and recognized increases in retained
earnings for the subsequent reissuances. Under US GAAP, treasury stock
transactions would be accounted for under the cost method.
c) Disclosure about fair value of financial instruments
Under Argentine GAAP, there are no specific rules regarding disclosure
of fair value of financial instruments.
F-38
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
c) Disclosure about fair value of financial instruments (continued)
Under US GAAP Statement of Financial Accounting Standards No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of credit risk" ("SFAS No.
105"), requires reporting entities to disclose certain information about
financial instruments with off-balance sheet risk of accounting loss. Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments", ("SFAS No. 107"), requires disclosure of fair value
information about financial instruments whether or not recognized in the balance
sheet, for which it is practicable to estimate fair value. Financial instruments
include such items as to cash and cash equivalents, investments in debt and
equity securities, accounts receivable and other instruments. Statement of
Financial Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and fair value of Financial Instruments" ("SFAS 119"), requires
reporting entities to disclose certain information for derivative financial
instruments. SFAS No. 133, which is effective July 1, 2000, supersedes SFAS No.
105 and SFAS No. 119 and amends SFAS No. 107 to include in SFAS No. 107 the
disclosure requirements of credit risk concentrations from SFAS No. 105. See
Note 12.II.d) for details of concentration of credit risk.
Fair value estimates are made as of a specific point in time based on
the characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgements made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair value, the Company's fair values should not be
compared to those of other companies.
Under the Statement, fair value estimates are based on existing
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amount presented
does not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemental with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each
class of financial instruments as of June 30, 2002 and 2001 are as follows:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, deposits and other short-term assets is considered to
approximate their respective carrying values due to their short-term nature.
o The fair value of trade accounts payable and other short-term
liabilities is considered to approximate their carrying values due to their
short-term nature.
o The Company carries trading investments, consisting of money-market
mutual funds, at fair value. The fair value of these instruments was determined
using quoted market prices.
F-39
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINEGAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
d) Disclosure about fair value of financial instruments (continued)
o The Company carries available for-sale-securities, consisting of
investments in mutual funds, commercial notes and equity securities at fair
value. The fair value of these instruments was determined using quoted market
prices.
o The fair values of net commodity positions were based upon quoted
market prices or estimated future prices including estimated carrying costs
corresponding with the future delivery period, if any.
o The fair value of the long-term note receivables is considered to
approximate its carrying value due to its variable interest rate.
e) Concentration of credit risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist mainly of cash and cash equivalents and
accounts receivable. The Company maintains its cash and cash equivalents
principally in domestic financial institutions and investments of high credit
rating. The Company's policy is designed to limit exposure to any one
institution. As of June 30, 2002 and 2001, approximately Ps. 38.3 million and
Ps. 11.5 million included in the cash balances were held with 14 and 16
institutions, respectively. The Company has not experienced any significant
losses in such accounts.
The Company's accounts receivable are derived primarily from sales of
crops to independent purchasers, live beef cattle to local meat processing
companies and milk products to domestic dairy companies. The Company performs
credit evaluations of its customers and generally does not require collateral.
The Company does not believe that significant credit risk exists at June 30,
2002 and 2001 due to the diversity of its customer base. No customer accounted
for greater than 10% of sales for the years ended June 30, 2002, 2001 and 2000.
The Company is a major supplier of milk production to Mastellone S.A.
("Mastellone"), the largest dairy company in Argentina. Sales to Mastellone
totaled approximately 2.8%, 3.4% and 4.9% of total net sales and amounted to
approximately Ps. 2.0 million, Ps. 2.3 million and Ps. 3.3 million for the years
ended June 30, 2002, 2001 and 2000, respectively. Although management believes
that the Company will be able to continue to sell its milk production to
Mastellone on favorable terms, there can be no assurance that the Company would
be able to maintain this relationship. Although management believes that other
large dairy producers would be willing and able to purchase the Company's milk
production, there can be no assurance that the Company could timely locate
alternative customers to sell its products at prices comparable to those paid by
its current major customers.
f) Statements of cash flows
The Company has elected to present the statements of cash flows in the
primary financial statements using the guidance set forth in SFAS No. 95
"Statement of Cash Flows" but using Argentine GAAP numbers. As further described
in Note 4.b), the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-40
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
e) Statements of cash flows
Under US GAAP, the total amounts of cash and cash equivalents at the
end of the years shown in the consolidated statements of cash flows are required
to be the same amounts as similarly titled line items shown in the consolidated
balance sheets, as of those dates. The following table reconciles the balances
included as cash and banks in the consolidated balance sheets to the total
amounts of cash and cash equivalents at the end of the years shown in the
consolidated statements of cash flows:
AS OF JUNE 30,
-----------------------------------------------------
2002 2001 2000
-------------- ---------------- --------------
Cash and banks ..................... Ps. 39,473,338 Ps. 3,696,692 Ps. 5,542,193
Cash equivalents:
Time deposits....................... - - 11,531,789
Mutual funds ....................... 6,770 73,738 4,803,799
-------------- ---------------- ---------------
Total cash and cash equivalents.... Ps. 39,480,108 Ps. 3,770,430 Ps. 21,877,781
============== ================ ===============
Under Argentine GAAP, nor the effect of exchange rate changes on cash
and cash equivalents neither the effects of inflation were disclosed by
presenting additional cash flow statement categories as required by US GAAP. As
a result, differences exist between cash flows reported in the primary financial
statements and cash flows that would be reported in a statement of cash flows
prepared using US GAAP numbers. The following table presents the cash flows from
operating, investing and financing activities, the effect of exchange rate
changes on cash and cash equivalents and the effects of inflation accounting
that would be reported in the statement of cash flows, which contemplate
classification differences under US GAAP.
YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------- ------------------ --------------------
Net cash provided by operating activities ............. Ps. 26,858,203 Ps. 15,412,780 Ps. 16,781,189
Net cash provided by (used in) investing activities ... 34,485,120 (57,198,676) (7,823,942)
Net cash (used in) provided by financing activities.... (19,038,386) 23,678,545 (23,201,735)
Effects of exchange rate changes on cash and cash
equivalents............................................ (4,601,151) - -
Effects of inflation accounting........................ (1,994,108) - -
------------------- ------------------ --------------------
Net increase (decrease) in cash and cash equivalents... Ps. 35,709,678 Ps. (18,107,351) Ps. (14,244,490)
=================== ================== ====================
f) Earnings per share
Under Argentine GAAP, the Company is not required to present earnings
per share information. Under US GAAP, basic and diluted earnings per share are
presented in conformity with SFAS No. 128 "Earnings per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB No. 98") for all periods presented.
F-41
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
f) Earnings per share (continued)
Basic net (loss) income per share is computed by dividing the net
(loss) income available to common shareholders for the period by the weighted
average shares of common stock outstanding during the period. Diluted net (loss)
income per share is computed by dividing the net (loss) income for the period by
the weighted average number of common and dilutive potential common shares then
outstanding during the period. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, ordinary shares and convertible
preferred shares issued or granted for nominal consideration prior to the
anticipated effective date of an initial public offering must be included in the
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, the Company has not had any
issuance or grants for nominal consideration.
Potential common shares consist of the incremental number of common
shares issuable upon the exercise of stock options (using the treasury stock
method). The calculation of diluted net (loss) income per share excludes
potential common shares if their effect is anti-dilutive. Diluted net loss per
share for the year ended June 30, 2002 excludes potential common shares because
the effect of their inclusion would be anti-dilutive, or would decrease the
reported loss per share. Using the treasury-stock method, the weighted average
potential common shares for the year ended June 30, 2002 totaled 1,150,481.
The following tables set forth the computation of basic and diluted net
(loss) income per share under US GAAP for the periods indicated:
YEAR ENDED JUNE 30,
----------------------------------------------------------
2001
2002 (RESTATED) 2000
------------------ ------------------ --------------------
Numerator:
---------
(Loss) income before accounting changes................ Ps. (110,974,841) Ps. 4,014,689 Ps. (3,334,334)
Accounting changes..................................... - (58,748) -
----------------- ----------------- -----------------
Net (loss) income available to common shareholders.. Ps. (110,974,841) Ps. 3,955,941 Ps. (3,334,334)
================= ================= =================
Denominator:
-----------
Basic and diluted weighted average shares
outstanding............................................ 119,748,872 119,669,749 119,669,749
Basic and diluted earnings per share under US GAAP:
(Loss) income before accounting changes................ Ps. (0.9267) Ps. 0.0336 Ps. (0.0279)
Accounting changes..................................... - (0.0005) -
----------------- ------------------ ----------------
Basic and diluted net (loss) income per common
share.................................................. Ps. (0.9267) Ps. 0.0331 Ps. (0.0279)
================= ================== ================
The following tables set forth the proforma effects of the retroactive
application of a change in accounting principle on earnings per share:
YEAR ENDED JUNE 30,
----------------------------------------------------------
2001
2002 (RESTATED) 2000
------------------ ------------------ ------------------
Basic and diluted net (loss) income per share
under US GAAP.......................................... Ps. (0.9267) Ps. 0.0336 Ps. (0.0284)
F-42
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
g) Segment information
Under Argentine GAAP, when an entity has different activities, it is a
recommended practice (but not compulsory) to disclose the revenues and expenses
for each activity in the financial statements or as supplementary information.
Argentine GAAP does not prescribe any guidance in presenting segment
information.
Under US GAAP, the Company applies the criteria of SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" for segment
reporting purposes. SFAS No. 131, which was issued by the FASB in June 1997,
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders.
Operating segments are components of a company about which separate financial
information is available that is regularly evaluated by the chief operating
decision maker(s) in deciding how to allocate resources and assess performance.
The Statement also establishes standards for related disclosures about a
company's products and services, geographical areas and major customers.
The Company is primarily engaged in agricultural operations, which are
subject to risk, including market prices, weather conditions and environmental
concerns. The Company is not in the land sales and development business;
however, it does from time to time sell properties to profit from real estate
appreciation opportunities and which, in the judgment of management, are surplus
to the Company's primary operations. Gain on the sale of properties is presented
in a separate line within operating income in the statement of income.
The Company conducts business in four business segments, organized
primarily on a product line basis, with each segment offering a variety of
different but related products. The Crops segment includes the planting and
harvesting and sale of fine and coarse grains and oilseeds, including wheat,
corn, soybeans and sunflowers. The Beef Cattle segment consists of the raising
and fattening of beef cattle from its own stock and the acquisition and
fattening of beef cattle for sale to meat processors. The Company only sells
live beef cattle and is not engaged in any slaughtering activities. The Milk
segment consists of the production of milk for sale to dairy companies. Others
segment consists of forest-related production activities encompassing the
production of charcoal and fence posts. The Company evaluates the performance of
its business segments based on gross profit less selling expenses. Accounting
policies of the four reportable segments are the same as those described in the
summary of significant accounting policies. Intercompany transactions between
segments, if any, are eliminated. The Company's principal operations and markets
are located in Argentina, the country of domicile. See Note 12.II.d) for a
discussion of significant customers. Financial information for each segment
follows:
F-43
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
g) Segment information (continued)
Year ended June 30, 2002:
Crops Beef Cattle Milk Others (i) Total
------------ ------------ ------------ ------------ ----------------
Sales............... Ps. 43,193,585 Ps. 24,581,122 Ps. 2,010,515 Ps. 1,666,149 Ps. 71,451,371
Gross sales tax..... (254,243) (129,254) (8,898) (258,157) (650,552)
Cost of sales....... (13,852,898) (20,279,656) (3,171,145) (1,889,666) (39,193,365)
Inventory holding... 671,586 (16,205,313) (1,861,339) (57,756) (17,452,822)
GROSS PROFIT (LOSS). 29,758,030 (12,033,101) (3,030,867) (539,430) 14,154,632
Selling expenses.... 6,386,716 1,462,448 - 856,554 8,705,718
SEGMENT GAIN (LOSS). 36,144,746 (10,570,653) (3,030,867) 317,124 22,860,350
DEPRECIATION........ 1,324,954 1,284,424 267,812 57,598 2,934,788
Operating
assets (ii)......... 69,843,722 105,103,212 11,535,399 4,923,718 191,406,051
Non operating
assets (ii)......... 159,274,70
TOTAL ASSETS........ 350,680,755
Year ended June 30, 2001:
Crops Beef Cattle Milk Others (i) Total
------------ ------------ ------------ ------------ ----------------
Sales............... Ps. 37,588,101 Ps. 26,115,044 Ps. 2,327,798 Ps. 2,430,875 Ps. 68,461,818
Gross sales tax..... (195,243) (167,837) (9,355) (50,643) (423,078)
Cost of sales....... (27,260,838) (21,713,923) (2,018,241) (2,118,981) (53,111,983)
Inventory holding... - (577,279) (748,637) - (1,325,916)
GROSS PROFIT (LOSS). 10,132,020 3,656,005 (448,435) 261,251 13,600,841
Selling expenses.... (6,633,781) (1,696,930) - (1,259,306) (9,590,017)
SEGMENT GAIN (LOSS). 3,498,239 1,959,075 (448,435) (998,055) 4,010,824
DEPRECIATION........ (920,425) (1,384,593) (329,358) (79,609) (2,713,985)
Operating
assets (ii)......... 73,085,099 139,667,515 15,102,289 8,306,666 236,161,569
Non operating
assets (ii)......... 163,696,363
TOTAL ASSETS........ 399,857,932
F-44
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
g) Segment information (continued)
Year ended June 30, 2000:
Crops Beef Cattle Milk Others (i) Total
------------ ------------ ------------ ------------ ----------------
Sales............... Ps. 36,168,042 Ps. 26,156,379 Ps. 3,331,217 Ps. 3,500,991 Ps. 69,156,629
Gross sales tax..... (180,583) (185,861) (15,113) (82,486) (464,043)
Cost of sales....... (26,921,429) (23,306,404) (4,980,877) (2,445,740) (57,654,450)
Inventory holding... - 138,505 1,582 - 140,087
GROSS PROFIT (LOSS). 9,066,030 2,802,619 (1,663,191) 972,765 11,178,223
Selling expenses.... (5,880,432) (1,903,294) - (1,357,702) (9,141,428)
SEGMENT GAIN (LOSS). 3,185,598 899,325 (1,663,191) (384,937) 2,036,795
DEPRECIATION........ (945,178) (1,527,346) (334,423) (53,585) (2,860,532)
Operating
assets (ii)......... 73,956,817 157,224,074 15,809,102 7,489,075 254,479,068
Non operating
assets (ii)......... 104,139,304
TOTAL ASSETS........ 358,618,372
(i) Others segment consists of forest-related production activities encompassing
the production of charcoal and fence posts. For the years ended June 30, 2002,
2001 and 2000, others also include certain developing stage activities primarily
consisting of the Company's online investment initiatives related to www.fyo.com
web site.
(ii) Identifiable operating assets represents assets on hand at year-end which
are allocable to a particular segment either by their direct use or by
allocation when used jointly by two or more segments. General corporate assets,
included as non-operating assets, consist principally of cash and cash
equivalents, temporary investments, certain other receivables and property and
equipment used in general corporate business.
F-45
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
h) Risks and uncertainties
Fresh produce is vulnerable to adverse weather conditions including
windstorms, floods, drought and temperature extremes, which are quite common but
difficult to predict. Fresh produce is also vulnerable to crop and beef cattle
diseases and pests. These factors may result in lower sales volume and increased
costs, but may also restrict supplies and lead to an increase in prices for
fresh produce.
The Company's earnings are sensitive to fluctuations in the volatile
market prices for its products. Sales prices for crops are based on the market
prices quoted in the Argentine grain exchanges, which largely reflect world
commodity prices. Beef cattle prices are based on the major Argentine auction
markets for cattle and are primarily determined by domestic supply and demand.
Milk prices are also determined on the basis of domestic supply and demand.
As with any agribusiness enterprise, the Company's business operations
are predominantly seasonal in nature. The harvest and sale of crop (corn,
soybean and sunflower) generally occurs from February to June. The harvest of
wheat generally occurs from December to January. Other segments of the Company's
business such as its cattle and milk sales, and its forestry activities, tend to
be more successive than seasonal in nature.
The Company's investment in IRSA is subject to risks common to
investments in commercial and residential properties in general, many of which
are not within IRSA's control. Any one or more of these risks might materially
and adversely affect IRSA's business, financial condition or results of
operations. The yields available from equity investments in real estate depend
on the level of sales or rental income generated and expenses incurred. In
addition, other factors may affect the performance and value of a property
adversely, including local economic conditions where the properties are located,
macroeconomic conditions in Argentina and the rest of the world, competition
from other real estate developers, IRSA's ability to find tenants, tenant
default or rescission of leases, changes in laws and governmental regulations
(including those governing usage, zoning and real property taxes), changes in
interest rates (including the risk that increased interest rates may result in
decreased sales of lots in the residential development properties) and the
availability of financing. IRSA may also be unable to respond effectively to
adverse market conditions or may be forced to sell one or more of its properties
at a loss because the real estate market is relatively illiquid. Certain
significant expenditures, such as debt service, real estate taxes, and operating
and maintenance costs, generally are not reduced in circumstances resulting in a
reduction in income from the investment.
F-46
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
h) Risks and uncertainties (continued)
It is possible that these or other factors or events will impede IRSA's
ability to respond to adverse changes in the performance of its investments,
causing a material decline in IRSA's financial condition or results of
operations. Given the relative size of the investment in IRSA, any such declines
could have a material adverse effect on the Company's financial condition and
results of operations.
IRSA's consolidated financial statements as of June 30, 2002 have
been prepared on the assumption that it will continue as a going concern. As a
result of the continued deterioration of the Argentine economy, the devaluation
of the Peso and the Argentine Government's adoption of various economic
measures, the Company cannot assure that IRSA will be able to obtain the
necessary financial resources to repay or refinance its debt, that the
restrictions imposed by the Argentine Central Bank on the transfer of funds
abroad will not prevent it from paying principal and interest on its external
debt as it comes due or that these conditions will not have a material adverse
effect on its financial condition or results of operations.
On September 9, 2002, IRSA's independent auditors issued a report
with an explanatory paragraph indicating the existence of substantial doubt
about its ability to continue as a going concern as a result of the
uncertainties described above.
i) Lease commitments
The Company has obligations under cancelable operating leases,
primarily for farmland as well as its office facilities. Generally, land leases
have initial terms of one year or less. Certain agricultural land leases provide
for contingent increases in minimum rentals based on production targets. Lease
payments under a portion of the Company's operating leases are based on
crop-sharing agreements. Under crop-sharing agreements, leases are paid in kind
based upon an agreed-upon percentage of the crops harvested. Land leases expense
forms part of the total cost of production of the Company. Substantially all of
the leases provide that the Company pays taxes, maintenance, insurance and
certain other operating expenses applicable to the leased assets.
Total rent expense, including rents related to land leases, was Ps.
5.1 million, Ps. 3.9 million and Ps. 6.7 million for the years ended June 30,
2002, 2001 and 2000 respectively.
j) Equity investments
The investments in Agro-Uranga S.A., Cactus Argentina S.A. and IRSA
Inversiones y Representaciones S.A. are accounted for using the equity method,
wherein the investment is recorded at the amount of the underlying equity in the
net assets of the investments and adjusted to recognize the Company's share of
the undistributed earnings or losses.
As discussed in Note 5.b), the Company changed the accounting for its
investment in IRSA Inversiones y Representaciones S.A. from market value to the
equity method of accounting effective March 31, 2002. Therefore the consolidated
statement of income for the year ended June 30, 2002 only includes the equity
results for this investment for the three-month period ended June 30, 2002.
F-47
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
j) Equity investments (continued)
The Company's share of the loss of these affiliates was Ps. (37.6)
million and Ps. (0.33) million and Ps. (0.03) million for years ended June 30,
2002, 2001 and 2000, respectively, and its investment in these companies totaled
Ps. 107.5 million at June 30, 2002 and Ps. 15.9 million at June 30, 2001. The
Company's share of undistributed earnings of these affiliates totaled Ps. 0.1
million at June 30, 2002 and Ps. 0.4 million at June 30, 2001. Summarized
financial information of these affiliates follows:
AGRO-URANGA S.A. 2002 2001
---------------- -------------------- ---------------------
Current assets........................................... Ps. 12,768,557 Ps. 9,742,875
Non-current assets....................................... 4,560,800 4,854,122
-------------------- ---------------------
Total assets............................................. Ps. 17,329,357 Ps. 14,596,997
==================== =====================
Current liabilities...................................... Ps. 6,341,427 Ps. 2,964,037
Non-current liabilities ................................. - 273,867
-------------------- ---------------------
Total liabilities........................................ Ps. 6,341,427 Ps. 3,237,904
-------------------- ---------------------
Shareholders' equity..................................... Ps. 10,987,930 Ps. 11,359,093
==================== =====================
Net sales................................................ Ps. 14,639,004 Ps. 12,432,005
Gross profit............................................. Ps. 8,712,696 Ps. 4,536,334
Net income............................................... Ps. 2,893,701 Ps. 1,890,694
==================== =====================
CACTUS ARGENTINA S.A 2002 2001
-------------------- --------------------- ---------------------
Current assets........................................... Ps. 2,164,660 Ps. 3,419,717
Non-current assets....................................... 4,619,706 5,177,715
--------------------- ---------------------
Total assets............................................. Ps. 6,784,366 Ps. 8,597,432
===================== =====================
Current Liabilities...................................... 2,123,183 3,417,337
Non-Current Liabilities.................................. 75,901 1,248,674
--------------------- ---------------------
Total liabilities........................................ Ps. 2,199,084 Ps. 4,666,011
--------------------- ---------------------
Shareholders' equity..................................... Ps. 4,585,282 Ps. 3,931,421
===================== =====================
Net sales................................................ Ps. 6,389,475 Ps. 6,768,623
Gross profit ............................................ Ps. 46,164 Ps. 456,649
Net loss................................................. Ps. (43,138) Ps. (741,267)
===================== =====================
IRSA INVERSIONES Y REPRESENTACIONES S.A. 2002
---------------------
Ps. (000)
---------------------
Current assets........................................... Ps. 83,541
Non-current assets....................................... 918,894
---------------------
Total assets............................................. Ps. 1,002,435
=====================
Current liabilities...................................... Ps. 540,065
Non-current liabilities ................................. 1,954
---------------------
Total liabilities........................................ Ps. 542,019
---------------------
Shareholders' equity..................................... Ps. 460,416
=====================
Net loss for the period (April to June, 2002)............ Ps. (44,469)
=====================
F-48
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
k) Investments in debt and equity securities:
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", the Company has classified part of its investments
in mutual funds as trading securities and the remaining mutual funds as well as
its investments in notes and equity securities as available-for-sale securities.
The following are additional disclosure requirements in accordance with SFAS No.
115:
Trading securities
The gross gains and losses recorded in the consolidated statements of
income for the years ended June 30, 2002 and 2001 were as follows:
2002 2001
--------------------------------------------- ------------------------------ -------------------------------
Gross unrealized gains..................... Ps. 5,693 Ps. 4,820
Gross realized gains....................... 1,093 146,585
------------------------------ -------------------------------
TOTAL...................................... Ps. 6,786 Ps. 151,405
============================== ===============================
Available-for-sale securities
The amortized cost, gross unrealized holding gains or losses and fair
value of the available-for-sale securities by major security type at June 30,
2002 and 20001 were as follows:
2002 2001
------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
INSTRUMENT COST LOSS MARKET VALUE COST GAIN (LOSS) MARKET VALUE
--------------------- -------------- ------------ --------------- -------------- ------------- --------------
Investment mutual
fund............... - - - 9,465,959 311,225 9,777,184
Notes.............. 90,620 (13,290) 77,330 1,598,537 (87,990) 1,510,547
Equity securities.. - - - 92,284,843 7,945,407 100,230,250
-------------- ------------ --------------- -------------- ------------- --------------
TOTAL.............. 90,620 (13,290) 77,330 103,349,339 8,168,642 111,517,981
============== ============ =============== ============== ============= ==============
Proceeds from sales of investment securities available-for-sale during
the years ended June 30, 2002 and 2001 were Ps. 42,889,195 and Ps. 68,387,502,
respectively. Gross gains of Ps. 1,416,147 and Ps. 8,269,053 for the years ended
June 30, 2002 and 2001, respectively, were realized on those sales.
F-49
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
l) Comprehensive income (loss)
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes guidelines for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Accumulated other comprehensive income is presented below, net of
income tax benefit/expense:
YEAR ENDED JUNE 30,
-------------------------------------------------------------
2001
2002 (RESTATED) 2000
--------------------- ------------------ ------------------
Net (loss) income under US GAAP................. Ps. (110,974,841) Ps. 3,955,941 Ps. (3,334,334)
Other comprehensive gain (loss):
Changes in other comprehensive income items of
equity investees................................ (490,093) 1,850 -
Realized holding gain in available-for-sale
securities outstanding at the beginning of the
year (net of income tax of Ps. 78,132, Ps.
1,899,429 and Ps. 213,520 for the fiscal years
2002, 2001 and 2000, respectively).............. (145,101) (3,527,510) (396,539)
Unrealized holding gain in available-for-sale
securities outstanding at the end of the year
(net of income tax of Ps. nil, Ps. 78,132, Ps.
1,899,429 and Ps. 213,520 for the fiscal years
2002, 2001, 2000 and 1999, respectively)........ - 145,101 3,527,510
--------------------- ------------------ ------------------
Comprehensive (loss) income..................... Ps. (111,610,035) Ps. 575,382 Ps. (203,363)
===================== ================== ==================
AS OF JUNE 30,
-------------------------------------------------------------
2002 2001 2000
--------------------- ------------------ ------------------
Accumulated other comprehensive income.......... Ps. (488,243) Ps. 146,951 Ps. 3,527,510
===================== ================== ==================
F-50
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. ADDITIONAL DISCLOSURE REQUIREMENTS (CONTINUED)
m) Pro forma financial information (unaudited)
As discussed in Note 3.e), the Company acquired FYO.Com in May 2000,
which had been incorporated in December 1999. As a result, the Company's pro
forma results for the year ended June 30, 1999 are unaffected by this
acquisition. The following selected unaudited pro forma information is being
provided to present a summary of the consolidated results of the Company as if
the acquisition of FYO.Com had occurred as of the beginning of each of the
periods presented, giving effect to purchase accounting adjustments. The pro
forma data is for informational purposes only and may not necessarily reflect
the results of operations of the Company had the acquired business operated as
part of the Company for the periods presented.
2000 1999
--------------------- ----------------------
Net revenues.................................. Ps. 68,692,586 Ps. 85,267,996
Operating loss................................ (6,256,715) (10,861,872)
Net income.................................... Ps. 2,170,547 Ps. 2,035,223
n) Recently issued accounting standards
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis.
An intangible asset that has a finite life should be amortized over its useful
life and evaluated for impairment on a regular basis. This statement is
effective for fiscal years beginning after December 15, 2001. The Company does
not anticipate that the adoption of SFAS No. 142 will have a significant impact
on the Company's financial statements.
In August, 2001, FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets. The
Company is required to adopt the provisions of SFAS No. 143 for fiscal year
beginning on July 1, 2002. The Company does not anticipate that SFAS No. 143
will significantly impact the Company's consolidated financial statements.
On October 3, 2001, FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of the Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The Company does not anticipate
that the initial adoption of SFAS No. 144 will have a significant impact on the
Company's financial statements.
F-51
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
13. OTHER FINANCIAL STATEMENT INFORMATION
The accompanying tables present additional statement disclosures
required under Argentine GAAP. This information is not a required part of the
financial statements under US GAAP; however, these tables include information
necessary to comply with the valuation and qualifying accounts schedule
requirements of the Securities and Exchange Commission.
a. Property and equipment
b. Intangible assets
c. Investments
d. Allowances and provisions
e. Cost of sales
f. Foreign currency assets and liabilities
g. Other expenses
F-52
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
A) PROPERTY AND EQUIPMENT
VALUE AT
THE ADDITIONS VALUE AT
BEGINNING AND/OR THE END
PRINCIPAL ACCOUNT OF YEAR TRANSFERS DEDUCTIONS OF YEAR
- --------------------- -------------- ------------- ------------- ---------------
Farms................ Ps. 120,206,029 Ps. 81,876 Ps.29,757,834 Ps.90,530,0719
Wire fences.......... 4,775,763 313,396 148,607 4,940,552
Watering troughs..... 3,783,711 3,627 497,546 3,289,792
Alfalfa fields and
meadows............ 3,234,507 447,095 1,042,084 2,639,518
Buildings and
constructions...... 7,311,186 8,116 2,141,064 5,178,238
Machinery............ 11,899,569 - 1,805,329 10,094,240
Vehicles............. 1,082,189 - 89,637 992,552
Tools................ 169,410 4,686 6,821 167,275
Furniture and
equipment.......... 3,160,914 51,399 1,238,600 1,973,713
Breeding livestock... 426,506 - 71,452 355,054
Corrals and leading
lanes.............. 539,129 5,062 27,701 516,490
Roads................ 1,067,729 141,520 - 1,209,249
Facilities........... 5,939,355 46,223 861,057 5,124,521
Planes............... 9,298 - - 9,298
Silo plants.......... 1,072,572 - 137,021 935,551
Constructions in
progress........... 1,812,777 170,393 214,022 1,769,148
Advances to suppliers 99,058 15,104 9,062 105,100
-------------- ------------- ------------- ---------------
Total as of June 30,
2002................. Ps. 166,589,70 Ps. 1,288,497 Ps.38,047,837 Ps. 129,830,362
-------------- ------------- ------------- ---------------
Total as of June 30,
2001................. Ps. 177,508,02 Ps. 4,080,531 Ps. 14,998,849 Ps. 166,589,702
-------------- ------------- -------------- ---------------
DEPRECIATION
----------------------------------------------------------
CURRENT YEAR
-------------------------------
NET NET
ACCUMULATED ACCUMULATED CARRYING CARRYING
AT THE DECREASE AT THE VALUE AS VALUE AS
RATE BEGINNING FOR THE END OF OF JUNE 30, OF JUNE 30,
PRINCIPAL ACCOUNT % OF YEAR YEAR AMOUNT YEAR 2002 2001
- ---------------------- --------- -------------- -------------- -------------- -------------- --------------- ---------------
Farms................ - Ps. - Ps. - Ps. - Ps. - Ps. 90,530,071 Ps. 120,206,029
Wire fences.......... 3 924,259 11,831 154,778 1,067,206 3,873,346 3,851,504
Watering troughs..... 3 578,454 120,740 160,207 617,921 2,671,871 3,205,257
Alfalfa fields and
meadows............ 13-25-50 1,699,784 547,899 512,117 1,664,002 975,516 1,534,723
Buildings and
constructions...... 2 2,353,586 797,892 90,636 1,646,330 3,531,908 4,957,600
Machinery............ 10 5,275,783 677,102 926,630 5,525,311 4,568,929 6,623,786
Vehicles............. 20 537,631 68,649 190,870 659,852 332,700 544,558
Tools................ 10 87,821 6,554 13,076 94,343 72,932 81,589
Furniture and
equipment.......... 10 1,698,830 679,353 253,888 1,273,365 700,348 1,462,084
Breeding livestock... 20 355,245 71,451 69,696 353,490 1,564 71,261
Corrals and leading
lanes.............. 3 74,098 11,222 16,909 79,785 436,705 465,031
Roads................ 10 416,799 - 110,620 527,419 681,830 650,930
Facilities........... 10-20-33 1,557,263 147,557 566,550 1,976,256 3,148,265 4,382,092
Planes............... 10 9,298 - - 9,298 - -
Silo plants.......... 2 118,214 783 51,410 168,841 766,710 954,358
Constructions in
progress........... - - - - - 1,769,148 1,812,777
Advances to suppliers - - - - - 105,100 99,058
-------------- -------------- -------------- -------------- --------------- ---------------
Total as of June 30,
2002................. Ps. 15,687,065 Ps. 3,141,033 Ps. 3,117,387 Ps. 15,663,419 Ps. 114,166,943 Ps. -
-------------- -------------- -------------- -------------- --------------- ---------------
Total as of June 30,
2001............. Ps.14,783,423 Ps. 2,292,063 Ps. 3,195,705 Ps. 15,687,065 Ps. - Ps. 150,902,637
-------------- -------------- -------------- -------------- --------------- ---------------
F-53
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
B) INTANGIBLE ASSETS
AMORTIZATION
-------------------------------------------------------
VALUE AT ACCUMULATED
THE ADDITIONS VALUE AT AT THE ACCUMULATED
BEGINNING AND/OR THE END RATE BEGINNING AT THE END
PRINCIPAL ACCOUNT OF YEAR TRANSFERS OF YEAR % OF YEAR AMOUNT OF YEAR
- ------------------------- ----------- ---------- ---------- --------- -------------- ------------- -------------
Goodwill................. Ps. 2,936,592 Ps. - Ps. 2,936,592 20.00 Ps. 587,318 Ps. 587,317 Ps. 1,174,635
Development costs........ 1,255,670 - 1,255,670 33.33 104,639 418,557 523,196
Patents and trademarks... 16,861 - 16,861 - - - -
----------- ----------- ----------- -------------- ------------- --------------
Total as of June 30,
2002..................... Ps. 4,209,123 Ps. - Ps. 4,209,123 Ps. 691,957 Ps. 1,005,874 Ps. 1,697,831
----------- ----------- ----------- -------------- -------------- --------------
Total as of June 30,
2001..................... Ps. 3,269,262 Ps. 939,861 Ps. 4,209,123 Ps. - Ps. 691,957 Ps. 691,957
----------- ----------- ----------- -------------- -------------- --------------
NET NET
CARRYING CARRYING
VALUE AS OF VALUE AS OF
PRINCIPAL ACCOUNT JUNE 30, 2002 JUNE 30, 2001
- -------------------------- -------------- --------------
Goodwill................. Ps. 1,761,957 Ps. 2,349,274
Development costs........ 732,474 1,151,031
Patents and trademarks... 16,861 16,861
--------------- --------------
Total as of June 30,
2002..................... Ps. 2,511,292 Ps. -
-------------- --------------
Total as of June 30,
2001..................... - Ps. 3,517,166
-------------- --------------
F-54
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
C) INVESTMENTS
Carrying Carrying
Type and characteristics value as of June 30, value as of June 30,
of the securities 2002 2001
- ------------------------------------------------- ------------------------------ ----------------------------
CURRENT INVESTMENTS
Mutual funds
Banco Frances Letes...................... Ps. 1,063 Ps. -
Banco Rio Letes.......................... 2,961 -
Banco Rio U.S.dollar money market........ 2,746 -
Banco Frances (US$)...................... - 31,056
Banco Provincia Buenos Aires (US$)....... - 16,742
Superfondo Banco Rio (US$)............... - 25,940
Quantum Dolphin, Plc. (US$).............. - 9,777,184
------------------------------ ----------------------------
Ps. 6,770 Ps. 9,850,922
------------------------------ ----------------------------
Notes
Bocon Pro 1.............................. Ps. - Ps. 1,510,547
Bonos Global 2010........................ 77,330 -
------------------------------ ----------------------------
Ps. 77,330 Ps. 1,510,547
------------------------------ ----------------------------
Equity securities
IRSA...................................... Ps. - Ps. 56,529,539
ADRs IRSA ................................ - 43,700,711
------------------------------ ----------------------------
- 100,230,250
------------------------------ ----------------------------
Total current investments................... Ps. 84,100 Ps. 111,591,719
============================== ============================
F-55
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
D) ALLOWANCES AND PROVISIONS
OPENING INCREASES FOR DEDUCTIONS ADJUSTED CLOSING
ITEMS BALANCES THE YEAR FOR THE YEAR INFLATION BALANCES
----- --------------- ---------------- --------------- --------------- -------------
2002
----
Deducted from assets
Allowance for doubtful accounts.......... Ps. 1,055,648 Ps. 232,324 Ps. - Ps. (573,109) Ps. 714,863
--------------- ---------------- --------------- --------------- ---------------
Total deducted from assets............. Ps. 1,055,648 Ps. 232,324 Ps. - Ps. (573,109) Ps. 714,863
=============== ================ =============== =============== ===============
2001
----
Deducted from assets
Allowance for doubtful accounts.......... Ps. 965,402 Ps. 127,101 Ps. (36,855) Ps. - Ps. 1,055,648
--------------- ---------------- --------------- --------------- ---------------
Total deducted from assets............. Ps. 965,402 Ps. 127,101 Ps. (36,855) Ps. - Ps. 1,055,648
=============== ================ =============== =============== ===============
2000
-----
Deducted from assets
Allowance for doubtful accounts.......... Ps. 717,041 Ps. 248,361 Ps. - Ps. - Ps. 965,402
--------------- ---------------- --------------- --------------- ---------------
Total deducted from assets............. Ps. 717,041 Ps. 248,361 Ps. - Ps. - Ps. 965,402
=============== ================ =============== =============== ===============
Included under liabilities
Provision for litigation................. Ps. 339,946 Ps. - Ps. (339,946) Ps. - Ps. -
--------------- ---------------- --------------- --------------- ---------------
Total included under liabilities....... Ps. 339,946 Ps. - Ps. (339,946) Ps. - Ps. -
=============== ================ =============== =============== ===============
F-56
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
E) COST OF SALES
For the year ended June 30,
--------------------------------------------------------------
2002 2001 2000
------------------- ------------------- ---------------------
Inventories at the beginning of the year ... Ps. 74,738,896 Ps. 87,106,077 Ps. 99,263,921
Holding results............................. (17,452,822) (1,325,916) 140,087
Transfer of inventory to property and
equipment................................... (457,347) (362,718) (515,982)
Recovery of inventories..................... - - 38,476
Gain from operations in the commodity markets (1,902,799) (202,186) (1,465,020)
Transfer of inventory to expenses........... (136,291) (193,746) (212,818)
Transfer of unharvested crops to expenses... (20,539,736) (14,946,552) (21,995,048)
Purchases................................... 21,156,212 20,095,419 21,644,547
Operating expenses (Note 11.g).............. 42,994,722 37,680,501 47,862,364
Stock at the end of the year ............... (59,207,470) (74,738,896) (87,106,077)
------------------- ------------------- ---------------------
Cost of Sales............................... Ps. 39,193,365 Ps. 53,111,983 Ps. 57,654,450
=================== =================== =====================
F-57
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
F) FOREIGN CURRENCY ASSETS AND LIABILITIES
JUNE 30, 2002 JUNE 30, 2001
----------------------------------------------- ------------------------------------
CURRENT
TYPE AND AMOUNT EXCHANGE AMOUNT IN TYPE AND AMOUNT AMOUNT OF LOCAL
OF FOREIGN RATE LOCAL CURRENCY OF FOREIGN CURRENCY
ITEM CURRENCY $ PESOS CURRENCY PESOS
---- ----------------- ---------- ---------------- ------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and banks.............. US$ 9,380,371 3.700 Ps. 34,707,374 US$ 92,093 Ps. 180,079
Investments
Mutual funds............. - - US$ 5,037,805 9,850,924
ADRs IRSA................ - - US$ 22,348,732 43,700,711
Accounts receivable......... US$ 2,930,785 3.700 10,843,906 - -
Other receivables
Collateralized........... US$ 4,469 3.700 16,534 US$ 2,739,579 5,356,973
Guarantee deposits....... US$ 198,265 3.700 733,580 US$ 1,832,590 3,583,446
Others................... US$ 381,304 3.700 1,410,823 US$ 21,770 42,569
Related parties.......... - - US$ 204,170 399,234
NON-CURRENT ASSETS
Other receivable
Collateralized........... - - US$ 1,485,000 2,903,769
Others................... - - US$ 95,430 186,604
Related parties.......... - Ps. - - Ps. -
----------------- ---------------- ------------------ -----------------
TOTAL ASSETS........... US$ 12,895,194 Ps. 47,712,217 US$ 33,857,169 Ps. 66,204,309
================= ================ ================== =================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payables
Suppliers................ US$ 2,050,969 3.800 Ps. 7,793,681 - Ps. -
Related Parties.......... - - US$ 50,000 97,770
Bank loans.................. - - US$ 13,607,361 26,607,834
Other liabilities
Sellers financing........ - - US$ 186,974 365,609
Advances................. - - US$ 400,000 782,160
NON-CURRENT LIABILITIES
Trade accounts payables
Sellers financing........ - - US$ 249,409 487,694
Other liabilities
Accruals................. US$ 267,863 3.800 Ps. 1,017,880 - Ps. -
----------------- --------------- ------------------ ----------------
TOTAL LIABILITIES...... US$ 2,318,832 Ps. 8,811,561 US$ 14,493,744 Ps. 28,341,067
================= ================ ================== =================
f-58
CRESUD SOCIEDAD ANONIMA COMERCIAL, INMOBILIARIA,
FINANCIERA Y AGROPECUARIA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(Adjusted for price-level changes and expressed
in constant Argentine Pesos)
12. OTHER FINNCIAL STATEMENT INFORMATION (CONTINUED)
G) OTHER EXPENSES
Expenses
---------------------------------------------------
Total
for the year
ended
Items Operating Selling Administrative June 30, 2002
- ----------------------------------------------------------------------------------------------------------------
Directors' fees......................... Ps. - Ps. - Ps. 604,286 Ps. 604,286
Fees and payments for services.......... 2,400,824 - 1,056,261 3,457,085
Salaries and wages and social security
contributions......................... 4,629,684 32,220 4,239,966 8,901,870
Taxes, rates and contributions.......... 593,912 - 40,545 634,457
Office and administrative expenses...... 70,580 - 59,632 130,212
Bank commissions and expenses........... 38,758 - 4,436 43,194
Depreciation............................ 2,926,876 - 190,511 3,117,387
Vehicle and travelling expenses......... 371,808 3,032 60,142 434,982
Spare parts and repairs................. 870,267 - - 870,267
Insurance............................... 52,253 - 146,118 198,371
Employees' maintenance.................. 208,937 - 62,602 271,539
Amortization of intangible assets....... 418,557 - - 418,557
Advertising expense..................... 17,423 7,223 24,646
Livestock expenses...................... 5,391,772 1,462,448 - 6,854,220
Dairy farm expenses..................... 1,218,256 - - 1,218,256
Agricultural expenses................... 20,463,017 6,386,716 - 26,849,733
Silo expenses........................... 442,770 - - 442,770
Coal expenses........................... 137,864 524,833 - 662,697
Firewood expenses....................... 81,851 56,922 - 138,773
Services................................ - - - -
Other expenses.......................... - - - -
General expenses........................ 2,659,313 - 986,082 3,645,395
Allowance for doubtful accounts expense. - 232,324 - 232,324
-------------------------------------------------------------------
Total for the year ended June 30, 2002.. Ps. 42,994,722 Ps. 8,705,718 Ps. 7,450,581 Ps. 59,151,021
===================================================================
Total for the year ended June 30, 2001.. Ps. 37,680,501 9,590,017 7,511,464
====================================================
Total for the year ended June 30, 2000.. Ps. 47,862,364 Ps. 9,141,428 Ps. 7,743,491
====================================================
Total Total
for the year for the year
ended ended
Items June 30, 2001 June 30, 2000
- -------------------------------------------------------------------------------
Directors' fees......................... Ps. 666,392 Ps. 587,717
Fees and payments for services.......... 2,932,785 2,477,000
Salaries and wages and social security
contributions......................... 9,132,095 10,595,693
Taxes, rates and contributions.......... 785,398 1,110,437
Office and administrative expenses...... 797,846 890,677
Bank commissions and expenses........... 34,988 43,072
Depreciation............................ 3,195,705 3,304,418
Vehicle and travelling expenses......... 652,943 665,983
Spare parts and repairs................. 1,411,067 1,284,350
Insurance............................... 174,418 162,187
Employees' maintenance.................. 325,547 412,894
Amortization of intangible assets....... 104,639 -
Advertising expense..................... 118,491 175,016
Livestock expenses...................... 8,592,354 8,968,553
Dairy farm expenses..................... 1,507,688 2,220,247
Agricultural expenses................... 21,718,336 29,252,755
Silo expenses........................... 316,053 183,843
Coal expenses........................... 975,696 1,329,908
Firewood expenses....................... 127,899 -
Services................................ 14,742 25,845
Other expenses.......................... 234,666 101,972
General expenses........................ 835,133 706,355
Allowance for doubtful accounts expense. 127,101 248,361
----------------------------------
Total for the year ended June 30, 2002.. - -
Total for the year ended June 30, 2001.. Ps. 54,781,982 -
=================
Total for the year ended June 30, 2000.. Ps. 64,747,283
================
F-59
REPORT OF INDEPENDENT ACCOUNTANTS
To the shareholders of
IRSA Inversiones y Representaciones Sociedad Anonima:
In our opinion, based in our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of changes in shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of IRSA Inversiones y
Representaciones Sociedad Anonima and its subsidiaries at June 30, 2002 and
2001, and the results of their operations and their cash flows for the each of
the three years in the period ended June 30, 2002 in conformity with accounting
principles generally accepted in Argentina. 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 did not audit the
financial statements of Brazil Realty Empreendimentos e Participacoes, Venezuela
Invest Ltd. and Fondo de Valores Inmobiliarios S.A.C.A., unconsolidated equity
investees of IRSA Inversiones y Representaciones Sociedad Anonima, as of and for
the year ended June 30, 2000, which represent 15.4% of total consolidated assets
and 23.9% of total consolidated revenues as of and for the year then ended.
Those financial statements were audited by other auditors whose respective
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Brazil Realty Empreendimentos
e Participacoes, Venezuela Invest Ltd. and Fondo de Valores Inmobiliarios
S.A.C.A, is based solely on the reports of the other auditors. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 , the
Company was negatively impacted by the continued deterioration of the Argentine
economy, the Argentine Government's adoption of various economic measures and
the devaluation of the Argentine Peso, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Accounting principles generally accepted in Argentina vary in certain
significant respects from the accounting principles generally accepted in the
United States and as allowed by Item 18 to Form 20-F. The application of the
latter would have affected the determination of consolidated net (loss) income
expressed in Argentine pesos for each of the three years in the period ended
June 30, 2002 and the determination of consolidated shareholders' equity and
consolidated financial position also expressed in Argentine pesos at June 30,
2002 and 2001 to the extent summarized in Note 19 to the consolidated financial
statements.
PricewaterhouseCoopers
Buenos Aires, Argentina
September 9, 2002
F-60
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001
-------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and banks (Notes 5.a. and 20.e.).............................. Ps. 24,831 Ps. 10,530
Investments (Notes 5.b. and 20.e.)................................. 36,796 89,707
Mortgages and leases receivable, net (Notes 5.c. and 20.e.)........ 12,004 59,928
Other receivables and prepaid expenses (Notes 5.d. and 20.e.)...... 38,547 36,927
Inventories (Note 5.e.)............................................ 24,130 24,783
-------------------- ----------------------
TOTAL CURRENT ASSETS........................................... 136,308 221,875
-------------------- ----------------------
NON-CURRENT ASSETS
Mortgages and leases receivable, net (Notes 5.c. and 20.e.)....... 3,135 44,326
Other receivables and prepaid expenses (Notes 5.d. and 20.e.)...... 89,621 34,764
Investments (Notes 5.b. and 20.e.)................................. 526,348 699,893
Inventories (Note 5.e.)............................................ 46,558 67,399
Fixed assets, net (Notes 20.a. y 20.e.)............................ 338,794 419,375
Intangible assets, net (Note 20.b.)................................ 3,951 6,917
-------------------- ----------------------
TOTAL NON-CURRENT ASSETS....................................... 1,008,407 1,272,674
-------------------- ----------------------
TOTAL ASSETS.......................................................... Ps. 1,144,715 Ps. 1,494,549
==================== ======================
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable (Notes 5.f. and 20.e.)...................... Ps. 12,224 Ps. 10,831
Customer advances (Note 20.e.)..................................... 1,931 4,300
Salaries and social security payables (Note 5.g.).................. 1,024 1,923
Short-term debt (Notes 5.h. and 20.e.)............................. 564,739 350,465
Taxes payable (Note 5.i. and 20.e.)................................ 12,598 8,036
Other liabilities (Notes 5.j. and 20.e.)........................... 13,544 10,106
-------------------- ----------------------
TOTAL CURRENT LIABILITIES...................................... 606,060 385,661
-------------------- ----------------------
NON-CURRENT LIABILITIES
Trade accounts payable (Notes 5.f. and 20.e.)...................... - 374
Long-term debt (Notes 5.h. and 20.e.).............................. 142 26,012
Customer advances (Note 20.e.)..................................... - 360
Other liabilities (Notes 5.j. and 20.e.)........................... 2,879 7,751
-------------------- ----------------------
TOTAL NON-CURRENT LIABILITIES.................................. 3,021 34,497
-------------------- ----------------------
TOTAL LIABILITIES..................................................... 609,081 420,158
-------------------- ----------------------
Minority interest.................................................. 75,218 114,356
-------------------- ----------------------
SHAREHOLDERS' EQUITY.................................................. 460,416 960,035
-------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ Ps. 1,144,715 Ps. 1,494,549
==================== ======================
The accompanying notes are an
integral part of these consolidated financial statements.
F-61
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands of constant
Argentine Pesos as of June 30, 2002)
2002 2001 2000
----------------- ------------------ -------------------
SALES (Net of gross sales tax of Ps. 6.0 million,
Ps. 10.4 million and Ps. 7.4 million, respectively)... Ps. 211,319 Ps. 339,843 Ps. 361,930
COSTS................................................. (121,355) (172,024) (167,689)
----------------- ------------------ -------------------
GROSS PROFIT.......................................... 89,964 167,819 194,241
----------------- ------------------ -------------------
Selling expenses...................................... (34,332) (33,748) (36,886)
Administrative expenses .............................. (37,643) (50,740) (55,629)
----------------- ------------------ -------------------
(71,975) (84,488) (92,515)
----------------- ------------------ -------------------
Gain (loss) on purchasers rescissions of sales contracts 27 (14) (1,541)
Loss from operations and holdings of real estate assets,
net (Note 8) ......................................... (64,956) (6,305) (2,696)
----------------- ------------------ -------------------
OPERATING (LOSS) INCOME............................... (46,940) 77,012 97,489
----------------- ------------------ -------------------
Net losses in equity investments...................... (1,967) (10,323) (1,428)
Financial results, net (Note 9)....................... (432,220) (110,302) (58,876)
Other expenses, net (Note 10)......................... (8,511) (5,624) (11,907)
----------------- ------------------ -------------------
(LOSS) INCOME BEFORE TAXES AND EXTRAORDINARY LOSS..... (489,638) (49,237) 25,278
----------------- ------------------ -------------------
Extraordinary loss (Note 16).......................... -- (5,653) --
Income tax ........................................... (9,981) (5,064) (13,727)
----------------- ------------------ -------------------
NET (LOSS) INCOME..................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
================= ================== ===================
For details of income statement line items, see Note 7 to the
consolidated financial statements.
The accompanying notes are an
integral part of these consolidated financial statements.
F-62
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands
of constant Argentine Pesos as of June 30, 2002)
Shareholders' contributions
----------------------------------------------------------------------------
Inflation Inflation
adjustment adjustment
of common of treasury Additional
Common stock Treasury stock stock paid-in-capital
(Note 6.a.) stock (Note 6.c.) (Note 6.c.) (Note 6.a.)
-------------- ------------ ------------ ------------- ---------------
BALANCES AS OF JUNE 30, 1999.......................... Ps. 188,476 Ps. 2,434 Ps. 198,099 Ps. 2,558 Ps. 506,767
-------------- ------------ ------------ ------------- ------------
Capital contributions ................................ 21,090 - - 20,166 - - - -
Approved by shareholders' meeting held on
October 28, 1999:
- Cash dividends (Ps. 0.11 per share)............. - - - - - - - - - -
- Legal reserve................................... - - - - - - - - - -
- Distribution of treasury stock.................. 2,433 (2,433) 2,557 (2,557) - -
Purchase of treasury stock............................ (6,237) 6,237 (6,496) 6,496 - -
Net income for the year............................... - - - - - - - - - -
-------------- ------------ ------------ ------------- ------------
BALANCES AS OF JUNE 30, 2000.......................... Ps. 205,762 Ps. 6,238 Ps. 214,326 Ps. 6,497 Ps. 506,767
-------------- ------------ ------------ ------------- ------------
Approved by shareholders' meeting held on
October 31, 2000:
- Legal reserve................................... - - - - - - - - - -
- Distribution of treasury stock.................. 20,730 (20,730) 21,592 (21,592) - -
Purchase of treasury stock............................ (19,080) 19,080 (19,876) 19,876 - -
Net loss for the year................................. - - - - - - - - - -
-------------- ------------ ------------ ------------- ------------
BALANCES AS OF JUNE 30, 2001.......................... Ps. 207,412 Ps. 4,588 Ps. 216,042 Ps. 4,781 Ps. 506,767
-------------- ------------ ------------ ------------- ------------
Net loss for the year................................. - - - - - - - - - -
-------------- ------------ ------------ ------------- ------------
BALANCES AS OF JUNE 30, 2002.......................... Ps. 207,412 Ps. 4,588 Ps. 216,042 Ps. 4,781 Ps. 506,767
============== ============ ============ ============= ============
Shareholders'
contributions
---------------
Legal Accumulated
reserve retained
(Note earnings Shareholders'
Total 6.d.) (deficit) Equity
------------- ----------- ------------- ------------
BALANCES AS OF JUNE 30, 1999.......................... Ps. 898,334 Ps. 12,379 Ps. 198,352 Ps.1,109,065
------------- ----------- ------------- ------------
Capital contributions ................................ 41,256 - - - - 41,256
Approved by shareholders' meeting held on
October 28, 1999:
- Cash dividends (Ps. 0.11 per share)............. - - - - (31,518) (31,518)
- Legal reserve................................... - - 4,349 (4,349) - -
- Distribution of treasury stock.................. - - - - - - - -
Purchase of treasury stock............................ - - - - (29,934) (29,934)
Net income for the year............................... - - - - 11,551 11,551
------------- ----------- ------------- ------------
BALANCES AS OF JUNE 30, 2000.......................... Ps. 939,590 Ps. 16,728 Ps. 144,102 Ps.1,100,420
------------- ----------- ------------- ------------
Approved by shareholders' meeting held on
October 31, 2000:
- Legal reserve................................... - - 577 (577) - -
- Distribution of treasury stock.................. - - - - - - - -
Purchase of treasury stock............................ - - - - (80,431) (80,431)
Net loss for the year................................. - - - - (59,954) (59,954)
------------- ----------- ------------- ------------
BALANCES AS OF JUNE 30, 2001.......................... Ps. 939,590 Ps. 17,305 Ps. 3,140 Ps. 960,035
------------- ----------- ------------- ------------
Net loss for the year................................. - - - - (499,619) (499,619)
------------- ----------- ------------- ------------
BALANCES AS OF JUNE 30, 2002.......................... Ps. 939,590 Ps. 17,305 Ps. (496,479) Ps. 460,416
============= =========== ============= ============
The accompanying notes are an
integral part of these consolidated financial statements.
F-63
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in
thousands of constant Argentine Pesos as of June 30, 2002)
2002 2001 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income for the year....................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
Adjustments to reconcile net income to net cash flow from operating
activities:
Depreciation and amortization..................................... 21,033 23,103 26,023
Minority interest................................................. (5,118) 1,459 4,818
Allowances and provisions......................................... 1,314 994 1,389
Gain from the sale of fixed assets................................ - - (29) (68)
Equity in earnings of affiliated companies........................ 17,797 (6,471) (10,810)
Loss from operations and holdings of real estate assets........... 41,631 5,708 743
Loss on early redemption of debt.................................. - - - - 1,199
Financial results................................................. 294,387 39,913 (21,094)
Income tax........................................................ 6,882 3,140 9,460
Changes in certain assets and liabilities, net of non-cash
transactions and the effects of acquisitions:
(Increase) decrease in current investments........................ (16,103) (34,740) 33,476
Decrease in non-current investments............................... 982 - - - -
Decrease in mortgages and leases receivables...................... 37,966 15,663 9,464
Increase in other receivables..................................... (13,377) (5,849) (12,848)
Decrease in inventories........................................... 52,758 52,188 17,590
Decrease (increase) in intangible assets.......................... - - 593 (135)
Increase (decrease) in trade accounts payable..................... 8,289 2,578 (3,277)
Increase (decrease) in customer advances, salaries and social
security and taxes payable...................................... 984 (12,762) 6,776
Cash dividends received........................................... 2,496 19,243 5,143
Increase (decrease) in other liabilities.......................... 22,800 (3,840) 5,006
Increase in accrued interest and exchange (loss) gain............. 72,223 54,957 44,628
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 47,325 95,894 129,034
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale of interests in joint controlled 119,933 134,074 (1,637)
companies.........................................................
Payment for acquisition of subsidiary companies and
equity investees.................................................. (19,322) (52,291) (16,354)
Loans granted to related parties.................................. (94,077) - - - -
Net proceeds from the sale of fixed assets........................ - - 63 481
Payment for acquisition of undeveloped parcels of land............ (2,952) (2,214) (12,928)
Purchase and improvements of fixed assets......................... (21,058) (6,876) (8,058)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.................. (17,476) 72,756 (38,496)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock........................................ - - (80,431) (29,934)
Issuance of common stock.......................................... - - - - 41,256
Payment of notes.................................................. - - - - (154,491)
Payment of cash dividends......................................... - - - - (31,518)
Increase in intangible assets..................................... (3,033) (4,802) (7,692)
Contributions from (dividends paid to) minority shareholders...... 3,059 - - (5,186)
Proceeds from the issuance of notes............................... - - 129,178 - -
Proceeds from short-term and long-term debt....................... 151,326 195,330 287,340
Payment of short-term and long-term debt.......................... (187,453) (385,590) (187,913)
Payment of seller financing ...................................... (1,766) (18,332) (16,333)
-------------- -------------- --------------
NET CASH USED IN FINANCING ACTIVITIES ............................... (37,867) (164,647) (104,471)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents................. (8,018) 4,003 (13,933)
Cash and cash equivalents as of beginning of year.................... 33,271 29,268 43,201
-------------- -------------- --------------
Cash and cash equivalents as of end of year.......................... Ps. 25,253 Ps. 33,271 Ps. 29,268
============== ============== ==============
The accompanying notes are an
integral part of these consolidated financial statements.
F-64
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Adjusted for price-level changes and expressed in thousands
of constant Argentine Pesos as of June 30, 2002)
2002 2001 2000
---------------- ---------------- ----------------
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest....................................................... Ps. 26,156 Ps. 55,402 Ps. 63,371
Income tax..................................................... 351 - - - -
NON-CASH ACTIVITIES:
Increase in deferred gain through a decrease in current
investments.................................................... Ps. - - Ps 2,328 Ps - -
Increase in non-current investments through a decrease in
mortgages and leases receivable................................ 20,200 - - 7,015
Increase in minority interest through a decrease in long-term
debt........................................................... - - 293 - -
Decrease in long-term debt through a decrease in investments .. 5,620 - - - -
Increase in fixed assets through a decrease in inventory....... - - 2,408 29,181
Increase in intangible assets through a decrease in inventory . - - 595 2,655
Decrease in non-current investments through a decrease in
other liabilities.............................................. 33,919 - - - -
Increase in inventory through a decrease in fixed assets....... 36,860 23,809 23,214
Incurrence of debt for related company acquisition............. - - - - 7,874
Increase in non-current investments through a decrease in
non-current other receivables.................................. - - - - 38,392
Increase in current investments through a decrease in
non-current investments........................................ - - - - 44,613
Decrease in customer advances through a decrease in mortgages
and leases receivable.......................................... - - - - 5,282
Decrease in other liabilities through a decrease in current
mortgages and leases receivable................................ - - - - 1,565
Increase in current taxes payable through a decrease in
non-current taxes payable...................................... - - - - 2,181
Increase in mortgages and leases receivable through a decrease
in non-current investments..................................... - - - - 4,495
Increase in inventory through a decrease in undeveloped plots
land........................................................... - - - - 2,973
Increase in non-current investments through an increase in
other liabilities.............................................. - - - - 2,529
Increase in non-current investments through a decrease in
fixed assets................................................... - - - - 20,448
2002 2001 2000
---------------- ---------------- ----------------
ACQUISITION OF EQUITY INVESTEES:
Investments.................................................... Ps. 19,322 Ps. 52,291 Ps. 16,354
---------------- ---------------- ----------------
Ps. 19,322 Ps. 52,291 Ps. 16,354
================ ================ ================
DISPOSITION OF SUBSIDIARY COMPANIES:
Mortgages and leases receivable, net........................... Ps. - - Ps - - Ps (3,058)
Other receivables.............................................. - - - - (5,374)
Inventory...................................................... - - - - (366)
Fixed assets, net........................................... - - - - (31,810)
---------------- ---------------- ----------------
TOTAL NON-CASH ASSETS DISPOSED OF .......................... - - - - (40,608)
---------------- ---------------- ----------------
Trade accounts payable...................................... - - - - 2,956
Loans....................................................... - - - - 23,787
Customer advances........................................... - - - - 1,166
Salaries payable............................................ - - - - 918
Taxes payable............................................... - - - - 209
Other liabilities........................................... - - - - 10,387
---------------- ---------------- ----------------
TOTAL LIABILITIES DISPOSED OF .............................. - - - - 39,423
---------------- ---------------- ----------------
NET NON-CASH ASSETS DISPOSED OF ............................ - - - - (1,185)
Cash disposed of............................................ - - - - (1,637)
---------------- ---------------- ----------------
VALUE OF NET ASSETS DISPOSED OF ............................ Ps. - - Ps. - - Ps. (2,822)
================ ================ ================
The accompanying notes are an integral
part of these consolidated financial statements.
F-65
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
IRSA Inversiones y Representaciones Sociedad Anonima ("IRSA"), is an
Argentine real estate company incorporated under the laws of Argentina which,
through its investments in subsidiaries, joint ventures and international
alliances (IRSA and subsidiaries is collectively referred hereinafter as "IRSA"
or the "Company"), is primarily involved in (i) the acquisition and development
of residential properties primarily for sale, (ii) the acquisition, development
and operation of office and other non-retail buildings primarily for rental
purposes, (iii) the development and operation of shopping center properties,
(iv) the acquisition and operation of luxury hotels, (v) the acquisition of
undeveloped land reserves either for future development or sale, (vi) e-commerce
activities and, (vii) other non-core activities. The Company seeks to identify
desirable properties for acquisitions which it acquires in the normal course of
business, and, regularly reviews its portfolio and from time to time considers
and effects the sale of certain properties. The Company is the only Argentine
real estate company whose shares are listed and traded on both the Buenos Aires
Stock Exchange ("BASE") and the New York Stock Exchange ("NYSE").
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION
Economic Crisis
Argentina is immersed in a critical economic climate. The main features
of the current economic context are a major public debt burden, a financial
system in crisis, country risk indicators far above normal average and an
economic recession that has already lasted more than four years. This situation
has led to a significant decrease in the demand for goods and services and a
large rise in the level of unemployment. These circumstances have affected the
Government's ability to comply with existing commitments and access to bank
financing.
As from December 3, 2001 measures were issued to restrict the free
availability and circulation of cash and the transfer of foreign currency
abroad. Subsequently, the Government declared default on the external debt.
On January 6, 2002 after a political crisis that resulted in the
resignation of two presidents, the Government enacted Law 25561 (Law of public
emergency and exchange system reform) that involved an in-depth change of the
prevailing economic model and the amendment of the Convertibility Law in force
since March 1991. In early February the Government announced new economic
measures though Decree 214 (Restructuring of the financial system) dated
February 3, 2002 and Decree 260 (Exchange Regime) dated February 8, 2002,
substantially modifying some of the measures implemented by the Public Emergency
Law. These decrees are being complemented by other regulations being issued by
the various control agencies, some of which are been pending at the date of the
issuance of these financial statements. In addition, on April 24, 2002 the
Government signed an agreement with provincial governors, which, together with
other changes to the National Administration, will lay down the basis for
further measures that have yet to be issued or fully implemented.
Listed below are some of the measures adopted by the Government that are
in force at the date of issuance of these financial statements and the effect
they have had on the Company's economic and financial situation to date.
Exchange system
On February 8, 2002 the Government established a single free exchange
market system as from February 11, 2002, through which all transactions
involving the exchange of currency are to be traded at a rate of exchange to be
freely agreed, observing the requirements to be laid down by the Argentine
Central Bank. At present, most transfers of funds abroad require the prior
approval of the Central Bank. Additionally, certain requirements have to be
fulfilled for export collections.
The new exchange regime replaces the previous convertibility legislation,
under which the previous exchange rate of Ps. 1 to US$ 1 existed for a number of
years. Also, during the year ended June 30, 2002, the Argentine peso devalued
significantly, and at June 30, 2002 the exchange rate was approximately Ps. 3.8
to US$ 1.
The devaluation of the Argentine peso resulted in a loss of approximately
Ps. 255.1 million for the year ended June 30, 2002. This loss from devaluation
was primarily the result of the Company's US denominated debt, partially offset
by a receivable related to the sale of the Company's investment in Brazil Realty
Empreendimentos e Participacoes.
F-66
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
Deposits in Argentine financial institutions
As from February 3, 2002 deposits in U.S. dollars or other
foreign currencies in Argentine financial institutions were converted to pesos
at the exchange rate of Ps. 1.4 per US$ 1 or its equivalent in such other
currency. Furthermore, there are restrictions on the availability of certain
balances in current accounts and savings accounts in dollars and fixed term
deposits in pesos or dollars. The terms of ultimate repayment of bank deposits
to depositors have not been finalized and is not yet known in what form such
payment, or other compensation, will be made. As from February 3, 2002 a
reference stabilization index (CER) and an interest rate were to be applied to
these rescheduled deposits. The CER is an index that measures the daily rate of
change derived from the monthly change in the Consumer Price Index (CPI)
published by the INDEC. The application of the CER for certain transactions has
met with substantial resistance in Argentina and its application may change
substantially in the future. In addition, the possibility exists of transforming
part or all of the rescheduled deposits into Government Bonds or other financial
institutions. If the depositors do not elect to receive Government Bonds, they
will receive bonds issued by the Bank that will observe the pre-existing
conditions.
Financial debts in foreign currency with Argentine financial institutions
Debts in U.S. dollars or other foreign currencies in the Argentine
financial system were converted to pesos at the rate of exchange of Ps. 1 per
US$ 1 or its equivalent in another currency. As from February 3, 2002 a
reference stabilization index (CER) and an interest rate will be applied to
these debts.
Credits and debts not related to the financial system
The obligation to pay money denominated in dollars or other foreign
currency that are not related to the Argentine financial system, whatever their
origin or nature, were converted to pesos at the exchange rate of Ps. 1 to US$ 1
or its equivalent in such other foreign currency. To these balances must be
applied a reference stabilization index as from February 3, 2002. If through
this provision, the resulting value of the item, good or service is higher or
lower at the time of payment, either of the parties can request a fair
readjustment of the price. If no agreement is reached, the case will be
submitted to the Courts.
Deferment of the deduction of the exchange difference from income tax purposes
The net negative results caused by this devaluation are deductible from
income tax over a five-year period, beginning in the fiscal year ended June 30,
2002.
Presentation of financial statements in constant Argentine pesos
As established by Resolution 3/2002 of the Professional Council in
Economic Sciences of the Autonomous City of Buenos Aires, Resolution 240/02 of
the Argentine Federation of Professional Councils in Economic Sciences and
Resolution No. 415 of the Comision Nacional de Valores ("CNV") - the National
Securities Commission in Argentina-, as from January 1, 2002 financial
statements are required to be restated to reflect the effects of inflation in
accordance with the guidelines of Technical Pronouncement No.6 of the Argentine
Federation of Professional Councils in Economic Sciences. See Note 3.c. for
further detail.
Impact of current economic conditions on the Company
The impact generated by all these measures adopted to date by the
Government on the financial situation of the Company at June 30, 2002 was
calculated according to the evaluations and estimates made by Management at the
date of preparing the financial statements. Future actual results could differ
from the evaluations and estimates made at the date of preparing these financial
statements and these differences could be significant. Therefore, the Company's
financial statements may not report all the adjustments that could result from
these adverse conditions. Furthermore, at this time it is not possible to
foresee the future development of the country's economy or its consequences on
the economic and financial situation of the Company. Thus, any decision that
must be made on the basis of these financial statements must take into account
the effects of these measures and their future development and the Company's
financial statements must be considered in the light of these uncertain
circumstances.
F-67
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. ARGENTINE ECONOMIC SITUATION AND ITS IMPACT ON THE COMPANY'S ECONOMIC AND
FINANCIAL POSITION (CONTINUED)
Impact of current economic conditions on the Company (continued)
The Company has been negatively impacted by the continued deterioration
of the Argentine economy, the Argentine Government's adoption of the economic
measures summarized above and the devaluation of the Argentine Peso. As
described in Note 5.h., the Company was unable to fully pay the principal and
interest of the Notes originally due on December 24, 2001 and the Loan Agreement
originally due on May 31, 2002. As a result of such non-payments, the Company
entered into negotiations with the holders of the remaining Notes and lenders
under the Loan Agreement and obtained for short-term deferrals to pay such
matured debts. Pursuant to the most recent deferrals, the principal and interest
of US$ 39.3 million Notes must be paid in September 9, 2002 and the US$ 80
million Loan Agreement must be paid in September 30, 2002. Due to the continuing
effects of economic recession, the unavailability of financial credit and the
succession of recent economic measures adversely affecting the normal operations
of the banking and payments system, it is probable on September 9, 2002 and
September 30, 2002 the Company will be unable to make the schedule payments upon
maturity of the US$ 39.3 million Notes and the US$ 80.0 million Loan Agreement.
Management is negotiating agreements with the holders of the Notes and the
lenders under the Loan Agreement. Management expects to use the net proceeds
from the rights offering mentioned in Note 11 to facilitate the renegotiations
or partial payment of the indebtedness outstanding above mentioned. It is not
yet certain what the outcome of such negotiations will be.
Additionally, as mentioned in Note 5.h.(v), Hoteles Argentinos S.A. has
not paid principal installments amounting to US$ 300, with original maturates
set for April 29 and July 29, 2002, and an interest installment amounting to US$
127 which fell due on July 29, 2002, under the long-term loan agreement secured
by a mortgage entered into with Bank Boston N.A., Buenos Aires branch.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplate continuity of operations, realization of
assets, and liquidation of liabilities in the ordinary course of business and do
not reflect any adjustment that might result should the Company be unable to
continue as a going concern.
3. PREPARATION OF FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles used in Argentina
("Argentine GAAP"), and the regulations of the Comision Nacional de Valores
("CNV"), the National Securities Commission in Argentina, which differ in
certain respects from generally accepted accounting principles in the United
States of America ("US GAAP"). Such differences involve methods of measuring the
amounts shown in the financial statements, as well as additional disclosures
required by US GAAP and Regulation S-X of the Securities and Exchange Commission
("SEC"). A description of the significant differences between Argentine GAAP and
US GAAP as they relate to the Company are set forth in Note 19 to these
consolidated financial statemets.
Amounts included in the notes to the consolidated financial statements
are expressed in thousands of Argentine Pesos, except as otherwise indicated.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries over which the Company has effective control. Investments
in companies in which the Company exercises significant influence, but not
control, are accounted for under the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
F-68
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
B. PRINCIPLES OF CONSOLIDATION (CONTINUED)
A description of the subsidiaries with their respective percentage of
capital stock owned is presented as follows:
------------------------------------------------
PERCENTAGE OF CAPITAL STOCK
OWNED AS OF JUNE 30, (I)
------------------------------------------------
--------------- --------------- ---------------
2002 2001 2000
--------------- --------------- ---------------
CONTROLLED COMPANIES
- --------------------
Hoteles Argentinos S.A. ("Hoteles Argentinos") (ii)............ 80.00% 80.00% 80.00%
Palermo Invest S.A. ("Palermo Invest") (ii).................... 66.67% 66.67% 66.67%
Abril S.A. ("Abril") (ii)...................................... 83.34% 83.34% 83.34%
Pereiraola S.A.I.C.I.F. y A. ("Pereiraola") (ii)............... 83.34% 83.34% 83.34%
Baldovinos S.A. ("Baldovinos") (ii)............................ 83.34% 83.34% 83.34%
Ritelco S.A. ("Ritelco") (iii)................................. 100.00% - - - -
IRSA International Limited ("IRSA Int' l") (iii)............... - - 100.00% 100.00%
Home Financing S.A. ("HOFISA") (iv) ........................... - - 100.00% 100.00%
Santa Maria del Plata S.A. ("SMP") (iv)........................ - - - - 100.00%
Sociedad del Dique S.A. ("Sociedad del Dique") (iv)............ - - - - 100.00%
(i) Percentage of equity interest owned has been rounded.
(ii) Results of operations have been accounted for under the proportionate
consolidation method.
(iii) As of June 30, 2002 the Company decided the liquidation of IRSA
International Ltd.
(iv) As from July 1, 2001, these companies have been merged into IRSA.
The consolidated statements of operations were prepared on a
proportionate consolidation basis. As from July 1, 1996, the Company uses the
"proportionate-consolidation method" of accounting for the investments in which
the Company exercises control and other jointly-controlled investments. This
method has not been used for balance sheet and cash flows purposes. All notes to
the consolidated financial statements relating to income-statement items have
been also prepared on a proportionate-consolidation basis. The Company
calculates the proportionate-consolidation method by applying its percentage
ownership interest to the financial statements of its equity method investments.
The Company considers this method more appropriately reflects the Company's
results of operations and the integration of its core businesses. The use of the
proportionate-consolidation method has been approved by the CNV. Although the
use of the proportionate-consolidation method as compared to the equity method
of accounting from a financial presentation perspective impacts almost all areas
of the Company's consolidated statements of income, it does not impact the
Company's consolidated shareholders' equity or net earnings.
Note 14 to the consolidated financial statements presents the Company's
statements of income for the three years in the period ended June 30, 2002
reporting (i) the jointly-controlled investments accounted for by the equity
method, with the earnings or losses included as earnings or losses from equity
investments, and (ii) minority interest in earnings or losses of controlled
subsidiaries.
A description of the jointly-controlled investments accounted for under
the proportionate consolidation method is presented as follows:
JOINTLY CONTROLLED COMPANIES
- ---------------------------- 2002 2001 2000
-------------- --------------- --------------
Brazil Realty S.A. Empreendimentos e Participacoes ("Brazil
Realty") (i)................................................... - - 49.27% 44.03%
Alto Palermo S.A. ("APSA")..................................... 49.69% 47.42% 45.66%
Llao Llao Resort S.A. ("LLR").................................. 50.00% 50.00% 50.00%
Argentine Realty S.A. ("ARSA") (ii)............................ 50.00% 50.00% 50.00%
Buenos Aires Realty S.A. ("BARSA") (ii)........................ 50.00% 50.00% 50.00%
Buenos Aires Trade & Finance Center S.A. ("BAT&FCSA") (ii)..... 50.00% 50.00% 50.00%
Puerto Retiro S.A. ("Puerto Retiro") .......................... 33.33% 33.33% 33.33%
Venezuela Invest, Ltd. ("Venezuela Invest").................... - - - - 50.00%
Fondo de Valores Inmobiliarios S.A.C.A. ("F.V.I.")............. - - - - 37.49%
(i) During February 2002, the Company sold its equity interest in Brazil
Realty. See Note 3.f..
(ii) On August 16, 2002, the Company and RAGHSA S.A. agreed the following:
i) the redistribution of the 5M site in Old Puerto Madero of the City
of Buenos Aires, ii) the division and distribution of the cost and
construction commitments for the sites assumed with Corporacion Antiguo
Puerto Madero S.A.(CAPM), iii) the adjustment of the remaining
commitments and obligations also assumed with CAPM and iv) the exchange
of shares issued by the mentioned companies owning the plots making up
the 5M site, ARSA, BARSA y BAT&FCSA , respectively.
As a result of this distribution the Company, as of the date of issuing
of these consolidated financial statements, holds 100% of the capital
stock of BAT&FCSA, while its 50% holding in ARSA and BARSA was
transferred to RAGHSA.
F-69
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
C. PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT ARGENTINE PESOS
Under Argentine GAAP, financial statements are required to be restated to
reflect the effects of the inflation for any fiscal year, provided that the
change in Indice de Precios Mayorista Nivel General (General Wholesale Price
Index, or "WPI") for such year has exceeded eight percent. As the change in the
WPI since January 1, 2002 has been more that eight percent, financial statements
in accordance with Argentine GAAP need to be adjusted for inflation after that
date. Accordingly, the consolidated financial statements have been prepared on
the basis of general price-level accounting which reflects the changes in the
purchasing power of the peso in the Company's historical financial statements,
as follows:
- - Non- monetary items and consolidated statement of operations amounts are
adjusted to reflect the then-current general purchasing power.
- - Monetary items are not adjusted as such items are, by their nature, stated
in terms of current general purchasing power in the financial statements;
and
- - Monetary gains or losses are recognized in the consolidated statement of
operations, reflecting the effect of holding monetary items. This gain of
loss on exposure to inflation (monetary gain or loss) is included in the
consolidated statement of operations within total financial results.
The Company used a conversion factor of 1.9562 to restate prior periods
financial statements in constant Argentine pesos of June 30, 2002 for
comparative purposes.
D. RECLASSIFICATIONS
Certain reclassifications of prior year information have been made to
conform with the current year presentation.
E. ACQUISITION AND FORMATION OF BUSINESSES
In the preparation of these consolidated financial statements, unless
otherwise indicated, the operating results of all acquired businesses have been
included in the Company's consolidated financial statements since the date of
the respective acquisition.
Year ended June 30, 2001
During the year ended June 30, 2001, the Company formed two holding
companies for the purposes of conducting the Company's e-business operations, as
follows:
(i) Latin American Econetworks N.V
In July 2000, the Company, together with divine interVentures, Inc.,
Dolphin Fund Plc (formerly Quantum Dolphin Plc.) and Catanzaro Holding B.V.,
formed Latin American Econetworks N.V., a holding company organized in the
Netherlands Antilles ("LAE"). LAE was conceived as a developer of software,
technology and internet-related information network for the technology service
suppliers. In connection with the formation, an 11.2% interest in the holding
company was issued to the Company in exchange for US$ 5.3 million in cash. As
mentioned in Note 3.f., the investment was sold in November 2001.
(ii) IRSA Telecomunicaciones N.V.
In the fourth quarter of the year ended June 30, 2000, the Company had
invested US$ 3.0 million, -in the form of irrevocable capital contributions-,
into two unrelated companies, namely, Red Alternativa S.A., a provider of
satellite capacity to internet service providers, and Alternativa Gratis S.A.,
an internet service provider (referred to herein as the "Companies"). At that
date, the Companies were development stage companies with no significant
operations.
F-70
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
E. ACQUISITION AND FORMATION OF BUSINESSES (CONTINUED)
Year ended June 30, 2001 (continued)
(ii) IRSA Telecomunicaciones N.V. (continued)
Between July 2000 and August 2000, the Company, together with Dolphin
Fund Plc, increased their respective investments in the abovementioned
Companies, in exchange for shares of common stock. In a series of transactions,
which occurred between August 2000 and December 2000, (i) the Company formed
IRSA Telecomunicaciones N.V. ("ITNV"), a holding company organized under the
laws of the Netherlands Antilles, for the purposes of completing a
reorganization of the Companies (the "Reorganization") and (ii) the Company,
Dolphin Fund Plc and the previous majority shareholder of the Companies
contributed their respective ownership interests in the Companies into ITNV in
exchange for shares of common stock of ITNV. As a result of the Reorganization,
the Companies are now wholly owned subsidiaries of ITNV. Following the
Reorganization, the Company held a 49.36% interest in ITNV. All assets and
liabilities were recorded at their historical carrying amounts.
During September and December 2000, the Company made additional capital
contributions in ITNV for a total amount of US$ 3 million, increasing its
ownership to 62%.
On December 27, 2000, the shareholders of ITNV entered into an agreement
with Quantum Industrial Partners LDC ("QIP") and SFM Domestic Investment LLC
("SFM" and together with QIP referred to herein as the "Investors") (the
"Shareholders Agreement"), under which the Investors contributed US$ 4.0 million
in cash in exchange for 1,751,453 shares of Series A mandatorily redeemable
convertible preferred stock and an option to purchase 2,627,179 additional
shares of mandatorily redeemable convertible preferred stock. Pursuant to the
terms of the Shareholders Agreement, options were granted for a period up to
five years and at an exercise price equal to the quotient of US$ 6.0 million by
2,627,179 preferred shares. On or after December 27, 2005, ITNV might be
required, at the written request of holders of the then outstanding Series A
preferred stock to redeem such holders' outstanding shares of series A preferred
stock for cash at the greater of (i) 200% of the original issue price multiplied
by the number of preferred stock to be redeemed, and (ii) the fair market value
of the common shares each holder of Series A preferred stock would have been
entitled to receive if such holder had converted the number of Series A
preferred stock to be redeemed into common stock at the redemption date; plus in
the case of (i) and (ii), any accrued or declared but unpaid dividends. As a
result of this transaction the Company retains a 49% ownership in ITNV.
Year ended June 30, 2000
(i) Puerto Madero Dique 3
During the year ended June 30, 2000, the Company, together with RAGHSA
Sociedad Anonima ("RAGHSA"), formed a company, namely, Buenos Aires Realty S.A.,
to acquire 20,947 square meters of undeveloped land in Puerto Madero, Buenos
Aires, for a total consideration of Ps. 61 million. Subsequent to this
acquisition, two additional companies were formed by the Company and RAGHSA,
namely, Buenos Aires Trade and Finance Center S.A. and Argentine Realty S.A.,
for the sole purpose of holding an interest in a portion of the undeveloped
land. In this connection, the land was subdivided into three separate lots, and
each lot transferred to a separate company. As of the date of these financial
statements, governmental permits have veen obtained and the Company intends to
construct office buildings on these sites.
(ii) Additional equity interest in Santa Maria del Plata S.A. ("SMP")
On November 10, 1999 the Company acquired an additional 9.92% equity
interest in SMP for US$ 3.9 million in cash (US$ 1.0 million) and seller
financing (US$ 2.9 million).
This additional acquisition was accounted for as a purchase. The purchase
price has been allocated to the assets and liabilities assumed based on
estimated fair values at the date of acquisition.
F-71
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
E. ACQUISITION AND FORMATION OF BUSINESSES (CONTINUED)
Year ended June 30, 2000 (continued)
(iii) Additional equity interest in Puerto Retiro S.A. ("Puerto Retiro")
During July and August 1999, the Company acquired an additional 5% equity
interest in Puerto Retiro for US$ 2.5 million in cash (US$ 1.4 million) and
seller financing (US$ 1.1 million).
The acquisition of Puerto Retiro was accounted for as a purchase. The
purchase price has been allocated to the assets and liabilities assumed based on
estimated fair values at the date of acquisition. The investment in Puerto
Retiro, representing 50% of the capital of such company, has been accounted for
under the equity method.
F. DISPOSITION OF BUSINESSES
Year ended June 30, 2002
(i) Latin American Econetworks N.V.
On November 7, 2001, the Company sold its interest in Latin American
Econetworks N.V. for a total consideration of US$ 5,250. The price was fully
collected on that date.
(ii) Brazil Realty Empreendimentos e Participacoes ("Brazil Realty")
On February 28, 2002 the Company sold its interests in Brazil Realty for
a total consideration of US$ 44.2 million. The price has been fully collected at
the date of issuance of these consolidated financial statements. Imputed
interest in this transaction was 12%.
Net gain from the sale was Ps. 31.5 million, and was recorded as part of
operating income under the line item "(Loss) gain from operations and holdings
of real estate assets".
Year ended June 30, 2001
(i) Fondo de Valores Inmobiliarios S.A.C.A. ("FVI") and Venezuela
Invest Ltd. ("Venezuela Invest")
Pursuant to an agreement entered into by the Company and Asesoria
Financiera Velutini & Asociados C.A. on August 1, 2000, the Company completed
the sale of its respective equity interests in FVI and Venezuela Invest on
December 18, 2000 for total consideration of US$ 67.0 million.
Loss from the sale was Ps. 1 million, and was recorded as part of
operating income under the line item "Loss from operations and holdings of real
estate assets".
Year ended June 30, 2000
(i) Inversora del Pacifico S.A. ("IPS")
On March 31, 2000, the Company sold to an unrelated party its equity
interest in Inversora del Pacifico S.A., for total consideration of US$ 3.0
million, resulting in a gain of Ps. 5.6 million, which was recorded as part of
operating income under the line item "Sales".
(ii) Llao Llao Resorts s.A. ("LLR")
On June 30, 2000, the Company sold to an unrelated party a 50% interest
in LLR, for total consideration of US$ 7.5 million resulting in a gain of Ps.
3.1 million, which was recorded as part of operating income under the line item
"Sales".
F-72
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. PREPARATION OF FINANCIAL STATEMENTS (CONTINUED)
F. DISPOSITION OF BUSINESSES (CONTINUED)
Year ended June 30, 2000 (continued)
(iii) Inversora del Puerto S.A. ("Inversora del Puerto")
On July 8, 1999, the Company sold a 99.999% equity interest in Inversora
del Puerto to APSA for total consideration of US$ 3.7 million. No result was
recognized for this transaction. Inversora del Puerto owns a property located at
3513 Figueroa Alcorta Avenue, Buenos Aires, near the Paseo Alcorta Shopping
Center.
G. USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are used when accounting for the
allowance for doubtful accounts, depreciation, impairment of long-lived assets,
income taxes and contingencies. Actual results could differ from those
estimates.
4. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Company in the preparation of these consolidated financial statements.
A. REVENUE RECOGNITION
The Company primarily derives its revenues from domestic and
international office and shopping center leases and services operations, the
development and sale of properties, hotel operations and to a lesser extent,
from e-commerce activities. See Note 7 for details on the Company's business
segments. As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. The Company uses the
"proportionate-consolidation method" of accounting for the investments in which
the Company exercises control and other jointly-controlled investments. This
method has not been used for balance sheet and cash flows purposes. Accordingly,
this note reflects the revenue recognition policies of the Company and its
controlled and jointly-controlled subsidiaries.
o Development and sale of properties
The Company records revenue from the sale of properties when all of the
following criteria are met:
(i) the sale has been consummated;
(ii) the Company has determined that the buyer's initial and continuing
investments are adequate to demonstrate a commitment to pay for
the property;
(iii) the Company's receivable is not subject to future subordination;
and
(iv) the Company has transferred to the buyer the risk of ownership,
and does not have a continuing involvement in the property.
The Company uses the percentage-of-completion method of accounting with
respect to sales of development properties under construction effected under
fixed-priced contracts. Under this method, revenue is recognized based on the
ratio of costs incurred to total estimated costs applied to the total contract
price. The Company does not commence revenue and cost recognition until such
time as the decision to proceed with the project is made and construction
activities have begun.
The percentage-of-completion method of accounting requires management to
prepare budgeted costs (i.e. the estimated costs of completion) in connection
with sales of properties and/or units. All changes to estimated costs of
completion are incorporated into revised estimates during the contract period.
F-73
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. REVENUE RECOGNITION (CONTINUED)
o Leases and services from office and other buildings
Leases with tenants are accounted for as operating leases. Tenants are
charged a base rent on a monthly basis. Rental income is recognized on a
straight-line basis over the term of the lease and unpaid rents are included in
accounts receivable in the accompanying consolidated balance sheets.
o Leases and services from shopping center operations
Leases with tenants are accounted for as operating leases. Tenants are
generally charged a rent which consists of the higher of (i) a monthly base rent
(the "Base Rent") and (ii) a specified percentage of the tenant's monthly gross
retail sales (the "Percentage Rent") (which generally ranges between 4% and 8%
of tenant's gross sales). Furthermore, pursuant to the rent escalation clause in
most leases, a tenant's Base Rent generally increases between 4% and 7% each
year during the term of the lease. Rental is recognized as income over the lease
term as it becomes receivable according to the provision of the lease. Scheduled
rent increases are recognized in the period the rental payment is due.
Certain lease agreements contain provisions which provide for rents based
on a percentage of sales or based on a percentage of sales volume above a
specified threshold. The Company determines the compliance with specific targets
and calculates the additional rent on a monthly basis as provided for in the
contracts. Thus, these contingent rents are not recognized until the required
thresholds are exceeded.
Generally, the Company's lease agreements vary from 36 to 120 months. Law
No. 24,808 provides that tenants may rescind commercial lease agreements after
the initial six months, upon not less than 60 days' written notice, subject to
penalties which vary from one to one and a half months rent if the tenant
rescinds during the first year of its lease, and one month of rent if the tenant
rescinds after the first year of its lease.
The Company also charges its tenants a monthly administration fee,
prorated among the tenants according to their leases, which varies from shopping
center to shopping center, relating to the administration and maintenance of the
common area and the administration of contributions made by tenants to finance
promotional efforts for the overall shopping centers operations. Administration
fees are recognized monthly when earned. In addition to rent, tenants are
generally charged "admission rights", a non-refundable admission fee that
tenants may be required to pay upon entering into a lease and upon lease
renewal. Admission right is normally paid in one lump sum or in a small number
of monthly installments. Admission rights are recognized using the straight-line
method over the life of the respective lease agreements. Furthermore, the lease
agreements generally provide for the reimbursement of real estate taxes,
insurance, advertising and certain common area maintenance costs. These
additional rents and tenant reimbursements are accounted for on the accrual
basis.
o Credit card operations
Revenues derived from credit card transactions consist of commissions and
financing income. Commissions are recognized at the time the merchants'
transactions are processed, while financing income is recognized when earned.
o Hotel operations
The Company recognizes revenues from its rooms, catering, and restaurant
facilities as earned on the close of business each day.
o International operations
As of June 30, 2001 the Company held a 49.27% ownership interest in
Brazil Realty, a company operating in Brazil, which business primarily comprised
the same type of operations related to real estate conducted by the Company in
Argentina. See Note 3.f.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturates of three months or less, consisting primarily of time deposits, to be
cash equivalents.
F-74
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. INVESTMENTS
(i) Current
Current investments include time deposits which are valued at their cost
plus accrued interest and mutual funds which are carried at market value. Time
deposits have original maturities of three months or less. Unrealized gains and
losses on time deposits and mutual funds are included in financial results, net,
in the consolidated statements of operations.
Current investments also include equity securities and government bonds.
Unrealized gains and losses on government bonds and equity securities are also
included in financial results, net, in the consolidated statements of
operations. Generally, these investments represent securities traded on a
National Securities Exchange which are valued at the last reported sales price
on the last business day of the year.
(ii) Non-current
a) Equity investments
Equity investments in unconsolidated affiliated companies, representing
between 20% and 50% of the capital stock in such companies, have been accounted
for under the equity method. However, as indicated in Note 3.b., the
consolidated statements of income were prepared on a proportionate consolidation
basis. The Company used the "proportionate-consolidation method" of accounting
for its investments in which the Company exercises control and other jointly
controlled investments. This method has not been used for balance sheet and cash
flows purposes.
Equity investments in less than 20% of the capital stock in companies in
which the Company does not exercise significant influence are generally carried
at market value, recognizing realized and unrealized gains and losses in
earnings.
b) Retained interest in transferred mortgage receivables
Non-current investments also include a retained interest in transferred
mortgage receivables pursuant to the securitization program described in Note
18.
(iii) Parcels of undeveloped land
The Company acquires undeveloped land in order to provide an adequate and
well-located supply for its residential and office building operations. The
Company's strategy for land acquisition and development is dictated by specific
market conditions where the Company conducts its operations. Land held for
development and sale and improvements are stated at cost adjusted for inflation
at the end of the year, as defined in Note 3.c. or estimated net realizable
value, whichever is lower. Land and land improvements are transferred to
inventories when construction commences.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 8,301 in connection with certain parcels of undeveloped
land (identified as Santa Maria del Plata and Torres Jardin IV), that is
reflected in the line "Loss from operations and holding of real estate assets,
net" in the statement of operations for the year ended June 30, 2002.
D. INVENTORY
Inventories comprise primarily of properties held for development and
sale and to a lesser extent other minor inventories from hotel operations. A
property is classified as available for sale upon determination by the Board of
Directors that the property is to be marketed for sale in the normal course of
business over the next several years.
F-75
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INVENTORY (CONTINUED)
Residential, office and other non-retail properties completed or under
construction are stated at cost adjusted for inflation at the end of the year,
as defined in Note 3.c., or estimated net realizable value, whichever is lower.
Costs include land and land improvements, direct construction costs,
construction overhead costs, interest on indebtedness and real estate taxes.
Selling and advertising costs are deferred and charged to expense in the period
in which the related revenue is earned, as determined under the
percentage-of-completion method. Total contract costs are charged to expense in
the period in which the related revenue is earned, as determined under the
percentage-of-completion method. No interest costs were capitalized during the
years ended June 30, 2002, 2001 and 2000.
Properties held for sale are classified as current or non-current based
on the estimated date of sale and the time at which the related receivable is
expected to be collected by the Company.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 11,232 in connection with certain properties classified as
inventories (mainly identified as Avda. Madero 1020, Rivadavia 2768,
Constitucion 1111, Terrenos de Caballito, Padilla 902 and parking lots in Dock
13), that is reflected in the line "Loss from operations and holding of real
estate assets, net" in the statement of operations for the year ended June 30,
2002.
E. FIXED ASSETS, NET
Fixed assets, net comprise primarily of rental properties and other
property and equipment held for use by the Company.
o Rental properties
Rental properties are carried at cost adjusted for inflation at the end
of the year, as defined in Note 3.c., less accumulated depreciation. Costs
incurred for the acquisition of the properties are capitalized. Accumulated
depreciation is computed under the straight-line method over the estimated
useful lives of the assets, which generally are estimated to be 50 years for
buildings and improvements. Expenditures for ordinary maintenance and repairs
are charged to operations in the period incurred. Significant renovations and
improvements which improve or extend the useful life of the asset are
capitalized and depreciated over its estimated remaining useful life. At the
time depreciable assets are retired or otherwise disposed of, the cost and the
accumulated depreciation of the assets are eliminated from the accounts and any
profit or loss is recognized. The Company capitalizes interest on long-term
construction projects. No interest costs were capitalized during the years ended
June 30, 2002, 2001 and 2000.
As mentioned in Note 4.o., at June 30, 2002, the Company has recognized
an impairment of Ps. 49,743 in connection with certain properties (identified as
Libertador 498, Maipu 1300, Avda. Madero 1020, Suipacha 652, Laminar Plaza,
Reconquista 823, Constitucion 1111, Dique 2 M10- Edificio C-. Libertador 602,
Dock 2 M10 -Building A-, Avda. Madero 942, Avda. De Mayo 595, Costeros Dique IV
and Sarmiento 517, Intercontinental Plaza, Alto Palermo Park, Alto Palermo
Plaza, Thames and Hotel Intercontinental), that is reflected in the line "Loss
from operations and holding of real estate assets, net" in the statement of
operations for the year ended June 30, 2002.
o Other properties and equipment
Other property and equipment are carried at cost adjusted for inflation
at the end of the year, as defined in Note 3.c., less accumulated depreciation.
Accumulated depreciation is computed under the straight-line method over the
estimated useful lives of the assets, as specified below:
F-76
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. FIXED ASSETS, NET (CONTINUED)
Asset Estimated useful life (years)
- ------------------------------------- -----------------------------------
Leasehold improvements On contract basis
Facilities 10
Machinery and equipment 10
Vehicles 5
Software 3
Computer equipment 3
Furniture and fixtures 5
The cost of maintenance and repairs is charged to expense as incurred.
The cost of significant renewals and improvements are added to the carrying
amount of the respective assets. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is reflected in the statement of operations.
F. SOFTWARE OBTAINED OR DEVELOPED FOR INTERNAL USE
The Company capitalizes certain costs associated with the development of
computer software for internal use. Costs capitalized during the years ended
June 30, 2002, 2001 and 2000 were not material. These costs are being amortized
on a straight-line basis over a period of 3 years.
G. INTANGIBLE ASSETS, NET
Intangible assets are carried at cost, adjusted for inflation at the end
of the year as defined in Note 3.c., less accumulated depreciation.
o Deferred Financing Costs
Expenses incurred in connection with the issuance of debt have been
deferred and are being amortized using the interest method over the life of the
related issuances.
o Preoperating and organization expenses
Expenses incurred relating to pre-opening activities and/or organization
of subsidiaries are amortized on a straight-line basis over a 5-year period
commencing upon the launching of the project.
o Selling and advertising expenses
Expenses incurred relating to the marketing of developing properties,
including advertising, commissions and other expenses, are charged to expense in
the period in which the related revenue is earned, as determined under the
percentage-of-completion method.
H. FOREIGN CURRENCY ASSETS AND LIABILITIES
Financial statements of foreign unconsolidated equity investees in which
the Company exercises joint control have been translated to Argentine pesos on
the basis of the financial statements of such subsidiaries expressed in the
local currency of the country of origin. The method of translation involves the
translation of monetary assets and liabilities at the exchange rate prevailing
at the end of each period, and non-monetary assets and liabilities and equity
accounts on the basis of the inflation-adjusted amounts at the exchange rate
prevailing at the end of each period. Average exchange rates have been used for
the translation of the accounts which make up the results of the periods. The
net gain/loss on translation is included within financial results, net, foreign
currency translation.
Assets and liabilities denominated in foreign currencies are translated
at the prevailing exchange rates as of year-end. Transactions denominated in
foreign currencies are translated into pesos at the prevailing exchange rates on
the date of transaction settlement. Foreign currency transaction gains and
losses are recorded within financial results, net.
F-77
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. INCOME TAX PROVISION
The Company and its subsidiaries calculate their income taxes on a
separate tax basis. The statutory income tax rate was 35% for all the periods
presented. The Company does not recognize deferred taxes.
As permitted under Argentine income tax law in determining its taxable
income for the years ended June 30, 2002, 2001 and 2000, the Company has taken
into consideration tax losses of approximately Ps. 372.2 million, Ps. 10.0
million and Ps. 61.9 million, respectively. The benefit attributable to such
losses was Ps. 130.3 million, Ps. 3.5 million and Ps. 21.5 million,
respectively.
As of June 30, 2002, the Company had accumulated tax loss carryforwards
of approximately Ps. 421.0 million, which expire as follows:
EXPIRATION YEAR AMOUNT
-------------------------
2002 ....................................... Ps. 2,0
2003 ....................................... 2.5
2004 ....................................... 2.2
2005 ....................................... 31.8
2006 ....................................... 6.6
2007 ....................................... 375.9
-------------------------
TOTAL Ps. 421.0
J. ASSET TAX PROVISION
On December 7, 1998, the Argentine National Congress passed Law No.
25,063 which amended prior tax laws and regulations. According to these
amendments, the Company is subject to a new asset tax effective December 31,
1998 ("Impuesto a la Ganancia Minima Presunta"). Pursuant to this new tax
regime, the Company is required to pay the greater of the income tax or the
asset tax. Any excess of the asset tax over the income tax may be carried
forward and recognized as a tax credit against future income taxes payable
(until 10 years).
The asset tax provision as of June 30, 2002 and 2001 has been calculated
on an individual entity basis at the statutory asset tax rate of 1%, and is
based upon the taxable assets of each company as of the end of the year, as
defined by Argentine law.
The Company has considered the effect of this asset tax in determining
the income tax provision for the year.
K. CUSTOMER ADVANCES
Customer advances represent payments received in advance in connection
with the sale and rent of properties.
L. PROVISIONS FOR ALLOWANCES AND CONTINGENCIES
The Company provides for losses relating to mortgage, lease and other
accounts receivable. The allowance for losses is recognized when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the terms of the agreements. The
allowance is determined on a one-by-one basis considering the present value of
expected future cash flow or the fair value of collateral if the loan is
collateral dependent, when applicable. While management uses the information
available to make evaluations, future adjustments to the allowance may be
necessary if future economic conditions differ substantially from the
assumptions used in making the evaluations. Management has considered all events
and/or transactions that are subject to reasonable and normal methods of
estimations, and the consolidated financial statements reflect that
consideration.
The Company has certain contingent liabilities with respect to existing
or potential claims, lawsuits and other proceedings, including those involving
labor and other matters. The Company accrues liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Such accruals are based on developments to date, the Company's estimates of the
outcomes of these matters and the Company's lawyers' experience in contesting,
litigating and settling other matters. As the scope of the liabilities becomes
better defined, there may be changes in the estimates of future costs, which
could have a material effect on the Company's future results of operations and
financial condition or liquidity.
F-78
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. ADVERTISING EXPENSES
The Company generally expenses advertising and promotion costs as
incurred with the exception of advertising and promotion expenses incurred to
market real estate projects. Advertising and promotion expenses were
approximately Ps. 2.2 million, Ps. 3.3 million and Ps. 5.0 million for the years
ended June 30, 2002, 2001 and 2000, respectively.
N. PENSION INFORMATION
The Company does not maintain any pension plans. Argentine laws provide
for pension benefits to be paid to retired employees from government pension
plans and/or privately managed funds plan to which employees may elect to
contribute.
O. IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is considered
impaired by the Company when the expected cash flows, undiscounted and without
interest, from such asset is separately identifiable and less than its carrying
value. In that event, a loss would be recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved or based on independent
appraisals. At June 30, 2002, due to the deterioration of the Argentine economy
and the impact on the Company's revenue of the measures adopted by the National
Government mentioned in Note 2 to the consolidated financial statements, the
Company has reevaluated the carrying value of its long-lived assets, recording
an impairment loss over certain parcels of undeveloped lands, inventories and
properties (See Notes 4.c.(iii), 4.d and 4.e).
P. HEDGING INSTRUMENTS
From time to time, the Company utilizes certain financial instruments as
a supplement to reduce its overall financing cost. In the past, the Company also
utilized foreign currency forward-exchange contracts to manage its exposure
associated with its net investment in foreign operations. The Company does not
engage in trading or other speculative use of these financial instruments. For
details on the Company's derivative instruments activity, see Note 17.
- Foreign currency forward-exchange contracts
Foreign currency forward-exchange contracts entered into by the Company
generally mature within one year. Premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contracts. The fair
value of the foreign currency forward-exchange contracts is not recognized in
the financial statements.
- Interest rate swaps
Interest rate swaps are used to minimize the Company's financing costs.
Interest rate swap agreements are accounted for on an accrual basis, with the
net receivable or payable recognized as an adjustment to interest expense. The
related accrued receivable or payable is included as an adjustment to interest
payable. The fair value of the interest rate swap agreements is not recognized
in the financial statements.
Q. MONETARY ASSETS AND LIABILITIES
Monetary assets and liabilities are disclosed at their par value, adding
or deducting the corresponding financial results.
F-79
5. DETAILS OF BALANCE SHEET ACCOUNTS
A. CASH AND BANKS:
AS OF JUNE 30,
--------------------------------------------------------
2002 2001
--------------------------- -------------------------
Cash .............................................. Ps. 7,960 Ps. 421
Bank accounts ..................................... 11,901 8,447
Checks to be deposited ............................ 4,970 1,662
--------------------------- -------------------------
Ps. 24,831 Ps. 10,530
=========================== =========================
B. INVESTMENTS:
AS OF JUNE 30,
--------------------------------------------------------
2002 2001
---------------------------- -------------------------
CURRENT
Time deposits ...................................... Ps. 422 Ps. 22,741
Banco Hipotecario S.A. ("BHSA") (i) (Note 12)....... 11,522 21,051
Telecom Argentina S.A. ("Telecom") ................. - - 17,351
Mutual funds ....................................... 24,852 13,545
Government bonds.................................... - - 12,817
Commercial bonds ................................... - - 1,414
Other............................................... - - 788
---------------------------- -------------------------
Ps. 36,796 Ps. 89,707
============================ =========================
NON-CURRENT
APSA................................................ Ps. 307,246 Ps. 318,465
Brazil Realty....................................... - - 133,800
Banco Hipotecario S.A. ("BHSA") (i) (Note 12)....... 6,500 32,015
Latin American Econetworks N.V. .................... - - 9,658
Llao Llao Resorts................................... 9,745 5,104
IRSA Telecomunicaciones N.V. ....................... 2,654 3,388
Alto Invest S.A. ................................... 174 - -
Banco de Credito y Securitizacion S.A. (Note 12) ... 6,236 9,781
Retained interest in mortgages receivable
securitization program (ii) ........................ 9,796 - -
Other .............................................. 38 33
---------------------------- -------------------------
Ps. 342,389 Ps. 512,244
============================ =========================
PARCELS OF UNDEVELOPED LAND (III)
Ciudad Deportiva de la Boca (SMP)................... Ps. 103,213 Ps. 110,244
Puerto Retiro ...................................... 41,170 41,530
Pereiraola ......................................... 19,439 19,349
Argentine Realty S.A. .............................. 4,559 3,977
Buenos Aires Realty S.A. ........................... 4,671 3,840
Buenos Aires Trade and Finance Center S.A. ......... 6,166 3,256
Torre Jardin IV..................................... 1,985 2,698
Intercontinental Plaza ............................. 1,020 - -
Other .............................................. 1,736 2,755
---------------------------- -------------------------
183,959 187,649
---------------------------- -------------------------
Ps. 526,348 Ps. 699,893
============================ =========================
(i) On February 2, 1999, the Company acquired 4,313,811 shares of BHSA for Ps.
59.1 million. On the same date the Company also acquired 3,697,500 options
to purchase BHSA American Depositary Shares ("ADS") for US$. 1.8 million.
Each option represents the right to purchase 100 ADSs at an exercise price
of US$. 7.0 per ADS. The options shall be exercisable by the holders in
whole or in part at any time on or after February 2, 2000 through February
2, 2004. In June 2001, the Company sold to an unrelated party 1,000,000
options for a total consideration of Ps. 3.1 million, resulting in a gain
of Ps. 2.2 million. The options are recorded at cost, adjusted for
inflation at the end of the year described in Note 3.c. No options have
been exercised as of the date of these financial statements.
(ii) Represents retained interest in mortgage receivables securitization
program described in Note 18.
(iii) The book value of parcels of undeveloped land at June 30, 2002 is
presented net of the impairment loss mentioned in Note 4.c.(iii).
F-80
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
C. MORTGAGES AND LEASES RECEIVABLE, NET:
AS OF JUNE 30,
--------------------------------------------------
2002 2001
----------------------- -----------------------
CURRENT
Mortgage receivable (i).................................. Ps. 3,980 Ps. 13,877
Less:
Unearned interest (i).................................... (404) (5,693)
Receivable from the sale of properties................... 3,698 39,723
Debtors under legal proceedings (ii)..................... 2,201 8,611
Leases and services receivable........................... 1,125 2,484
Hotel receivables........................................ 1,908 1,450
Related parties (Note 12)................................ 717 1,177
Other.................................................... -- 95
Less:
Allowance for doubtful accounts (Note 20.c.)............. (1,221) (1,796)
----------------------- -----------------------
Ps. 12,004 Ps. 59,928
======================= =======================
NON-CURRENT
Mortgage receivable (i).................................. Ps. 1,293 Ps. 57,794
Receivable from the sale of properties................... 579 --
Related parties (Note 12)................................ 1,638 --
Less:
Unearned interest (i).................................... (375) (13,468)
----------------------- -----------------------
Ps. 3,135 Ps. 44,326
======================= =======================
(i) Mortgage receivable consist of fixed-rate mortgages. At June 30,
2002, the remaining principal balance consists of mortgage receivable from
several borrowers. The amount due from the largest individual borrower was Ps.
1,518 at a contractual interest rate of 10%. At June 30, 2002, principal
payments on mortgage receivable become due as follows: 2003 - Ps. 3,980; 2004
- - Ps. 246; 2005 - Ps. 176; 2006 - Ps. 142; 2007 - Ps. 123; thereafter - Ps 606.
(ii) Comprised of Ps. 1.0 million and Ps. 6.8 million related to mortgage
receivable and Ps. 1.2 million and Ps. 1.8 million related to leases receivable,
for the years ended June 30, 2002 and 2001, respectively.
D. OTHER RECEIVABLES AND PREPAID EXPENSES:
AS OF JUNE 30,
--------------------------------------------------
2002 2001
----------------------- -----------------------
CURRENT
Receivable from the sale of equity securities and investees .... Ps. 26,129 Ps. 12,520
Value Added Tax ("VAT") receivable.............................. 466 6,457
Asset tax credits............................................... 2,319 4,634
Prepaid expenses................................................ 5,511 3,988
C.N. Hacoaj Project............................................. 593 1,363
Premiums on foreign currency forward exchange contracts......... 315 939
Income tax advances............................................. 333 886
Related parties (Note 12)....................................... 261 802
Debtors under legal proceedings................................. -- 2,449
Advances to financial brokers................................... -- --
Patriotic Bond.................................................. 2,312 --
Other .......................................................... 308 2,889
----------------------- -----------------------
Ps. 38,547 Ps. 36,927
======================= =======================
NON-CURRENT
Asset tax credits............................................... Ps. 14,617 Ps. 29,584
VAT receivable.................................................. 1,226 2,555
Related parties (Note 12)....................................... 73,309 2,551
Other........................................................... 469 74
----------------------- -----------------------
Ps. 89,621 Ps. 34,764
======================= =======================
F-81
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
E. INVENTORIES:
AS OF JUNE 30,
----------------------------------------------------------------------------------
2002 2002 2001 2001
------------------- ------------------- ------------------- -------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------------------- ------------------- ------------------- --------------------
Abril/Baldovinos......... Ps. 8,344 Ps. 11,298 Ps. 11,872 Ps. 18,838
Alto Palermo Park........ 4,555 -- 5,452 8,666
Constitucion 1111........ 3,767 -- 2,330 --
Torres Jardin............ 356 261 1,759 450
Caballito plots of land.. -- 12,120 -- 17,709
Dock 4 Puerto Madero..... -- 5,483 -- 5,475
Benavidez................ -- 12,645 -- 12,645
Pilar.................... 3,032 -- 3,032
Alto Palermo Plaza....... 2,087 -- 1,289 --
Minetti "D".............. -- 194 491 156
Sarmiento 517............ -- 589 428 84
Villa Celina............. -- 48 61 2
Dock 6 Puerto Madero..... -- -- 184 15
Padilla 902.............. -- 219 -- 321
Alcorta Palace........... -- -- 430 --
Dock 13 Puerto Madero.... 48 -- 51 6
Madero 1020 ............. 4,730 -- -- --
Puerto Madero Dock 5 .... -- 407 -- --
Other.................... 243 262 436 --
------------------- ------------------- ------------------- --------------------
Ps. 24,130 Ps. 46,558 Ps. 24,783 Ps. 67,399
=================== =================== =================== ====================
F. TRADE ACCOUNTS PAYABLE:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
----------------------- --------------------------
CURRENT
Accruals ........................................... Ps. 7,742 Ps. 6,752
Suppliers .......................................... 3,270 4,040
Other .............................................. 979 --
Related Parties (Note 12) .......................... 233 119
Less:
Unaccrued interest ................................. -- (80)
----------------------- --------------------------
Ps. 12,224 Ps. 10,831
======================= ==========================
NON-CURRENT
Suppliers .......................................... Ps. -- Ps. 374
----------------------- --------------------------
Ps. -- Ps. 374
======================= ==========================
G. SALARIES AND SOCIAL SECURITY PAYABLES:
AS OF JUNE 30,
-------------------------------------------------------
2002 2001
------------------------- --------------------------
Social security payable ........................... Ps. 454 Ps. 1,043
Provision for vacation and bonuses................. 351 726
Other ............................................. 219 154
------------------------- --------------------------
Ps. 1,024 Ps. 1,923
========================= ==========================
F-82
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
H. SHORT-TERM AND LONG-TERM DEBT:
SHORT-TERM DEBT CONSISTS OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- -------------------------
Loan Agreement (i).................................. Ps. 311,206 Ps. 157,685
Notes plus accrued interest (ii).................... 149,789 86,466
Commercial paper less unaccrued interest (iii)...... -- 47,995
Uncollateralized loans plus accrued interest (iv)... 3,538 34,916
Collateralized loans plus accrued interest (v)...... 100,206 22,310
Other .............................................. -- 1,093
------ ------------------ ------ ------------------
Ps. 564,739 Ps. 350,465
====== ================== ====== ==================
LONG-TERM DEBT CONSIST OF THE FOLLOWING:
AS OF JUNE 30,
------------------------------------------------------
2002 2001
------------------------- ------ ------------------
Collateralized loans (v)............................ Ps. -- Ps. 20,540
Other............................................... 142 5,472
------------------------- ------ ------------------
Ps. 142 Ps. 26,012
========================= ====== ==================
(i) On May 24, 2000, the Company entered into a syndicated loan arranged
by Bank Boston, as principal agent, to provide a US$ 80.0 million credit
facility, originally expiring on May 31, 2002 (the "Loan Agreement"). The Loan
Agreement includes other financial institutions, as lenders. The Company was
unable to pay the Loan Agreement due at the original maturity date. As a result
of such non-payment, the Company started a negotiation process with the lenders
and obtained short-term deferrals to pay such matured debt. Pursuant to the most
recent deferral, which was granted on July 31, 2002, the Loan Agreement must be
paid in full on September 30, 2002. The facility beared interest at three-month
Libor plus a margin of 500 basis points. At June 30, 2002, interest rate
applicable to the loan was 6.99%. The Loan Agreement requires the Company to
meet certain financial tests and to comply with certain other covenants,
including restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, repurchases of stock
and investments. As of June 30, 2002, the Company was not in compliance with
certain of the financial covenants. On July 2002, the Company obtained waivers
to these financial covenants from the lenders.
(ii) On December 21, 2000, the Company issued US$ 43.5 million unsecured
Class 2 notes due December 24, 2001 (the "Notes"). The Notes beared interest at
a variable rate. Interest on the Notes were payable quarterly, commencing March
21, 2001. Proceeds from this issuance were used to repay certain outstanding
short-term indebtedness of the Company. The Notes include various restrictive
covenants, which among other things, require the Company to maintain certain
financial ratios and net worth amounts. The Company was unable to pay the
principal and interest due at the original maturity date. However, in May 2002,
the Company repurchased US$ 6.5 million Notes for a total consideration of Ps.
22.0 million. The Company continued the negotiation process with the remaining
holders of the Notes of US$ 39.3 million and obtained short-term deferrals to
pay such matured debt. Pursuant to the most recent deferral, which was granted
on August 30, 2002, the Notes must be paid in full on September 9, 2002. As of
June 30, 2002, the Company was not in compliance with certain of the financial
covenants.
(iii) In August 2000, the Company entered into a Class 1 Zero Coupon
Commercial Paper maturing September 2001. During fiscal year 2001, the maximum
commercial paper outstanding was US$ 25.0 million at a discount interest rate of
9.86% at the date of issuance. These Commercial Papers were repaid in August
2001.
(iv) Generally, the Company's short-term uncollateralized borrowings are
in the form of overdraft facilities and/or bank loans with an original maturity
of less than one year. The weighted average interest rates on uncollateralized
short-term debt were 8.0% (plus "CER") and 10.17 % as of June 30, 2002 and 2001,
respectively. The Company generally uses the proceeds from these borrowings for
working capital needs and other general corporate purposes.
Pursuant to Decree 214, debts in U.S. dollars or other foreign currencies
in the Argentine financial system were converted to pesos at the rate of
exchange of $ 1 per US$ 1 or its equivalent in another currency. As from
February 3, 2002 the reference stabilization index (CER) and an interest rate
may ultimately be applied to these debts (Note 2).
F-83
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
H. SHORT-TERM AND LONG-TERM DEBT (CONTINUED):
(v) Collateralized loans accrue interest at fixed/variable rates ranging
from 6.56% to 25.00% due at various dates through October 2006. Loans amounting
to Ps. 42.8 million are collateralized by real estate properties with a net book
value of Ps. 31.7 million while the remaining loans, amonting to Ps. 57.4
million, are collateralized with Palermo Invest shares, representing the
Company's ownership of Alto Palermo Plaza and Alto Palermo Park with a net book
value of Ps. 120.7 million (See Note 15.(ii).). Also, certain of these
collateralized loans require the Company to meet certain financial tests and to
comply with certain other customary covenants, including restrictions on
incurrence of debt and liens, restrictions on mergers, acquisitions, asset
dispositions, capital contributions and others. In connection with the loan
amounting to Ps. 42.8 million above mentioned, at the date of issuing of these
financial statements, as a result of the current economic situation, the lack of
credit and the crisis of the Argentine financial system, principal installments
falling due on April 29 and July 29, 2002 and the interest installment amounting
to US$ 127 thousand falling due on July 29, 2002 were not paid. Although Hoteles
Argentinos' Management is renegotiating the debt with its creditors, as failure
to pay the installments when due entitles the bank to require acceleration of
principal and interest maturities, the loan has been classified and is shown
under short term debt in these financial statements.
As of June 30, 2002, APSA was not in compliance with certain financial
covenants with respect to its Ps. 120 million Senior Notes ("ASN") and its Ps.
85.0 million Notes ("AN") due 2005. On August 22, 2002, APSA obtained a limited
waiver from the holders of the ASN with respect to such covenant violation for
the quarter ended June 30, 2002. No such waiver was obtained with respect to the
AN, and as a result, APSA is not able to incur any additional indebtedness for
so long as such covenant violation is in existence. On January 15, 2002 APSA was
unable to make scheduled payments of approximately Ps. 19.6 million on the ASN.
However, as of July 17, 2002, all interest owned and the amortization coupon
that originally matured in January 2002, had been fully paid. On February 8,
2002 IRSA Inversiones y Representaciones and Parque Arauco, principal APSA's
shareholders, subordinated the collection of their loan receivables with APSA to
the repayment of principal and interest on the ASN and on short-term debt. If
APSA defaults on its indebtedness, due to cross-default provisions in the
agreements that govern the Loan Agreement and the Notes, any event of default
under any of the ir ASN, AN or their swap agreement would also constitute an
event of default under the Company's financial agreements.
I. TAXES PAYABLE:
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- ----------------------
CURRENT
Asset tax payable, net................................ Ps. 473 Ps. 4,107
Income tax provision, net............................. 2,103 1,416
Income tax withholdings............................... 6,790 1,213
VAT payable........................................... 1,454 524
Gross sales tax payable............................... 1,072 317
Value added tax withholdings.......................... 62 248
Provision for tax on interest payable (i)............. - - 211
Other................................................. 644 - -
---------------------- ----------------------
Ps. 12,598 Ps. 8,036
====================== ======================
(i) Effective January 1, 1999, interest payable is subject to a 15% tax
levied on interest paid on debt and other financial costs incurred by the
Company. Pursuant to a new tax reform enacted December 2000, this tax will be
gradually reduced as from January 1, 2001 and eliminated effective July 1, 2002.
F-84
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. DETAILS OF BALANCE SHEET ACCOUNTS (CONTINUED)
J. OTHER LIABILITIES:
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- ----------------------
CURRENT
Customer advances..................................... Ps. 964 Ps. 2,306
Deferred gain (i)..................................... - - 1,958
Seller financing (ii)................................. 786 1,626
Related parties (Note 12)............................. 36 - -
Dividends payable..................................... 6,567 - -
Accruals.............................................. 597 880
Lessee deposits....................................... 968 1,240
Collections on behalf of third parties................ 50 188
Premiums on foreign currency forward exchange contracts - - 571
Fees and other accounts payable....................... 5 188
Provision for contingencies (Note 20.c.) (iii)........ 440 133
Payable to financial brokers.......................... 903 - -
Payable from hotel operator........................... 853 - -
Other................................................. 1,375 1,016
---------------------- ----------------------
Ps. 13,544 Ps. 10,106
====================== ======================
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- ----------------------
NON-CURRENT
Lessee deposits....................................... Ps. 837 Ps. 3,468
Seller financing (ii) ................................ 725 2,836
Deferred gain (i)..................................... - - 370
Provision for contingencies (Note 20.c.) (iii)........ 357 207
Related parties (Note 12) ............................ 503 37
Other................................................. 457 833
---------------------- ----------------------
Ps. 2,879 Ps. 7,751
====================== ======================
(i) As discussed in Note 3.e., the Company formed ITNV in August 2000.
The issuance of preferred stock by ITNV to the Investors in December 2000
decreased the Company's percentage of ownership in ITNV and the value assigned
to the ITNV's preferred stock issued under the transaction was substantially
more than the Company's carrying amount per share of ITNV stock, thus triggering
a change in the Company's interest in ITNV. The change in the Company's interest
resulted in the recognition of a deferred gain of Ps. 3.3 million since ITNV is
in the early stage of development and the realizability of the gain is not
assured. This gain is being amortized to income as the investee incurs operating
losses.
(ii) Comprised of a principal amount of Ps. 1.45 million plus accrued
interest of Ps. 0.11 million relating to the seller financing obtained in the
acquisition of SMP. The shares of SMP are pledged as collateral for this seller
financing. Such seller financing accrues interest at a one-year LIBOR. As of
June 30, 2002, the one-year LIBOR was 6.51%. The non-current portion of Ps. 0.73
million is payable in November, 2003.
(iii) This reserve relates to: (a) labor lawsuits filed against the
Company, (b) tax matters related to differences in basis in the computation of
certain tax contributions, and, (c) other sundry claims. In the opinion of
management and based on consultation with external legal counsel, the Company
has established provisions for amounts which are probable of adverse occurrence
and which, according to estimates developed by the Company's legal counsel,
would meet all related contingencies and corresponding fees relating to these
claims. The classification of contingency reserves as non-current liabilities
was based on a review of the current facts and circumstances and consultation
with external legal counsel. Management reassesses these matters as new facts
are brought into management's attention.
F-85
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDERS' CONTRIBUTION
A. COMMON STOCK
As of June 30, 2002, the Company had 207,411,988 authorized and
outstanding shares of common stock, having a par value of Ps. 1.0 per share.
Holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders.
Following is a detail of the activity in the Company's shares as from
June 30, 1999:
COMMON STOCK APPROVED BY
------------------------------------------- --------------------------
SHARES ADDITIONAL DATE OF
ISSUED PAR VALUE PAID-IN-CAPITAL BODY DATE REGISTRATION
------------ -------------- -------------- -------------- ---------- -------------
BALANCES AS OF JUNE 30, 1999 ..... 188,476,317 Ps. 188,476 Ps. 506,767
============ ============== ==============
1999 Noncontributory Management Extraordinary April 7, April 24,
Stock Ownership Plan ............. 21,090,024 21,090 -- Shareholder's 1998 2000
Meeting
Distribution of treasury stock ... 2,432,932 2,433 --
Purchase of treasury stock ....... (6,236,762) (6,237) --
------------ -------------- --------------
BALANCES AS OF JUNE 30, 2000 ..... 205,762,511 Ps. 205,762 Ps. 506,767
============ ============== ==============
Purchase of treasury stock ....... (19,079,995) (19,080) --
Distribution of treasury stock ... 20,729,472 20,730 --
------------ -------------- --------------
BALANCES AS OF JUNE 30, 2001 ..... 207,411,988 Ps. 207,412 Ps. 506,767
============ ============== ==============
Purchase of treasury stock ....... -- -- --
Distribution of treasury stock ... -- -- --
------------ -------------- --------------
BALANCES AS OF JUNE 30, 2002 ..... 207,411,988 Ps. 207,412 Ps. 506,767
============ ============== ==============
At June 30, 2002, the negative retained earnings recorded by the Company
use up over 50% of shareholders contributions and reserves. Section 206 of the
Argentine Corporations Law establishes obligatory capital reduction in such
circumstances. However, as a result of the Argentine economic crisis, by Decree
1269, the National Government suspended the application of this section until
December 10, 2003.
B. CAPITAL NATURE TRANSACTIONS
From time to time, the Company repurchases shares of common stock
outstanding when it believes that its stock price is undervalued in the
marketplace.
During fiscal years 2001 and 2000, the Company repurchased 19,079,995 and
6,236,762 outstanding shares of common stock for a total consideration of Ps.
80.4 million and Ps. 29.9 million, respectively. These acquisitions are recorded
as "Treasury stock" and resulted in a reduction of retained earnings.
In October 2000 and 1999, the Company distributed 20,729,472 and
2,432,932 shares of common stock on a pro rata basis to its shareholders.
C. INFLATION ADJUSTMENT OF COMMON STOCK
As mentioned in Note 3.c. the Company's consolidated financial statements
were prepared on the basis of general price-level accounting which reflected
changes in the purchase price of the peso in the historical financial
statements. In this period, the annual inflation adjustments related to common
stock and treasury stock were taken to inflation adjustment reserves that form
part of shareholders' equity. According to Argentine GAAP, the balances in the
inflation adjustment reserves may be applied only towards the issuance of common
stock to shareholders of the Company.
D. RESTRICTION ON THE DISTRIBUTION OF PROFITS
In accordance with the Argentine Corporations Law and the Company's
By-laws, 5% of the net and realized profit for the year calculated in accordance
with Argentine GAAP plus (less) prior year adjustments must be appropriated by
resolution of the shareholders to a legal reserve until such reserve equals 20%
of the Company's outstanding capital. This legal reserve may be used only to
absorb losses.
F-86
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDERS' CONTRIBUTION (CONTINUED)
E. NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN
On October 30, 1997, the shareholders authorized the Company to enter
into a Noncontributory Management Stock Ownership Plan ("NMSOP") with eight
executive officers of the Company (the "Beneficiaries"), pursuant to which the
Beneficiaries were granted the right to purchase up to 24 million shares of
common stock (the "Participation Shares"), at a purchase price equal to Ps. 1.0
per share, subject to the implementation of an Equity Participation Agreement
("EPA"). Under Argentine law, the Company established a special purpose trust in
this connection (the "Trust").
The Beneficiaries were required to purchase the Participation Shares
available, if any, within 24 months of any capital increase. The Trust has an
original term of six years. According to the terms of the NMSOP and the Trust,
Beneficiaries are not entitled to receive any distributions (either in the form
of shares, cash or other) from the Trust during its term, although,
Beneficiaries are allowed to cause the Trust to sell their designated shares of
common stock held by the Trust in certain cases. In addition, the Company was
not allowed to grant any loans or otherwise assist the Beneficiaries in
financing the purchase of the Participation Shares.
On April 7, 1998, the Company's shareholders, at an extraordinary
shareholders' meeting, approved a capital increase of 24 million shares to
permit the Beneficiaries to purchase all of the Participation Shares to which
they were entitled under the EPA. The BASE and the CNV approved the capital
increase on June 4, 1999, and on August 31, 1999 the Beneficiaries acquired
21,090,024 shares at Ps. 1.0 per share.
7. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting. Accordingly, the
Company has six reportable segments. These segments are Development and sales of
properties, Office and other non-shopping center rental properties, Shopping
centers, Hotel operations, International and Others. As discussed in Note 3.b.,
the consolidated statements of income were prepared on a proportionate
consolidation basis. The Company uses the "proportionate-consolidation method"
of accounting for its investments in which the Company exercises control and
other jointly-controlled investments. This method has not been used for balance
sheet and cash flows purposes. Accordingly, this note reflects the results of
operations of the Company's controlled and jointly-controlled subsidiaries on a
proportionate basis.
A general description of each segment follows:
o Development and sale of properties
This segment includes the operating results of the Company's construction
and ultimate sale of residential buildings business.
o Office and other non-shopping center rental properties
This segment includes the operating results of the Company's lease and
service revenues of office space and other non-retail building properties from
tenants.
o Shopping centers
This segment includes the operating results of the Company's shopping
centers principally comprised of lease and service revenues from tenants. This
segment also includes revenues derived from credit card transactions that
consist of commissions and financing income.
o Hotel operations
This segment includes the operating results of the Company's hotels
principally comprised of room, catering and restaurant revenues.
F-87
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION (CONTINUED)
o International
This segment includes the results of operations of the Company's equity
investments in: i) Brazil for all periods presented; as discussed in Note 3.f.,
the Company sold its ownership interest in Brazil in February 2002, and ii) the
results of operations of the equity investments in Venezuela for the years ended
June 30, 2001 and 2000; as discussed in Note 3.f., the Company sold its
ownership interest in Venezuela in December 2000.
o Others
This segment primarily includes revenues and associated costs generated
from the sale of equity securities, other securities-related transactions and
other non-core activities of the Company. For the years ended June 30, 2002 and
2001, this segment also includes the results in equity investees of the Company
relating to internet, telecommunications and other technology-related activities
of the Company.
The Company measures its reportable segments based on net income.
Inter-segment transactions, if any, are accounted for at current market prices.
The Company evaluates performance of its segments and allocates resources to
them based on net income. The Company is not dependent on any single customer.
The accounting policies of the segments are the same as those described
in Note 4.
As of and for the year ended June 30, 2002:
Office and other
Development non-shopping
and sale of center rental Shopping Hotel
properties properties centers operations International Others Total
-------------- -------------- ------------ ------------ ------------- ------------ ------------
Sales ........................... Ps. 45,202 Ps. 34,250 Ps. 77,585 Ps. 29,462 Ps. 24,820 Ps. -- Ps. 211,319
Costs ........................... (37,402) (10,692) (38,426) (20,774) (14,061) -- (121,355)
Gross profit .................... 7,800 23,558 39,159 8,688 10,759 -- 89,964
Selling expenses ................ (3,672) (477) (22,289) (3,318) (4,578) -- (34,332)
Administrative expenses ......... (8,971) (4,959) (11,219) (8,721) (3,773) -- (37,643)
Loss on purchasers rescissions
of sales contracts .............. 27 -- -- -- -- -- 27
Gain (loss) from operations and
holdings of real estate assets,
net ............................. (30,788) (41,738) (23,946) -- 31,514 -- (64,956)
Operating (loss) income ......... (35,602) (23,616) (18,295) (3,351) 33,924 -- (46,940)
Financial results, net .......... (18,532) (14,831) 8,855 (15,504) (3,597) (388,611) (432,220)
Net loss in related companies ... -- -- (3,911) -- 404 1,540 (1,967)
Other income (expenses), net .... -- -- (4,744) 167 47 (3,981) (8,511)
Loss (income) before taxes and
extraordinary items ............. (54,134) (38,447) (18,095) (18,688) 30,778 (391,052) (489,638)
Extraordinary loss
Income tax ...................... (569) (3,341) (1,333) (58) (4,533) (147) (9,981)
Loss (income) for the year ...... (54,703) (41,788) (19,428) (18,746) 26,245 (391,199) (499,619)
Additions of fixed assets........ 1,459 18,463 -- 1,136 -- -- 21,058
Depreciation and amortization (a) (5,889) 7,663 30,403 4,815 219 -- 37,211
Non-current investments in
jointly controlled companies..... 37,893 -- 307,246 9,745 -- 2,654 357,538
Operating assets................. 317,384 245,810 269,351 102,848 -- -- 935,393
Non operating assets............. 36,644 27,581 30,223 11,540 26,129 77,205 209,322
------------- ------------- ------------ ----------- ----------- ------------ ------------
Total assets..................... Ps. 354,028 Ps. 273,391 Ps. 299,574 Ps.114,388 Ps. 26,129 Ps. 77,205 Ps.1,144,715
------------- ------------- ------------ ----------- ----------- ------------ ------------
(a) Included in operating loss (income)
F-88
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION (CONTINUED)
As of and for the year ended June 30, 2001:
Office and other
Development non-shopping
and sale of center rental Shopping Hotel
properties properties centers operations International Others Total
------------- ------------- ------------ ------------ ------------- -------------- ------------
Sales.......................... Ps. 89,772 Ps. 45,591 Ps. 94,475 Ps. 40,873 Ps. 69,132 Ps. -- Ps 339,843
Costs.......................... (68,164) (8,914) (36,829) (27,076) (31,041) -- (172,024)
Gross profit................... 21,608 36,677 57,646 13,797 38,091 -- 167,819
Selling expenses............... (8,500) (468) (11,364) (4,738) (8,678) -- (33,748)
Administrative expenses........ (13,429) (6,279) (14,049) (9,814) (7,169) -- (50,740)
Loss on purchasers rescissions
of sales contracts............. (14) -- -- -- -- -- (14)
Gain (loss) from operations and
holdings of real estate assets,
net ........................... (3,793) (1,878) -- -- (634) -- (6,305)
Operating (loss) income........ (4,128) 28,052 32,233 (755) 21,610 -- 77,012
Financial results, net ........ (24,981) (19,945) (28,113) (8,452) (14,347) (14,464) (110,302)
Net income in related companies (22) -- (1,420) -- (1,299) (7,582) (10,323)
Other income (expenses), net .. -- -- (178) 237 (37) (5,646) (5,624)
Loss (income) before taxes and
extraordinary items ........... (29,131) 8,107 2,522 (8,970) 5,927 (27,692) (49,237)
Income tax .................... 20 (2,404) (786) 40 (1,933) -- (5,063)
Extraordinary loss............. -- -- -- (5,653) -- -- (5,653)
Net (loss) income for the year (29,111) 5,703 1,736 (14,583) 3,994 (27,692) (59,953)
Additions of fixed assets ..... 178 4,241 -- 2,525 4 -- 6,948
Depreciation and amortization (a) 659 7,481 33,263 5,663 276 -- 47,341
Non-current investments in
jointly controlled companies .. 11,293 -- 307,172 5,104 133,800 13,046 470,415
Operating assets............... 392,952 316,034 307,481 110,463 133,933 -- 1,260,863
Non operating assets........... 26,467 18,987 18,474 6,637 8,046 155,075 233,686
------------ ------------- ------------- ------------- -------------- ------------ -----------
Total assets................... Ps. 419,419 Ps. 335,021 Ps. 325,955 Ps. 117,100 Ps. 141,979 Ps. 155,075 Ps 1,494,549
------------ ------------- ------------- ------------- -------------- ------------ ------------
(a) Included in operating loss (income)
As of and for the year ended June 30, 2000:
Office and other
Development non-shopping
and sale of center rental Shopping Hotel
properties properties centers operations International Others Total
----------- ------------- ------------ ------------ ------------- -------------- --------------
Sales...............................Ps. 80,511 Ps. 46,692 Ps. 89,299 Ps. 59,066 Ps. 86,362 Ps. -- Ps. 361,930
Costs............................... (52,479) (8,105) (34,005) (38,473) (34,627) -- (167,689)
Gross profit........................ 28,032 38,586 55,294 20,593 51,736 -- 194,241
Selling expenses.................... (4,712) (579) (19,095) (6,463) (6,037) -- (36,886)
Administrative expenses............. (15,200) (6,647) (12,391) (11,262) (10,129) -- (55,629)
Loss on purchasers rescissions of
sales contracts..................... (1,541) -- -- -- -- -- (1,541)
Gain (loss) from operations and
holdings of real estate assets, net (743) -- -- -- (1,953) -- (2,696)
Operating income.................... 5,835 31,360 23,809 2,868 33,617 -- 97,489
Financial results, net ............. (17,938) (15,599) (21,807) (7,565) 4,808 (775) (58,876)
Net income in related companies .... -- -- (20) -- (1,408) -- (1,428)
Other income (expenses), net ....... -- -- (1,076) 395 (4,536) (6,690) (11,907)
Income before taxes ................ (12,103) 15,761 906 (4,302) 32,481 (7,465) 25,278
Income tax ......................... (2,439) (2,043) (2,134) (503) (6,608) -- (13,727)
Net (loss) income for the year ..... (14,542) 13,717 (1,228) (4,804) 25,873 (7,465) 11,551
Additions of fixed assets .......... 2,193 2,140 -- 5,886 -- -- 10,219
Depreciation and amortization (a)... 1,766 6,690 25,795 7,150 (4,398) -- 37,003
Non-current investments in jointly
controlled companies ............... 9,315 -- 297,753 11,725 256,627 -- 575,420
Operating assets.................... 439,998 343,722 297,753 126,091 256,626 -- 1,464,190
Non operating assets................ 19,369 13,073 11,325 8,659 9,759 138,852 201,037
------------- ------------- ----------- ------------- -------------- ------------- -------------
Total assets........................Ps. 459,367 Ps. 356,795 Ps. 309,078 Ps. 134,749 Ps. 266,386 Ps. 138,852 Ps.1,665,227
------------- ------------- ----------- ------------- -------------- ------------- -------------
(a) Included in operating loss (income)
F-89
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. LOSS FROM OPERATIONS AND HOLDINGS OF REAL ESTATE ASSETS, NET:
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------ -------------------
Income (loss) from transactions related to
shares of jointly controlled, affiliated
and related companies....................... Ps. 31,854 Ps. (634) Ps. (184)
Results from holding of investment in real
estate...................................... (96,810) (5,671) (2,881)
Other....................................... -- -- 369
------------------- ------------------ -------------------
Ps. (64,956) Ps. (6,305) (2,696)
=================== ================== ===================
9. FINANCIAL RESULTS, NET:
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------ -------------------
GENERATED BY ASSETS:
Interest income............................. Ps. 9,656 Ps. 8,141 Ps. 7,631
Financial operating net results............. (117,386) (4,014) 6,164
(Loss) gain on exposure to inflation........ (151,448) 19,988 71,362
Exchange loss............................... 50,327 (18,901) (24,529)
Other....................................... (265) -- --
------------------- ------------------ -------------------
Ps. (209,116) Ps. 5,214 Ps. 60,628
------------------- ------------------ -------------------
GENERATED BY LIABILITIES:
Gain (loss) on exposure to inflation........ Ps. 98,397 Ps. (7,610) (31,786)
Exchange loss............................... (305,415) (6,686) (7,615)
Interest expense............................ (16,095) (100,674) (79,208)
Other....................................... 9 (546) (895)
------------------- ------------------ -------------------
Ps. (223,104) Ps. (115,516) Ps. (119,504)
------------------- ------------------ -------------------
FINANCIAL RESULTS, NET...................... Ps. (432,220) Ps. (110,302) Ps. (58,876)
=================== ================== ===================
10. OTHER EXPENSES, NET:
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------ -------------------
Loss (gain) on early redemption of debt (i). Ps. (174) Ps. 1,166 Ps. (3,486)
Gain (loss) from the sale of fixed assets.. -- 166 (39)
Unrecoverable VAT........................... (1,344) (3,288) (2,471)
Donations................................... (263) (1,997) (2,631)
Other....................................... (6,730) (1,671) (3,280)
------------------- ------------------ -------------------
Ps. (8,511) Ps. (5,624) Ps. (11,907)
=================== ================== ===================
(i) For the years ended June 30, 2002 and 2001, this line item includes
the proportionate share of the net (loss) gain on early redemption of
debt recorded by a company's subsidiary during such periods. During
the year ended June 30, 2000, the Company redeemed convertible
negotiable obligations for a face value of US$ 61.9 million. In this
connection, the Company recorded a loss of Ps. 3.5 million.
11. CONVERTIBLE DEBT
The Shareholders meeting held on March 8, 2002 approved the issuance of
up to US$ 100.0 million unsecured convertible debt securities for a five-year
term at a fixed annual interest rate of 6% to 12% with semi-annual payments. At
the option of the holders, debt may be converted into shares of common stock of
the Company at up to 110% of the volume weighted average price on the BASE
during twenty consecutive trading days immediately preceding the beginning of
the subscription period.
In this connection the Shareholders' meeting held on March 8, 2002
approved the issuance to thE convertible debt holders of warrants to purchase
the Company's common stock. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of Ps. 1 per share. These warrants
are to be exercisable within 15 days after the finalization of the conversion
period.
No securities were issued in connection with this approval as of June 30,
2002
F-90
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The following is a summary of the balances and transactions with related
parties:
Income (Loss) included in the
statements of operations for the Balance receivable
year ended June 30, (payable)as of June 30,
- ------------------------------------------------------------------------------------------------------ -------------------------
Description of
Company Relation Transaction / caption 2002 2001 2000 2002 2001
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Current mortgages and
leases receivables, net Ps. -- Ps. -- Ps. -- Ps. 384 Ps. 188
Non-current mortgages
and leases receivables,
net -- -- -- 1,638 --
Other non-current
An equity receivables -- -- -- 73,160 --
APSA ............... investee of the Current account payable -- -- -- (140) (96)
Company (i) Other current liabilities -- -- -- (28) --
Other non-current
liabilities -- -- -- (503) --
Sales and developments -- 153 123 -- --
Accrued interest 10,691 -- 374 -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Investments current -- -- -- 11,522 21,051
Investments non-current -- -- -- 6,500 32,015
Current mortgages and
BHSA................ Related leases receivables, net -- -- -- 2 2
party(ii) Other current receivables -- -- -- 1 --
Results from holding and
operations (38,103) (15,339) -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Banco de Credito y
Securitizacion S.A.. Related party Investments non-current -- -- -- 6,236 9,781
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Cresud S.A.C.I.F. y Shareholder of Current mortgages and
A. ......... the Company(iii) leases receivables, net -- -- -- 132 254
Current account payable -- -- -- (42) --
Other current liabilities -- -- -- (5) --
Accrued interest 410 -- -- -- --
Rental income 147 329 -- -- --
Sales and developments -- 125 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
APSA, an equity leases receivables, net -- -- -- -- 23
Alto Invest S.A. ... investee of the Rental income -- 18 33 -- --
Company
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
E-Commerce leases receivables, net -- -- -- 54 180
Altocity.com S.A.... S.A., an equity Other current liabilities -- -- -- -- (37)
investee of APSA Rental income 207 329 65 -- --
Sale and developments -- 139 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
APSA, an equity leases receivables, net -- -- -- 11 39
Tarshop S.A......... investee of the Other current liabilities -- -- -- (3) --
Company Rental income 72 -- -- -- --
Sale and developments -- 98 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
Cresud, an leases receivables, net -- -- -- -- 4
Cactus S.A. ........ equity investee Sales and developments -- 8 -- -- --
of the Company
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Dolphin Fund Related party Current mortgages and
Management S.A...... leases receivables, net -- -- -- 128 309
Other current receivables -- -- -- 58 --
Current account payable -- -- -- (45) --
Rental income 134 59 -- -- --
Sale and developments -- 119 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
Emprendimientos APSA, an equity leases receivables, net -- -- -- -- 25
Recoleta S.A........ investee of the Other current receivables -- -- -- 20 --
Company Current account payable -- -- -- (4) --
Sale and developments -- 80 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
APSA, an equity leases receivables, net -- -- -- -- 10
Fibesa S.A.......... investee of the Current account payable -- -- -- (2) --
Company Sale and developments -- 29 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Subsidiary of Current mortgages and
Futuros y Cresud, an leases receivables, net -- -- -- 12
opciones.com. ...... equity investee Sales and developments -- 43 -- -- --
of the Company
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Hoteles Argentinos Other current receivables -- -- -- -- 10
S.A................. Related party Current account payable -- -- -- -- (23)
Accrued interests -- (1,716) 2,007 -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Latin American Current mortgages and
Econetworks N.V..... Equity investee leases receivables, net -- -- -- -- 105
Rental income -- 207 -- -- --
Sale and developments -- 31 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Alternativa Gratis Current mortgages and
S.A. ............... leases receivables, net -- -- -- 1 8
Accrued interest -- (1) -- -- --
Rental income 112 129 18 -- --
Sale and developments -- 39 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Red Alternativa Current mortgages and
S.A. ............... Related party leases receivables, net -- -- -- 5 18
Rental income 47 -- 14 -- --
Sale and developments -- 88 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
Managers, directors Other current
and other staff of Related receivables(personnel
the Company......... parties(iv) loans) -- -- -- 182 792
Other non-current
receivables (personnel
loans) -- -- -- 149 2,551
Interests 120 311 -- -- --
- ---------------------------------------------------------------------------- ------------ ------------ ----------- ------------
F-91
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
(i) On July 20, 2001, the Company's board of directors approved to grant APSA
several loans to finance transactions related to its swap agreement (the
"Loan Agreements"). On February 8, 2002 the Company and Parque Arauco
signed subordination agreements in order to subordinate the payment of
that Loans Agreements to the payment of the Senior Notes. The interest
rate associated to the Loan Agreements is the lesser of (i) variable cost
of money for us in operations of up to 30 days and, (ii) the average of
the last five BADLAR rates for US dollar transactions, plus 200 annual
nominal basis points for operations in foreign and local currency
according to market conditions. At June 30, 2002, the outstanding balance
of these loans amounted to Ps. 73.1 million and beared an annual interest
rate of 10 % plus CER. On August 20, 2002 the Company subscribed
convertible notes issued by APSA mainly applying the loan above-mentioned
for a total amount of US$ 27.2 million.
(ii) The Company is a shareholder of BHSA.
(iii) Included in net revenues for the year ended June 30, 2002, are Ps. 410,
in office space lease and fees billed to Cresud S.A.C.I.F. y A
("Cresud"). Amounts receivable as of June 30, 2002 totaled Ps. 132.
(iv) The Company provided loans and advances to employees and directors, the
balances of which amounted to Ps.331 and Ps.3,343 as of June 30, 2002 and
2001, respectively. Such balances are to be repaid via scheduled payroll
deductions.
F-92
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. ADDITIONAL INFORMATION ON ASSETS AND LIABILITIES
The breakdown of main assets and liabilities as of June 30, 2002 is as
follows:
To mature To mature To mature
between between Between To mature in
To mature in 4 and 6 7 and 9 10 and 12 greater than
3 months months months months 1 year Past due
-------------- -------------- ------------- -------------- -------------- --------------
ASSETS
Investments Ps. 17,669 Ps. - Ps. 158 Ps. - Ps. 9,798 Ps. -
Mortgages and leases
receivable, net 8,971 1,477 442 115 1,664 262
Other receivables and
prepaid expenses 34,525 686 533 529 13,646 432
-------------- -------------- ------------- -------------- -------------- --------------
Ps. 61,165 Ps. 2,163 Ps. 1,133 Ps. 644 Ps. 25,108 Ps. 694
-------------- -------------- ------------- -------------- -------------- --------------
LIABILITIES
Trade accounts payable Ps. 11,331 Ps. 242 Ps. 6 Ps. 7 Ps. - Ps. 331
Customer advances 1,931 - - - - -
Salaries and social
security payable 1,011 9 4 - - -
Short and long term
debt 521,961 - - - - 42,778
Taxes payable 9,237 3,223 138 - - -
Other liabilities 5,004 1,100 199 265 1,560 6,614
-------------- -------------- ------------- -------------- -------------- --------------
Ps. 550,475 Ps. 4,574 Ps. 347 Ps. 272 Ps. 1,560 Ps. 49,723
-------------- -------------- ------------- -------------- -------------- --------------
Accruing interest at a Accruing interest at a
No fixed term fixed rate variable rate
----------------------------- ----------------------------- -----------------------------
Current Non-Current Total Current Non-Current Current Non-Current
------------- -------------- -------------- -------------- -------------- ------------- --------------
ASSETS
Investments Ps. 18,969 Ps. 516,550 Ps. 563,144 Ps. 17,890 Ps. 3,624 Ps. 7,384 Ps. 6,174
Mortgages and leases
receivable, net 737 1,471 15,139 7,710 1,672 - -
Other receivables and
prepaid expenses 1,842 75,975 128,168 27,503 73,908 - -
------------- -------------- -------------- -------------- -------------- ------------- --------------
Ps. 21,548 Ps. 593,996 Ps. 706,451 Ps. 53,103 Ps. 79,204 Ps. 7,384 Ps. 6,174
------------- -------------- -------------- -------------- -------------- ------------- --------------
LIABILITIES
Trade accounts payable Ps. 307 Ps. - Ps. 12,224 Ps. - Ps. - Ps. - Ps. -
Customer advances - - 1,931 - - - -
Salaries and social
security payable - - 1,024 - - - -
Short and long term
debt - 142 564,881 207,998 - 356,741 -
Taxes payable - - 12,598 - - - -
Other liabilities 362 1,319 16,423 786 1,228 - -
------------- -------------- -------------- -------------- -------------- ------------- --------------
Ps. 669 Ps. 1,461 Ps. 609,081 Ps. 208,784 Ps. 1,228 Ps.356,741 Ps. -
------------- -------------- -------------- -------------- -------------- ------------- --------------
Not accruing interest
-----------------------------
Current Non-Current Total
-------------- -------------- --------------
ASSETS
Investments Ps. 11,522 Ps. 516,550 Ps.563,144
Mortgages and leases
receivable, net 4,294 1,463 15,139
Other receivables and
prepaid expenses 11,044 15,713 128,168
-------------- -------------- -------------
Ps. 26,860 Ps. 533,726 Ps.706,451
-------------- -------------- -------------
LIABILITIES
Trade accounts payable Ps. 12,224 Ps. - Ps. 12,224
Customer advances 1,931 - 1,931
Salaries and social
security payable 1,024 - 1,024
Short and long term
debt - 142 564,881
Taxes payable 12,598 - 12,598
Other liabilities 12,758 1,651 16,423
-------------- -------------- -------------
Ps. 40,535 Ps. 1,793 Ps.609,081
-------------- -------------- -------------
F-93
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. CONSOLIDATION
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As from July 1, 1996, the
Company used the "proportionate-consolidation method" of accounting for its
investments in which the Company exercises control and other jointly-controlled
investments. This method has not been used for balance sheet and cash flows
purposes. The Company calculates the proportionate-consolidation method by
applying its percentage ownership interest to the historical financial
statements of its equity method investments. The following table presents the
Company's statements of income for the three years in the period ended June 30,
2002 reporting (i) the jointly-controlled investments accounted for by the
equity method, with the earnings or losses included as earnings or losses from
equity investees, and (ii) minority interest in earnings or losses of controlled
subsidiaries.
YEAR ENDED JUNE 30,
------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
SALES.................................................. Ps. 123,462 Ps. 195,657 Ps. 222,895
COSTS (Note 20.d.)..................................... (74,836) (111,378) (117,255)
--------------------------------------- -------------------
GROSS PROFIT........................................... 48,626 84,279 105,640
--------------------------------------- -------------------
Selling expenses (Note 20.f.).......................... (7,978) (15,546) (14,679)
Administrative expenses (Note 20.f.)................... (28,528) (35,593) (42,156)
--------------------------------------- -------------------
(36,506) (51,139) (56,835)
--------------------------------------- -------------------
Loss from operations and holdings of real estate
assets, net............................................ (41,684) (6,342) (2,696)
--------------------------------------- -------------------
OPERATING (LOSS) INCOME................................ (29,564) 26,798 46,109
--------------------------------------- -------------------
Losses from equity investees........................... (17,797) 6,471 10,810
Financial results, net................................. (445,821) (83,358) (24,719)
Other income(expenses), net............................ (4,322) (5,266) (6,371)
--------------------------------------- -------------------
(LOSS) INCOME BEFORE INCOME TAX AND MINORITY INTEREST.. (497,504) (55,355) 25,829
--------------------------------------- -------------------
Minority interest...................................... 5,118 (1,459) (4,818)
Income tax............................................. (7,233) (3,140) (9,460)
------------------- ------------------- -------------------
NET (LOSS) INCOME..................................... Ps. (499,619) Ps. (59,954) Ps. 11,551
------------------- ------------------- -------------------
15. RESTRICTED ASSETS
(i) In a series of transactions, which occurred between 1999 and 2000,
the Company acquired from an unrelated party, Puerto Retiro, the sole asset of
which is an undeveloped parcel of land in Retiro, Buenos Aires. Prior to the
acquisition of Puerto Retiro by the Company, Puerto Retiro had acquired the
abovementioned land from Tandanor S.A. ("Tandanor"), a formerly state-owned
entity, which had been acquired by Inversora Darsena Norte S.A. ("Indarsa") in
1991 through a privatization process. Indarsa did not cancel the outstanding
balance of the purchase price of Tandanor, and as a result, the Federal
Government, through its Ministry of Defense, petitioned the bankruptcy of
Indarsa. Since the sole asset of Indarsa was its ownership interest in Tandanor,
the government is seeking to extend the bankruptcy procedures to any company or
individual, which, according to its view, acted as a group, and therefore,
requested the bankruptcy of Puerto Retiro. In this connection, the bankruptcy
court for the Buenos Aires District issued an order restraining the ability of
Puerto Retiro to sell or dispose in any manner the land previously acquired from
Tandanor.
The Company is vigorously defending against this case. While there can be
no assurance of success, the Company believes it is likely to prevail on the
case and obtain a judgment in its favor.
(ii) On November 9, 2001, IRSA Inversiones y Representaciones S.A. ("the
Company") and GSEM/AP Holdings L.P. ("GSEM") entered into a first amendment to
the Shareholders' Agreement entered into on February 25, 1998, which was
followed by a second amendment dated November 27, which established, among other
issues, the Company's obligation to pay a total amount of US$ 13,135 to GSEM
(called "GSEM Credit"), to be settled in two equal installments for a total
amount of US$ 6,567 each, plus interest accrued at the time of payment, the
first installment falling due on January 31, 2002 and the second on April 30,
2002. As a consequence of that obligation, the Company entered into a Share
Trust Agreement pursuant to which the Company has assigned in trust, under the
terms of Law No. 24,441, in favor of the Trustee (ABN AMRO BANK N.V.), all the
shares it owns in Palermo Invest S.A. The Trustee shall not in any way transfer,
pledge or otherwise assign all or part of the Company's Shares to any Person and
at all times shall vote the Shares in the manner instructed by the Company.
Additionally, in no event shall GSEM be granted any rights under the terms of
the Trust to request the Trustee to foreclose on the Company's Shares. Upon the
Company's total fulfillment of its obligations to GSEM, the trustee must return
the shares to IRSA under the terms and conditions of the trust agreed with the
Trustee.
(iii) In connection with the acquisition of additional interest in Santa
Maria del Plata S.A., the Company pledged 2,460,041 shares of its interest in
that company to secure the balance owed until it is fully paid.
(iv) The Labor Court N(degree) 55 decided the embargo of units N(degree)
14 and 20 located in Sarmiento 517, property of the Company, in connection with
a lawsuit in which the Company is codefendant.
F-94
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. EXTRAORDINARY LOSS
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As such, this line item
represents the proportionate share of an extraordinary loss recorded by one of
the Company's subsidiaries, LLR., relating to the judgment against it in the
amount of Ps. 5.7 million entered by Parques Nacionales, a governmental agency,
following a dispute on the amount of the selling price of the hotel Llao Llao,
sole asset of the subsidiary.
LLR had filed an appeal contending the verdict was erroneous as a matter
of law, both as to liability and damages, and the plaintiff filed a cross
appeal, which outcome resulted adverse to the subsidiary.
17. DERIVATIVE INSTRUMENTS
From time to time, the Company utilizes certain financial instruments,
primarily foreign currency forward-exchange contracts, as a supplement to reduce
its overall financing costs. The counterparties to these instruments generally
are major financial institutions. The Company does not hold or issue derivative
instruments for trading purposes. In entering into these contracts, the Company
has assumed the risk that might arise from the possible inability of
counterparties to meet the terms of their contracts. The Company does not expect
any losses as a result of counterparty defaults. In the past, the Company also
utilized foreign currency forward-exchange contracts to manage its exposure
associated with its net investment in foreign operations.
At June 30, 2002, there were no operations with derivative instruments.
At June 30, 2001, the Company had the following derivative activity:
(i) Forward-exchange contract to hedge a portion of its net investment in
a foreign operation
On February 7, 2000, the Company entered into a six-month foreign
currency forward-exchange contract to sell Brazilian Reais ("BR") 28,050,000 at
1US$=1.87BR, when the spot rate was 1US$=1.77BR. The Company considered this
forward contract as an economic hedge of a portion of its net investment in
Brazil Realty. For the years ended June 30, 2001 and 2000, the Company
recognized a loss of approximately Ps. 0.6 million and Ps. 1.4 million relating
to this contract, respectively. At June 30, 2002 and 2001, the Company had no
outstanding contracts designated as hedges of a net investment in a foreign
operation.
(ii) Foreign currency forward-exchange contracts
The Company uses foreign currency forward-exchange contracts as a
supplement to reduce its overall financing costs. Premiums on foreign currency
forward-exchange contracts are amortized over the life of the respective
contract. At June 30, 2001, the Company had three outstanding foreign currency
forward-exchange contracts with financial institutions to sell an aggregate
amount of US$ 16.8 million maturing August 2001, and one foreign currency
forward-exchange contract to sell US$ 10.0 million maturing in September 2001.
The Company recognized a net gain of Ps. 5.3 million and Ps. 0.4 million for the
years ended June 30, 2002 and 2001, respectively, related to these contracts.
(iii) Interest rate swap
In order to minimize its financing costs and to manage interest rate
exposure, the Company entered into an interest rate swap agreement to
effectively convert a portion of its peso-denominated fixed-rate debt to
peso-denominated floating rate debt. As of June 30, 2001, the Company had an
interest rate swap agreement outstanding with an aggregate notional amount of
Ps. 29.3 million with maturities through August 2001. As of June 30, 2001,
interest rate payable was at a variable rate of 22.3% and interest rate
receivable was at a fixed rate of 10.15%. Any differential to be paid or
received was accrued and was recognized as an adjustment to interest expense in
the statement of operations. The related accrued receivable or payable was
included as an adjustment to interest payable. The fair value of the swap
agreement was not recognized in the financial statements.
18. MORTGAGE RECEIVABLE SECURITIZATION
On November 2, 2001 the Company entered into a securitization program
with Banco Sudameris ("BS").
Under this program, during the year ended June 30, 2002, the Company sold
an aggregate amount of US$ 26.6 million mortgages receivable to a Trust in
exchange for US$ 10.0 million in cash, US$ 3.3 million senior debt certificates
and US$ 13.3 million subordinated debt certificates. Such US denominated
certificates were converted into Argentine pesos at the exchange rate Ps. 1 to
US$ 1 as a result of Government economic measures summarized in Note 2.
Accounts receivable sold under this program are excluded from accounts
receivable in the consolidated financial statements.
F-95
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP
The Company's consolidated financial statements are prepared in
accordance with Argentine GAAP, which differs in certain significant respects
from US GAAP. Such differences involve methods of measuring the amounts shown in
the financial statements, as well as additional disclosures required by US GAAP
and Regulation S-X of the Securities and Exchange Commission (SEC).
I. Differences in measurement methods
The following reconciliation to US GAAP does not include the reversal of
the adjustments to the consolidated financial statements for the effects of
inflation required under Argentine Technical Resolution No. 6, with the
modification established in the Argentine Technical Resolution No. 19, because
the application of this Resolution represents a comprehensive measure of the
effects of price level changes in the Argentine economy.
The principal differences, other than inflation accounting, between
Argentine GAAP and US GAAP are described below, together with an explanation,
where appropriate, of the method used in the determination of the necessary
adjustments.
YEAR ENDED JUNE 30,
-------------------------------------------------------------
RECONCILIATION OF NET (LOSS) INCOME: 2002 2001 2000
------------------- ------------------- -------------------
Net (loss) income as reported under Argentine GAAP.... Ps. (499,619) Ps. (59,954) Ps. 11,551
US GAAP ADJUSTMENTS:
Impact of US GAAP adjustments on equity investees
(Note 19.I.a))........................................ (119,245) 76,241 (17,588)
Accounting for marketable securities (Note 19.I.b))... (3,727) 21,250 13,912
Accounting for derivatives and hedging activities
(Note 19.I.c))........................................ (7,257) 1,037 4,153
Accounting for options to acquire marketable
securities (Note 19.I.d))............................. (6,789) 9,421 (2,150)
Non-contributory management stock ownership plan
(Note 19.I.e))........................................ (11,551) (15,679) (12,377)
Depreciation of fixed assets (Note 19.I.f))........... 8,314 (2,318) (2,345)
Preoperating and organization expenses (Note 19.I.g)). 1,545 (736) (18)
Depreciation expense (Notes 19.I.h) and j))........... 119 119 119
Securitization accounting (Note
19.I.i)........................................ (2,015) -- --
Deferred income tax (Note 19.I..k.))................. (23,582) (3,777) (11,933)
Minority interest (Note 19.I.l))..................... 12,859 (5,580) (222)
------------------- ------------------- -------------------
Net (loss) income under US GAAP....................... Ps. (650,948) Ps. 20,024 Ps (16,898)
=================== =================== ===================
Basic and diluted earnings per share under US GAAP:
(Loss) income before accounting change................ Ps. (3.138) Ps. (0.002) Ps. (0.083)
Accounting change..................................... -- 0.100 --
------------------- ------------------- -------------------
Net (loss) income per share........................... Ps. (3.138) Ps. 0.098 Ps. (0.083)
=================== =================== ===================
F-96
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
AS OF JUNE 30,
------------------------------------------------
2002 2001
---------------------- -----------------------
RECONCILIATION OF SHAREHOLDERS' EQUITY:
Total shareholders' equity under Argentine GAAP.................... Ps. 460,416 Ps. 960,035
Impact of US GAAP adjustments on equity investees (Note 19.I.a)).. (69,129) (43,527)
Accounting for derivatives and hedging activities (Note 19.I.c))... -- 505
Accounting for options to acquire marketable securities (Note
19.I.d)).......................................................... (985) 5,804
Depreciation of fixed assets (Note 19.I.f))....................... (2,866) (11,180)
Preoperating and organization expenses (Note 19.I.g))............. (2,988) (4,533)
Mortgage payable with no stated interest rate (Note 19.I.h))...... (1,806) (1,806)
Differences in basis related to purchase accounting (Note 19.I.j)) (3,290) (3,290)
Depreciation expense (Note 19.I.h) and j))........................ 567 448
Securitization accounting (Note
19.I.i))............................................................... (2,945) --
Deferred income tax (Note 19.I.k))................................ (55,807) (19,955)
Minority interest (Note 19.I.l))................................. 8,325 (4,564)
---------------------- -----------------------
Shareholders' equity under US GAAP................................ Ps. 329,492 Ps. 877,937
====================== =======================
Description of changes in shareholders' equity under US GAAP:
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------
2002 2001
---------------------- -----------------------
Shareholders' equity under US GAAP as of beginning of year......... Ps. 877,937 Ps. 1,024,427
Amortization of deferred compensation expense...................... 11,551 15,679
Purchase of treasury stock......................................... -- (80,431)
Additional paid-in-capital......................................... -- (489)
Foreign currency translation adjustment............................ 100,026 (67,922)
Unrealized loss on available-for-sale securities................... (7,560) (34,298)
Unrealized loss on retained interest in transferred mortgage
receivables........................................................ (575) --
Unrealized loss on available-for-sale securities on equity
investees.......................................................... (939) 947
Net (loss) income under US GAAP.................................... (650,948) 20,024
---------------------- -----------------------
Shareholders' equity under US GAAP as of end of year............... Ps. 329,492 Ps. 877,937
====================== =======================
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES
Under Argentine GAAP, investments in companies in which it exercises
significant influence, but not control, are accounted for under the equity
method. Under the equity method, the investment is recorded at original cost and
periodically increased (decreased) by the investor's proportionate share of
earnings (losses) of the investee and decreased by all dividends received from
the investor by the investee. The Company applies its percentage ownership
interest to the financial statements of its equity method investments prepared
under Argentine GAAP. For purposes of this reconciliation, the Company has
assessed the impact of US GAAP adjustments on the Argentine GAAP financial
statements of its equity investees. As a consequence of this assessment, the
Company recognized a net (loss) gain of Ps. (119.2) million, Ps. 76.2 million
and Ps. (17.6) million for the years ended June 30, 2002, 2001 and 2000,
respectively. Following is a description of the significant differences between
Argentine GAAP and US GAAP as they relate to the Company's equity investees:
F-97
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES (CONTINUED)
(i) Foreign currency translation adjustments
Under Argentine GAAP, financial statements of foreign unconsolidated
equity investees have been translated to Argentine pesos on the basis of the
financial statements of such subsidiaries expressed in the local currency of the
country of origin. The method of translation involves the translation of
monetary assets and liabilities at the exchange rate prevailing at the end of
each period, and non-monetary assets and liabilities and equity accounts on the
basis of the inflation-adjusted amounts at the exchange rate prevailing at the
end of each period. Average exchange rates have been used for the translation of
the accounts which make up the results of the periods. The net gain on
translation is included within financial results, net, as gain/(loss) on
exposure to inflation.
Under US GAAP, financial statements of foreign unconsolidated
subsidiaries have been translated into Argentine pesos following the guidelines
established in SFAS No. 52, "Foreign Currency Translation". Under SFAS No. 52,
there are two methods of translation: the current rate method and the
monetary/non-monetary method.
- In the case of foreign subsidiaries whose local currency is the
functional currency, the current rate method of translation has been used. This
method involves the translation of assets and liabilities at the exchange rate
in effect at the end of each period. Average exchange rates have been applied
for the translation of the accounts that make up the results of the periods. In
this case, translation adjustments are recorded as a separate component of
shareholders' equity. The Company has applied the current rate method to
translate financial information of its Brazilian equity investee. As discussed
in Note 3.f., the Company sold its equity ownership interest in its Brazilian
subsidiary effective February 28, 2002.
- In the case of foreign subsidiaries operating in economies which the
Company has designated as highly inflationary, pursuant to SFAS No. 52 and
Emerging Issues Task Force ("EITF") D-55, "Determining a Highly Inflationary
Economy", the monetary/non-monetary method of translation has been used. This
method involves the translation of monetary assets and liabilities at the
exchange rate in effect at the end of each period, and the non-monetary assets
and liabilities and equity at historical exchange rates (i.e., the exchange
rates in effect when the transactions occur). Average exchange rates have been
applied for the translation of the accounts that make up the results of the
periods, except for those charges related to non-monetary assets and
liabilities, which have been translated using historical exchange rates.
Translation adjustments are included in the consolidated statement of income.
The Company has applied the monetary/non-monetary method to translate financial
information of its Venezuelan equity investee. As discussed in Note 3.f., the
Company sold its equity ownership interest in its Venezuelan subsidiary
effective December 18, 2000.
(ii) Accounting for mandatorily redeemable convertible securities
As discussed in Note 3.e., on December 27, 2000, the shareholders of ITNV
entered into an agreement with the Investors, under which the Investors
contributed US$ 4.0 million in cash in exchange for 1,751,453 shares of Series A
mandatorily redeemable convertible preferred stock and an option to purchase
2,627,179 additional shares of mandatorily redeemable convertible preferred
stock. On or after December 27, 2005, ITNV is required, at the written request
of holders of the then outstanding Series A preferred stock to redeem such
holders' outstanding shares of series A preferred stock for cash at the greater
of (i) 200% of the original issue price multiplied by the number of preferred
stock to be redeemed, and (ii) the fair market value of the common shares each
holder of Series A preferred stock would have been entitled to receive if such
holder had converted the number of Series A preferred stock to be redeemed into
common stock at the redemption date; plus in the case of (i) and (ii), any
accrued or declared but unpaid dividends.
F-98
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(A) IMPACT OF US GAAP ADJUSTMENTS ON EQUITY INVESTEES (CONTINUED)
(ii) Accounting for mandatorily redeemable convertible securities
(continued)
Under Argentine GAAP, the issuance of preferred stock by ITNV to the
Investors decreased the Company's percentage of ownership in ITNV from 62% to
49% and the value assigned to the ITNV's preferred stock issued under the
transaction was substantially more than the Company's carrying amount per share
of ITNV stock, thus triggering a change in the Company's interest in ITNV. The
change in the Company's interest resulted in the recognition of a deferred gain
of Ps. 3.3 million since ITNV is in the early stage of development and the
realizability of the gain is not assured. This gain is being amortized to income
as the investee incurs operating losses.
Under US GAAP, the issuance of preferred stock by ITNV to the Investors
did not change the Company's percentage of ownership in ITNV as the Series A
mandatorily redeemable convertible stock was recorded as temporary equity in
ITNV and is being accreted to its redemption value. Accretion was included in
minority interest as a charge against income. In relation with the options
granted, at June 30, 2002, exercise price exceeds the fair market value and,
accordingly, no compensation expense has been recognized.
(iii) Other US GAAP adjustments
Other significant differences that give rise to US GAAP adjustments on
equity investees are as follows: (i) the deferral of certain preoperating and
advertising expenses under Argentine GAAP which are expensed as incurred under
U.S. GAAP; (ii) the accounting for securitized credit card receivables in
accordance with SFAS No. 140; (iii) the accounting for derivatives and hedging
activities under SFAS No. 133; and (iv) the application of SFAS No 109 "Deferred
Income Taxes".
(B) ACCOUNTING FOR MARKETABLE SECURITIES
As of June 30, 2002, the Company has certain investments in equity
securities and mutual funds. Under Argentine GAAP, the Company is carrying these
investments at market value with unrealized gains and losses, if any, included
in the statement of operations.
Under US GAAP, the Company has classified these investments as
available-for-sale and is carrying these investments at market value with
material unrealized gains and losses, if any, included in stockholders' equity
in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). Specific identification was used to determine cost in computing realized
gain or loss. The Company's investments are considered available for sale as
these securities could potentially be sold in response to needs for liquidity,
changes in the availability of and the yield on alternative instruments or
changes in funding sources or terms. Management determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. SFAS No. 115 also
states that for individual securities classified as available-for-sale an
enterprise shall determine whether a decline in fair value below the amortized
cost basis is other than temporary. In such event, accumulated unrealized losses
included in other comprehensive income shall be reclassified into the statement
of operations. Accordingly, unrealized holding losses recognized in earnings for
the year ended June 30, 2002 amounted to Ps. 45,746.
During the years ended June 30, 2002, 2001 and 2000, proceeds from the
sale of available-for-sale securities were Ps. 4.6 million, Ps. 42.4 million and
Ps. 50.7 million, respectively. Gross realized (loss) gain were Ps. (15.0)
million, Ps. 3.1 million and Ps. 12.3 million for the years ended June 30, 2002,
2001 and 2000, respectively.
F-99
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(B) ACCOUNTING FOR MARKETABLE SECURITIES (CONTINUED)
The Company's investments consist of the following (in thousands):
Gross Unrealized
------------------------------------
Cost Fair Value Gain Loss
--------------- ---------------- ------------- ----------------
JUNE 30, 2000
Dolphin Fund 15,755 21,851 6,096 - -
BHSA 58,536 67,051 8,515 - -
--------------- ---------------- ------------- ----------------
74,291 88,902 14,611 - -
--------------- ---------------- ------------- ----------------
JUNE 30, 2001
Dolphin Fund 11,446 13,545 2,099 - -
BHSA 57,364 50,427 - - 6,937
Telecom Argentina 18,062 17,351 - - 711
Perez Companc 894 784 - - 110
Bocon PRO 1 13,797 12,817 - - 980
--------------- ---------------- ------------- ----------------
101,563 94,924 2,099 8,738
--------------- ---------------- ------------- ----------------
JUNE 30, 2002
Dolphin Fund 27,764 24,852 - - 2,912
BHSA 61,131 15,385 - - 45,746
--------------- ---------------- ------------- ----------------
88,895 40,237 - - 48,658
--------------- ---------------- ------------- ----------------
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
As discussed in Note 17, from time to time, the Company utilizes certain
financial instruments, primarily foreign currency forward-exchange contracts, as
a supplement to reduce its overall financing costs. In the past, the Company
also utilized foreign currency forward-exchange contracts to manage its exposure
associated with its investment in foreign operations.
Following is a description of the Company's derivative activity during
the years ended June 30, 2002, 2001 and 2000.
(i) Foreign currency forward-exchange contracts
During the years ended June 30, 2002 and 2001, the Company used foreign
currency forward-exchange contracts as a supplement to reduce its overall
financing costs. At June 30, 2001, the Company had three outstanding foreign
currency forward-exchange contracts with financials institutions to sell an
aggregate amount of US$ 16.8 million maturing August 2001, and one foreign
currency forward-exchange contract to sell US$ 10.0 million maturing September
2001. Under Argentine GAAP, premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contract. The Company
recognized net gains of Ps. 5.3 million and Ps. 0.4 million for the years ended
June 30, 2002 and 2001, respectively, related to these contracts. As of June 30,
2002, the Company had no outstanding foreign currency forward-exchange
contracts.
F-100
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument 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's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 was subsequently amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133, and is now effective for fiscal years beginning after
June 15, 2000, but may be implemented as of the beginning of any fiscal quarter
after issuance. Retroactive application is not permitted. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997. Changes in accounting methods will be required
for derivative instruments utilized by the Company to hedge foreign currency
exchange rate and interest rate risks. Such derivatives include foreign currency
forward contracts and interest rate swaps. In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of implementation issues
arising from SFAS No. 133.
Under US GAAP, the Company adopted SFAS No. 133 and its corresponding
amendments under SFAS No. 138, on July 1, 2000.
Under US GAAP, these forward contracts did not qualify for hedge
accounting treatment under SFAS No. 133. However, these derivatives, although
not designated in a hedging relationship, are required to be recorded on the
balance sheet at fair value, with related gain and losses recognized in
earnings. As the Company did not have any open forward exchange contracts at
June 30, 2000, no cumulative-effect type adjustment was recorded in accordance
with the transition provisions of SFAS No. 133.
(ii) Forward-exchange contract to hedge a portion of its net investment
in a foreign operation
On February 7, 2000, the Company entered into a six-month foreign
currency forward-exchange contract to sell Brazilian Reais ("BR") 28,050,000 at
1US$=1.87BR, when the spot rate was 1US$=1.77BR. The Company considered this
forward contract as a economic hedge of a portion of its net investment in its
Brazilian subsidiary. At June 30, 2002 and 2001, the Company had no outstanding
contracts designated as hedges of a net investment in a foreign operation.
Under Argentine GAAP, premiums on foreign currency forward-exchange
contracts are amortized over the life of the respective contract. Gains and
losses under these contract are recognized in earnings. For the years ended June
30, 2001 and 2000, the Company recognized losses of approximately Ps. 0.6
million and Ps. 1.4 million, respectively.
Under US GAAP, until June 30, 2000 the Company recorded premiums and
gains and losses on forwards exchange contracts in other comprehensive income
(OCI) in the same manner as the translation adjustment was recorded. Effective
July 1, 2000, the Company adopted SFAS No. 133, and its corresponding amendments
under SFAS No. 138. SFAS No. 133 requires that forward contracts qualifying for
hedge accounting of a net investment in a foreign operation be recorded on the
balance sheet as an asset at fair value with the corresponding gain or loss
recorded in OCI. Accordingly, the adoption of SFAS No. 133 has not had any
impact on the Company's financial position and results of operations.
F-101
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
Prospectively, under US GAAP, the effective portion of the change in the
fair value of the forward contract is recorded in OCI in the same manner as the
translation adjustment is recorded. The entire cumulative change in the fair
value of the instrument that hedges a net investment in a foreign operation can
be recorded in OCI as long as it does not exceed the translation adjustments for
the net investment on an after-tax basis. Any excess of the hedging derivative's
changes in fair value, however, must be recorded in current earnings. As
discussed in Note 3.f., the Company sold its equity ownership interest in its
Brazilian subsidiary during the year ended June 30, 2002. Therefore, the
accumulated after-tax loss recorded within other comprehensive income at June
30, 2001 was reclassified into earnings during the year ended June 30, 2002.
(iii) Interest rate swap
As of June 30, 2001, the Company held a pay-floating interest rate swap
to hedge the change in fair value of a Ps. 29.3 million original debt due August
2001 related to fluctuations in interest rates. Under this agreement, the
Company paid interest at a variable rate in exchange for fixed rate payments,
transforming the debt to a floating rate obligation. The notional amount of this
swap agreement was Ps. 29.3 million. The notional amount of this derivative
instrument did not represent an asset or liability of the Company, but, rather,
was the basis for the settlements under the contract terms. This contract
matured in September 2001. At June 30, 2001, interest rate payable was at a
variable rate of 22.3% and interest rate receivable was fixed at 10.15%.
Under Argentine GAAP, any differential to be paid or received is accrued
and is recognized as an adjustment to interest expense in the statement of
operations. The related accrued receivable or payable is included as an
adjustment to interest payable. The fair value of the swap agreement is not
recognized in the consolidated financial statements.
Under US GAAP, the interest rate swap was designated as a hedge of the
change in fair value of the fixed rate debt related to fluctuations in interest
rates. Under SFAS No. 133, the swap is required to be recorded on the balance
sheet at fair value. The swap was classified as a fair value hedge, and
accordingly, changes in the fair value of the swap and of the hedged fixed rate
debt were recognized in earnings. Differences, if any, between the changes in
the fair value of the swap and the hedged fixed rate debt represent hedge
ineffectiveness and are recognized in realized gain or loss. Fair value hedge
ineffectiveness resulted in a loss of Ps. 23.4 for the year ended June 30, 2001.
(iv) Additional disclosure requirements
The Company's policy requires that contracts used as hedges must be
effective at reducing the risk associated with the exposure being hedged and
must be designated as a hedge at the inception of the contract. Hedging
effectiveness is assessed periodically. Any contract that is either not
designated as a hedge, or is so designated but is ineffective, is marked to
market and recognized in earnings immediately. The Company will discontinue
hedge accounting prospectively if it is determined that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a
hedged item; when the derivative expires or is sold, terminated, or exercised;
when the derivative is dedesignated as a hedge instrument, because it is
probable that the forecasted transaction will not occur; or management
determines that designation of the derivative as a hedge instrument is no longer
appropriate.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
F-102
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in OCI will be recognized immediately in earnings. When the hedged
forecasted transaction is no longer probable, but is reasonably possible, the
accumulated gain or loss remains in OCI and will be recognized when the
transaction affects earnings; however, prospective hedge accounting for this
transaction is terminated. In all other situations in which hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
(D) ACCOUNTING FOR OPTIONS TO ACQUIRE MARKETABLE SECURITIES
As discussed in Note 5.b. (i), in February 1999 the Company acquired
3,697,500 options to purchase certain marketable securities for Ps. 3.6 million
in cash, of which 1,000,000 were sold in June 2001 for a total consideration of
Ps. 3.1 million, resulting in a gain of Ps. 2.2 million. Under Argentine GAAP,
these options were recorded at cost.
Under US GAAP, the Emerging Issues Task Force ("EITF") reached a consensus
in EITF No. 96-11 "Accounting for Forward Contracts and Purchased Options to
Acquire Securities covered by FASB Statement No. 115", that forward contracts
and purchased options with no intrinsic value at acquisition that are entered
into to purchase securities, requiring physical settlement of the securities and
that will be accounted for under Statement No. 115, should, at inception, be
designated as held-to-maturity, available-for-sale, or trading and accounted for
in a manner consistent with the accounting prescribed by Statement No. 115 for
that category of securities. Accordingly, options were designated as
available-for-sale securities and recorded at fair value with unrealized gains
and losses excluded from income and reported as a separate component of
shareholders' equity. In addition, the time value component of the cost of such
options was amortized over the life of the respective options.
As discussed in Note 19.(c)(i), the Company adopted SFAS No. 133 and its
corresponding amendments under SFAS No. 138, on July 1, 2000. SFAS No. 133
partially nullified EITF 96-11 and stated that if the asset to which the
underlying to the derivative contract is readily convertible to cash, the
related options addressed in EITF 96-11 are derivative instruments within the
scope of SFAS No. 133. As such, purchased options that are derivatives subject
to SFAS No. 133 should be recognized as assets and measured at fair value. SFAS
No. 133 addresses the accounting for changes in the fair value of a derivative.
The accounting for changes in the fair value (that is gains or losses) of a
derivative depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. The Company has
not designated this derivative-type contract as a hedge. As such, gains and
losses should be recognized currently in earnings.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded a net of tax cumulative-effect type adjustment of Ps. 20.5 million
(gain) in earnings during the year ended June 30, 2001 to reclassify the amount
accumulated in OCI at June 30, 2000. As from July 1, 2000, changes in fair value
are being recognized in earnings.
F-103
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN
As discussed in Note 6.e., on October 30, 1997, the shareholders
authorized the Company to enter into a Noncontributory Management Stock
Ownership Plan ("NMSOP") with eight executive officers of the Company (the
"Beneficiaries"), pursuant to which the Beneficiaries were granted options to
purchase up to 24 million shares of common stock (the "Participation Shares"),
at a purchase price equal to Ps. 1.0 per share, subject to the implementation of
an Equity Participation Agreement ("EPA"). Under Argentine law, the Company
established a special purpose trust in this connection (the "Trust"). On April
7, 1998, the Company's shareholders, at an extraordinary shareholders' meeting,
approved a capital increase of 24 million shares to permit the Beneficiaries to
purchase all of the Participation Shares to which they were entitled under the
EPA. As of June 30, 1998, the EPA had not yet been implemented. On October 1,
1998, the Company issued 21,090,024 shares to be subscribed by the Beneficiaries
and, on August 31, 1999, the Company and the Beneficiaries entered into a
Subscription Agreement pursuant to which the Beneficiaries purchased from the
Company the abovementioned amount of shares at Ps. 1.0 per share.
Under the Subscription Agreement, the Participation Shares were placed
into the Trust. The Trust has an original term of six years. According to the
terms of the NMSOP and the Trust, Beneficiaries are not entitled to receive any
distributions (either in the form of shares, cash or otherwise) from the Trust
during its term, although, Beneficiaries are allowed to cause the Trust to sell
their designated shares of common stock held by the Trust in certain cases, such
as, to prepay the loans obtained to finance the purchase of the Participation
Shares. The Trust will release the shares to the Beneficiaries on the sixth
anniversary of the inception of the Trust on a pro rata basis.
Under Argentine GAAP, the Company accounted for the issuance of the
Participation Shares at the price of Ps. 1.0 per share. Consequently, no
compensation expense was recognized in the statement of operations.
Under US GAAP, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This Statement gave the Company the option of either
(1) continuing to account for stock-based employee compensation plans in
accordance with the guidelines established by Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations while providing the disclosures required under SFAS No. 123, or
(2) adopting SFAS No. 123 accounting for all employee and non-employee stock
compensation arrangements. The Company opted to continue to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25.
In connection with the Company's issuance of restricted stock to
executive officers during the year ended June 30, 1999, the Company recorded
unearned stock compensation of Ps.86,638 for the difference between the issuance
price of the restricted stock at date of issuance and the fair value of the
shares of common stock subject to the awards. This amount was included as a
reduction of stockholder's equity and is being amortized on a straight-line
basis over 7 years. The Company recognized stock compensation expense of Ps.
12,377 for each of the two years in the period ended June 30, 2000.
On May 31, 2001, the Company entered into a Confidential Separation
Agreement and General Release (the "Agreement") with its Chief Financial Officer
(the "CFO") pursuant to which the Company and the CFO set forth therein their
mutual agreement with respect to all matters relating to the CFO's resignation
and cessation of employment with the Company and the CFO's release of claims
upon the terms set forth therein. The CFO formed part of one of the eight
members of management who had been granted restricted shares pursuant to the
NMSOP.
F-104
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN (CONTINUED)
Pursuant to the Agreement, the Company accelerated the vesting of all of
the restricted shares so as to allow the CFO to sell the shares as part of its
termination settlement. On May 24, 2001, the CFO entered into a Purchase
Agreement (the `Purchase Agreement") with one of the principal shareholders of
the Company and also a Beneficiary under the EPA, pursuant to which the CFO sold
its respective shares in the Trust at a fixed price per share below the fair
market value per share at the date of the Purchase Agreement. Therefore, no
additional compensation cost was recognized.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" - an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB No. 25 for only certain issues. Among other
issues, FIN 44 clarifies the definition of employee for purposes of applying APB
No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock options or awards, and the accounting for
an exchange of stock compensation awards in a business combination. The Company
adopted FIN 44 beginning July 1, 2000. FIN 44 stipulates that a modification to
accelerate the vesting of a fixed award effectively results in the renewal of
that award if, after the modification, an employee is able to exercise (vest in)
an award that, under the original terms, would have expired unexercisable
(unvested). Compensation cost is measured on the modification date. That cost is
calculated as the excess of the award's intrinsic value on the modification date
over the award's intrinsic value on the original measurement date, if any. That
cost would be recognized as compensation cost if, absent the acceleration, the
award would have been forfeited unexercisable (unvested) pursuant to the
original terms. On September 11, 2000, the EITF issued EITF 00-23 "Issues
Related to the Accounting for Stock Compensation" which further clarified this
matter. The Task Force reached a consensus in EITF 00-23 that if the former
employee is providing no substantive services to the grantor subsequent to the
termination, the award should continue to be accounted for under Opinion 25, and
the modification should be accounted for under FIN 44. Since the award's
intrinsic value on the modification date (Ps. 0.92 per share) is less than the
award's intrinsic value on the original measurement date (Ps. 4.11 per share),
no additional compensation cost is to be recognized on the modification.
However, the unearned compensation expense should be recognized to expense on
the date the accelerated vesting occurs. As such, the Company recorded an
additional loss of Ps.3,302 for the year ended June 30, 2001. Total compensation
expense was Ps. 11,551 and Ps. 15,679 for the years ended June 30, 2002 and
2001, respectively.
At June 30, 2002, the remaining unearned compensation of Ps. 34,654
million will be amortized ratably through fiscal year 2005. The amount of
unearned compensation expense to be recorded in future periods could decrease if
restricted stock awards for which accrued but unvested compensation has been
recorded, are forfeited.
Had compensation cost for the awards under the NMSOP been determined
based on the grant date fair values consistent with the method required under
SFAS No 123, the Company's net (loss) income under US GAAP would have been
decreased to the pro forma amounts indicated below:
YEAR ENDED JUNE 30, 2002 YEAR ENDED JUNE 30, 2001 YEAR ENDED JUNE 30, 2000
------------------------------------------------------------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
---------------------------------------------------------------------------------------
Net (loss) income (650,948) (649,948) 20,024 21,382 (16,898) (15,826)
Net (loss) income before
accounting changes (650,948) (649,948) (462) 896 (16,898) (15,826)
Basic and diluted net income
(loss) per share (3.138) (3.134) 0.098 0.105 (0.083) (0.077)
Basic and diluted net (loss)
income per share before
accounting changes (3.138) (3.134) (0.002) (0.004) (0.083) (0.077)
F-105
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(E) NONCONTRIBUTORY MANAGEMENT STOCK OWNERSHIP PLAN (CONTINUED)
The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected lives in days 129 days
Risk free interest rates 9.00%
Dividend yield 0.00%
Volatility 36.72%
Because option grants might be made in subsequent years, the above pro
forma disclosures are not representative of the pro forma effects of option
grants on reported results for future years.
(F) DEPRECIATION OF FIXED ASSETS
Under Argentine GAAP, the Company depreciates buildings, including office
and apartment complexes, over 50 years. For US GAAP purposes, determination of
the useful lives of assets is judgmental and considers such factors as the
condition and age of the buildings, the type of construction and the effects of
usage by its owners or tenants. Accordingly, for US GAAP purposes, buildings
would have been depreciated using an estimated useful life of 40 years.
As discussed in Note 4.e., during the year ended June 30, 2002 the
Company recognized an impairment charge relating to certain properties. Since
the net book value of such properties under US GAAP was lower than the net book
value under Argentine GAAP, the US GAAP adjustment for the year ended June 30,
2002 also includes the partial reversal of such impairment.
(G) PREOPERATING AND ORGANIZATION EXPENSES
Under Argentine GAAP, the Company capitalized certain expenses incurred
relating to pre-opening activities and/or organization of subsidiaries and other
expenses incurred in connection with project evaluations. These expenses are
amortized on a straight-line basis over a 3/6-year period commencing upon the
launching of the project. Under US GAAP, these expenses are charged to expense
as incurred.
F-106
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) MORTGAGE PAYABLE WITH NO STATED INTEREST
Under Argentine GAAP, the Company has not made any fair value adjustments
for certain non-interest bearing mortgages. Under US GAAP however, and in
accordance with Accounting Principles Board ("APB") Opinion No. 21, "Interest on
Receivables and Payables", non-interest bearing mortgages held by the Company
have been recorded at the estimated market value of the note.
In 1991, the Company obtained non-interest bearing mortgage with a face
value of US$ 3.3 million to acquire a property (Suipacha 652/64). The Company
used an interest rate of 12%, which approximated their weighted average
borrowing rate, in determining the present value of this debt (calculated at Ps.
1,806 as of the date of issuance). This mortgage was fully repaid in November
1996. This adjustment gives rise to differences in depreciation expense.
(I) SECURITIZATION ACCOUNTING
As discussed in Note 18, on November 2, 2001 the Company entered into a
securitization program with Banco Sudameris ("BS"), through which the Company
sold a portion of its mortgage receivable balances to a Trust that issued
certificates to public and private investors.
Under Argentine GAAP, mortgage receivables sold under this program were
excluded from accounts receivable in the consolidated financial statements. The
Company's retained interest in Class A, B and C debt securities are valued at
cost plus accrued interest while the retained interest in Class D securities is
accounted for under the equity method.
Under US GAAP, the Company applies Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments Of Liabilities" ("SFAS No. 140"). SFAS No. 140 requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered. The proceeds of securitized financial assets are allocated to
the assets sold, the servicing asset or liability and retained interest, based
on their relative estimated fair values at the transfer date in determining the
gain on the securitization transaction. SFAS No. 140 also requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service financial assets that have been securitized and amortize
it over the period of estimated net servicing income or loss. The Company has
not recognized any servicing asset or liability since the estimated fair value
of the servicing right was zero. In determining the estimated fair value, the
Company considered the fees received as compensation just adequate to compensate
the Company for its servicing responsibilities (i.e. the fees received as
compensation for the services rendered are similar to those that would be paid
to a substitute servicer, should one be required, according to estimated market
values). The retained interests in mortgage receivables are treated as a debt
security classified as available-for-sale in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities", and are carried at fair value. At
the time of securitization, the retained interest is initially recorded at the
basis allocated in accordance with SFAS No. 140. This original cost basis is
periodically adjusted to fair value, which is based on the discounted
anticipated future cash flows on a "cash out" basis. The cash out method
projects cash collections to be received only after all amounts owed to
investors have been paid. Adjustments to fair value (net of related deferred
income taxes) are recorded as a component of other comprehensive income. A loss
of Ps. 6.5 million was recognized from the sale of mortgages receivables during
the year ended June 30, 2002.
F-107
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(I) SECURITIZATION ACCOUNTING (CONTINUED)
The following summarizes the Company's securitization activity:
YEAR ENDED
JUNE 30, 2002
---------------------
Proceeds from securitizations Ps. 16,696
Servicing fees received (i) 178
(i) As from April 1, 2002, the Company is no longer the servicer on
the accounts.
The following summarizes the changes in the balance of the Company's
retained interest for the year ended June 30, 2002:
ESTIMATED
COST UNREALIZED LOSS FAIR VALUE
-------------------- --------------------- --------------------
Balance at June 30, 2001 Ps. - Ps. - Ps. -
Retained interest in portfolios 4,158 - 4,158
sold
Unrealized loss - (930) (930)
-------------------- --------------------- --------------------
Balance at June 30, 2002 Ps. 4,158 Ps. (930) Ps. 3,228
==================== ===================== ====================
As of June 30, 2002, the gross net unrealized loss has been offset by
a deferred tax benefit of Ps. 325.
The key economic assumptions used in measuring the fair value of retained
interests at the time of and subsequent to a securitization are the estimated
cash flows and the discount rate. The estimated cash flows have been discounted
at 25%. The following represents the sensitivity of the current fair value of
retained interest in securitizations at June 30, 2002 to changes to key
assumptions:
IMPACT ON FAIR VALUE OF
-----------------------------------------------
5% ADVERSE CHANGE 10% ADVERSE CHANGE
----------------------- -----------------------
Discount rate 25% Ps. (546) Ps. (993)
The above sensitivities are hypothetical and should be used with caution.
As the amounts indicate, changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
The Company's managed mortgage receivables consist of retained interest
in mortgage receivable securitization and investor's share of securitizations
sold to unrelated parties without recourse. The Company records its retained
interest in mortgage receivable securitizations on the consolidated balance
sheet.
F-108
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) DIFFERENCES IN BASIS RELATING TO PURCHASE ACCOUNTING
Under Argentine GAAP and US GAAP, the Company applied the purchase method
of accounting to the acquisition of businesses mentioned in Note 3.e.
Accordingly, the fair market value of assets and liabilities acquired was
estimated and the excess of the purchase price over the fair value, if any, was
considered goodwill. The US GAAP adjustment for "Differences in basis relating
to purchase accounting" reflects the application of US GAAP adjustments such as
the accounting for deferred income taxes when estimating the fair value of such
assets and liabilities. This adjustment gives rise to differences in
depreciation expense.
(K) DEFERRED INCOME TAX
As discussed in Note 4.i., the Company and its subsidiaries calculate
their income taxes on a separate tax basis. The statutory income tax rate was
35% for all the periods presented. Under Argentine GAAP, income taxes are
recognized on the basis of amounts currently due in accordance with Argentine
tax laws and regulations. Under US GAAP, the Company records income taxes using
the method required by Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes". Accordingly, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. SFAS 109 requires companies to
record a valuation allowance for that component of net deferred tax assets which
does not meet the more likely than not criterion for realization.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning in making these assessments. In accordance with
SFAS 109, the Company is required to continuously evaluate the recoverability of
deferred tax assets. This evaluation is made based on internal projections which
are routinely updated to reflect more recent operating trends. Based on current
financial projections, the Company is uncertain that it will recover its
deferred tax assets through future taxable income. Accordingly, the Company has
established a valuation allowance against its deferred tax assets.
F-109
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(K) DEFERRED INCOME TAX (CONTINUED)
2002 2001
--------------------------------------- ----------------------------------------
SFAS 109 SFAS 109
APPLIED TO SFAS 109 APPLIED TO SFAS 109
ARGENTINE APPLIED TO ARGENTINE APPLIED TO
GAAP US GAAP GAAP US GAAP
BALANCES ADJUSTMENTs SFAS 109 BALANCES ADJUSTMENTs SFAS 109
------------- ------------ ------------ ------------ ------------ ------------
Deferred tax assets:
Tax loss carryforwards..... Ps. 147,349 Ps. - - Ps. 147,349 Ps. 31,516 Ps. - - Ps. 31,516
Short-term and long-term
debt....................... 16,702 - - 16,702 - - - - - -
Provisions................. 1,277 - - 1,277 1,733 - - 1,733
Other...................... 5,841 - - 5,841 9,334 - - 9,334
------------- ------------ ------------ ------------ ------------ ------------
Total gross deferred tax
assets..................... 171,169 - - 171,169 42,583 - - 42,583
Deferred tax liabilities:
Investments................ (17,785) 11,229 (6,556) (2,203) 7,314 5,111
Mortgage receivables....... (379) - - (379) (6,960) - - (6,960)
Inventories................ (2,430) - - (2,430) (426) - - (426)
Fixed assets............... (69,241) 1,635 (67,606) (25,773) 4,544 (21,229)
Intangible assets.......... (1,057) 847 (210) (1,553) 1,432 (121)
------------- ------------ ------------ ------------ ------------ ------------
Total gross deferred tax
liabilities................ (90,892) 13,711 (77,181) (36,915) 13,290 (23,625)
------------- ------------ ------------ ------------ ------------ ------------
Valuation allowance........ (149,795) - - (149,795) (38,913) - - (38,913)
------------- ------------ ------------ ------------ ------------ ------------
Net deferred income tax
liability.................. Ps. (69,518) Ps. 13,711 Ps.(55,807) Ps (33,245) Ps. 13,290 Ps.(19,955)
============= ============ ============ ============ ============ ============
As of June 30, 2002 and 2001, Ps. 1,545 and Ps. 1,946 were classified as
current assets and Ps. 57,352 and Ps. 21,901 were classified as non-current
liabilities, respectively.
A reconciliation of income taxes computed at the statutory rate to the
income tax amount recorded for the years ended June 30, 2002, 2001 and 2000 is
as follows:
2002 2001 2000
------------------- ------------------ -------------------
Income tax at statutory tax rate on pretax
income in accordance with US GAAP.............. Ps. (223,338) Ps. 11,894 Ps. 3,337
Non taxable income/(loss)...................... 43,035 (35,875) 2,539
Amortization expense........................... 6,856 348 319
Valuation allowance............................ 110,882 27,911 13,779
Inflation adjustment........................... 88,650 - - - -
Non deductible expenses........................ 1,440 3,322 1,418
------------------- ------------------ -------------------
Income tax expense............................. Ps. 27,525 Ps. 7,600 Ps. 21,392
=================== ================== ===================
(L) MINORITY INTEREST
This adjustment represents the effect on minority interest of the
foregoing reconciling items.
F-110
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
II. Additional disclosure requirements
(A) BALANCE SHEET CLASSIFICATION DIFFERENCES
Under Argentine GAAP, assets and liabilities are classified as current or
non-current depending on their respective settlement dates. Under US GAAP,
balance sheets of real estate entities typically are unclassified.
As discussed in Note 19.II. (p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. For US GAAP purposes, the Company poses controlling financial
interests in these companies. Accordingly, consolidation is appropriate under US
GAAP.
As these differences have no effect on net (loss) income or on
shareholders' equity, no reconciling items are presented for US GAAP
purposes.
(B) STATEMENT OF OPERATIONS CLASSIFICATION DIFFERENCES
OPERATING INCOME
As discussed in Note 19.II. (o), under Argentine GAAP the Company uses
the "proportionate-consolidation method" of accounting for its investments in
which the Company exercises control and other jointly controlled investments.
Under US GAAP, the equity in income (loss) of jointly-controlled companies would
have been reported as a separate line item in the statement of operations, and
the ownership percentages the Company does not own in the majority-owned
companies would have been reflected as minority interest.
As discussed in Note 19.II. (p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. For US GAAP purposes, the Company possesses controlling financial
interests in these companies. Accordingly, consolidation is appropriate under US
GAAP.
In addition, (i) certain financial results and other income and expense
items included in the Argentine GAAP financial statements of the Company, would
be included in the determination of operating income under US GAAP, and (ii)
certain gains or losses on the sale of real estate properties and equity
investees were included as operating income under Argentine GAAP while they
should be recognized as separate line items and designated as non-operating
income under US GAAP.
Accordingly, operating (loss) income under US GAAP would have been
Ps. (31.5) million, Ps. 17.6 million and Ps. 46.2 million for the years ended
June 30, 2002, 2001 and 2000, respectively.
EXTRAORDINARY ITEMS
As discussed in Note 19.II.j), the Company adopted SFAS No. 145 on April
1, 2002. As such, under US GAAP, gains and losses on extinguishment of debt
recorded in prior periods are no longer reported as extraordinary items.
As discussed in Note 16, under Argentine GAAP, the Company recognized an
extraordinary loss of Ps. 5,653 during the year ended June 30, 2001. Under US
GAAP, as required by APB 30, this charge does not qualify as extraordinary item
and should be reported as operating loss.
F-111
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(C) STATEMENT OF CHANGES IN SHAREHOLDERS'S EQUITY CLASSIFICATION
DIFFERENCES
As discussed in Note 6.b., from time to time the Company repurchases
shares of common stock outstanding when it believes that its stock price is
undervalued in the marketplace. During fiscal years 2001 and 2000, the Company
(i) repurchased 19,079,995 and 6,236,762 outstanding shares of common stock for
a total consideration of Ps. 80.4 million and Ps.29.9 million, respectively, and
(ii) distributed 20,729,472 and 2,432,932 shares of common stock on a pro rata
basis to its shareholders. Under Argentine GAAP, the Company recorded these
acquisitions as a reduction in retained earnings. Under US GAAP, these
acquisitions were accounted for under the cost method, resulting in a reduction
of capital stock.
(D) SEGMENT INFORMATION
Under Argentine GAAP, when an entity has different activities, it is
recommended practice (but not compulsory) to disclose the revenues and expenses
for each activity in the financial statements or as supplementary information.
Furthermore, the Company believes that the presentation of segment information
facilitates a clearer understanding of the Company's performance by readers.
Argentine GAAP does not prescribe any guidance in presenting segment
information. Accordingly, the Company has chosen to follow the guidance set
forth under US GAAP in SFAS No. 131 "Disclosures About Segments of an Enterprise
and Related Information" in determining the number and nature of reportable
operating segments presented in the primary financial statements. SFAS No. 131,
which was issued by the FASB in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
reports issued to shareholders. Operating segments are components of a company
about which separate financial information is available that is regularly
evaluated by the chief operating decision marker(s) in deciding how to allocate
resources and assess performance. The Statement also establishes standards for
related disclosures about a company's products and services, geographical areas
and major customers. As such, no additional disclosure requirements are
necessary. See Note 7 for details.
(E) MATURITIES OF LONG-TERM DEBT
Aggregate annual maturities during the next five years, as of June 30,
2002, are as follows:
2004 Ps. - -
2005 - -
2006 - -
2007 - -
2008 142
--------------------------
Ps. 142
==========================
(F) OPERATING LEASES
As discussed in Note 3.b., the consolidated statements of income were
prepared on a proportionate consolidation basis. As from July 1, 1996, the
Company uses the "proportionate-consolidation method" of accounting for the
investments in which the Company exercises control and other jointly controlled
investments. This method has not been used for balance sheet and cash flows
purposes. Accordingly, this note discloses operating leases information of the
Company and its controlled and jointly controlled subsidiaries.
F-112
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(F) OPERATING LEASES (CONTINUED)
- Operating lease revenue information:
o Leases and services from office and other buildings
The Company enters into cancelable commercial leases with its tenants for
terms ranging from three to five years, with most leases having terms of no more
than 5 years. Tenants are charged a base rent on a monthly basis. No contingent
rentals were recorded for the years ended June 30, 2002, 2001 and 2000.
o Leases and services from shopping center operations
The Company enters into cancelable commercial leases with its tenants for
terms ranging from three to ten years, with most leases having terms of no more
than five years. Tenants are generally charged a rent which consists of the
higher of (i) the base rent and (ii) the percentage rent (which generally ranges
between 4% and 8% of the tenants sales). Furthermore, pursuant to the rent
escalation clause in most leases, a tenant's base rent generally increases
between 4% and 7% each year during the term of the lease. Included in lease
revenues for the years ended June 30, 2002, 2001 and 2000 were contingent
rentals of Ps. 2.6 million, Ps. 3.6 million and Ps. 4.1 million, respectively.
- Operating lease expense information:
The Company leases office space under cancelable operating leases that
expire on various dates through January 2004. Rent expense is recognized ratably
over the lease term. Rent expense for the years ended June 30, 2002, 2001 and
2000 amounted to Ps.0.5 million, Ps.1.0 million and Ps.0.2 million,
respectively.
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS
The following disclosures of transactions with related parties are required
under US GAAP.
- Executive Employment Agreement: On October 30, 1997, the Company
entered into Master Executive Employment Agreements (the "Employment
Agreements") with Eduardo S. Elsztain, M. Marcelo Mindlin, Saul Zang and Oscar
P. Bergotto (collectively herein referred to as the "Employees"), pursuant to
which each such person will serve in his current capacity as director or
executive officer. The term of the Employment Agreements is seven years; however
either the Company or the relevant executive may terminate the Employment
Agreements prior to the expiration of their respective terms. If the Company
terminates the Employment Agreements without cause it will be liable to the
relevant executive for two years of compensation. Under the Employment
Agreements, the Employees will each be entitled to receive from the Company
annual compensation in the aggregate of approximately Ps.750,000, subject to an
annual 4% increase. The Employment Agreements also restrict the Employees from
participating in real estate activities in Argentina that are in the same line
of business as IRSA. The Employment Agreements were executed in December 1997
and approved by the Company's shareholders at an extraordinary shareholders'
meeting on April 7, 1998.
- APSA loan: On July 20, 2001, Company's board of directors approved to
grant APSA several loans to finance transactions related to its swap agreement.
On February 8, 2002 the Company and Parque Arauco signed subordination
agreements subordinating the repayment of our respective loans to the payment of
APSA's senior notes. The interest rate on such loans till February 1, 2002 was
the lesser of (i) variable cost of money for the Company in operations of up to
30 days and (ii) the average of the last five BADLAR rates for U.S. dollar
transactions, plus 200 annual nominal basis points for operations in foreign and
local currency according to market conditions. The interest rate on such loans
from February 1, 2002 till August 20, 2002 was 10.23% plus an inflation
adjustment. At August 20, 2002, the outstanding principal of these loans was Ps.
43.6 million.
F-113
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS (CONTINUED)
In May and July, 2002 the Company advanced APSA a US$ 10.1 million loan
that was applied on August 20, 2002 to our subscription for US$27.2 million of
APSA's convertible notes. From May, 2002 to August 20, 2002 the interest rate on
such loans was 10%.
- Subscription of convertible notes issued by APSA: In August 2002, the
Company subscribed for US$ 27.2 million convertible notes issued by APSA. The
payment was made by cancelling a loan APSA has borrowed from the Company for US$
22.3 million and of US$4.9 million in cash. At June 30, 2002, the Company owned
49.7% of APSA's common shares. Immediately following APSA's offering (assuming
the Company exercise its conversion rights of all of its convertible notes and
no exercise of such rights by any of APSA's other bondholders), the Company
would own 77.1% of APSA's common shares. In the case all shareholders exercise
their conversion rights and the Company exercise them as well, the Company would
own 53.01% of APSA's common stock.
- Purchase of the Company's shares by Cresud: During the years ended
June 30, 2002 and 2001, Cresud invested in shares of the Company for a total
amount of Ps. 111.8 million, resulting in a 19.85 % ownership at June 30, 2002.
Eduardo S. Elsztain, M. Marcelo Mindlin and Saul Zang, are Chairman, First
Vice-Chairman and Second Vice-Chairman, respectively, of the Board of Directors
as well as shareholders of the Company. They are also Chairman, First
Vice-Chairman and Second Vice-Chairman, respectively, of the Board of Directors
of Cresud. Mr. Eduardo S. Elsztain and Saul Zang are also shareholder of Cresud.
- Donations: During the years ended June 30, 2002, 2001, and 2000, the
Company made donations to two not-for-profit organizations, namely Fundacion
IRSA and Museo de los Ninos, for a total amount of Ps. 0.08 million, Ps. 1.9
million and Ps. 1.2 million, respectively. Eduardo S. Elsztain is the President
of these organizations.
- Lease agreements: IRSA leases a portion of its headquarters office
space from DFM for a monthly rent of Ps. 11.9 under two lease contracts expiring
on June 30, 2007. DFM leases such offices both from Elsztain e Hijos S.C.A., a
company controlled by relatives of Eduardo S. Elsztain, Chairman of the Company,
and also from Hamonet S.A., a company controlled by Fernando A. Elsztain, the
Company's Chief Commercial Officer, and certain of his relatives. Rental
expense incurred during the years ended June 30, 2002, 2001 and 2000 amounted to
Ps. 244, Ps. 280 and Ps. 280, respectively.
The Company leased office space to Cresud until December 2001. Eduardo
Elsztain, Marcelo Mindlin and Saul Zang, Chairman, First Vice-Chairman and
Second Vice-Chairman, respectively, of the Board of Directors as well as
shareholders of the Company are directors of Cresud. Mr. Eduardo Elsztain is
also shareholder of Cresud. Rent income is recognized ratably over the lease
term. Rental income amounted to Ps. 147 and Ps. 329 for the year ended June 30,
2002 and for each of the two years in the period ended June 30, 2001,
respectively.
The Company has entered into lease agreements for offices located in the
Costero, a building located in Puerto Madero with Altocity.Com, Alternativa
Gratis S.A y Dolphin Interventures S.A. The first agreement expires in May 2003
and the second in May 2004. Both of them may be extended by the lessees for up
to seven additional consecutive twelve - month periods. The leases are for
monthly rents of Ps. 9.5 and Ps. 10.0, respectively.
The Company leases to Tarshop the seventh floor of the Company's property
located in Suipacha 664. Monthly rent income amounts to Ps. 3.7 and the lease
agreement expires on August 10, 2004.
F-114
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(G) DISCLOSURE OF RELATED PARTY TRANSACTIONS (CONTINUED)
- Mutual investment fund: Since 1996, the Company has investments in
Dolphin Fund Plc, an open - ended investment fund which is related to the
Company's directors. These investments are carried at market value as of
year-end. Unrealized gains and losses related to investment funds are included
in financial results, net, in the consolidated statements of operations.
The amounts relating to the Company's net gain on holding Dolphin Fund
investments for the years ended June 30, 2002, 2001 and 2000 are Ps. 25.1
million, Ps. 2.9 million and Ps. 1.6 million, respectively.
- Investment in Banco Hipotecario S.A.: As of June 30, 2002 the Company
owns 5.73 % of Banco Hupotecario S.A. Additionally, as of the same date the
Company owns 2,697,500 options to purchase Banco Hipotecario S.A.'s American
Depositary Shares (ADS). Each option represents the right to purchase 100 ADS's
at an exercise price of Ps. 10.4 per ADS. These options are exercisable through
February 2, 2004. Some of the Company's directors are also directors of Banco
Hipotecario S.A.
- Agreement with APSA for the commercialization of Torres de Abasto: On
May 1, 2000, the Company entered into an agreement with APSA for the
commercialization of the units of Torres de Abasto. The services rendered by us
include:
o commercial operation services such as implementation of sale and lease
strategy pursuant to the prices, terms and conditions set by APSA;
o selection of suppliers and hire of advertising agencies, real estate
brokers, notary public and appraisers; and
o coordination of the subscription of sale agreements, deeds of sale and
lease agreements according to the terms set by APSA.
The monthly fee for the commercialization services is Ps. 2.5 plus value
added tax, and an additional fee of:
o Sales: 1% plus value added tax, of the sale price of each unit; or
o leases: 2% plus value added tax, of the total lease price of each
unit.
Since the commercialization of the units is completed, the agreement
between both companies has expired.
- Corporate services: In order to reduce administrative expenses and to
achieve a more efficient allocation of corporate resources,as of June 30, 2002,
the Company and APSA provide corporate services in the areas of institutional
relations, finance and human resources to the Company and Cresud.
In the future and in order to continue with the Company's policy of
achieving a more efficient allocation of corporate resources, the Company may
extend the areas in which the Company share corporate services with APSA and
Cresud. The Company's chairman and vice-chairman are also chairman and
vice-chairman of Cresud.
- Legal services: During the years ended June 30, 2002, 2001 and 2000,
the Company paid the law firm Zang, Bergel & Vines an aggregate amount of
approximately Ps. 0.5 million, Ps. 0.9 million and Ps. 1.0 million for legal
services. Saul Zang and Ernesto M. Vines, directors of the Company, and Salvador
D.Bergel and Juan C. Quintana Teran, alternate directors of the Company, are
partners of the law firm.
F-115
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Under Argentine GAAP, there are no specific rules regarding disclosure of
fair value of financial instruments.
Under US GAAP, SFAS No. 105 requires reporting entities to disclose
certain information about financial instruments with off-balance sheet risk of
accounting loss. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate fair value. Financial instruments include such items as
to cash and cash equivalents and accounts receivable and other instruments. SFAS
No. 107 excludes from its disclosure requirements lease contracts and various
significant assets and liabilities that are not considered to be financial
instruments. SFAS No. 119 requires reporting entities to disclose certain
information for derivative financial instruments. SFAS No. 133, which is
effective July 1, 2000, supersedes SFAS No. 105 and SFAS No. 119 and amends SFAS
No. 107 to include in SFAS No. 107 the disclosure requirements of credit risk
concentrations from SFAS No. 105. See Note 19.II.(i) for details of
concentration of credit risk.
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgements made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumption used to estimate fair value, the Company's fair values should not be
compared to those of other companies.
Under the Statement, fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amount presented
does not represent the underlying value of the Company. For certain assets and
liabilities, the information required under the Statement is supplemental with
additional information relevant to an understanding of the fair value.
The methods and assumptions used to estimate the fair values of each
class of financial instruments as of June 30, 2002 and 2001 are as follows:
- Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of three months or less, consisting primarily of time deposits, to be
cash and cash equivalents. The carrying amount reported in the balance sheet
approximates fair value.
- Marketable securities
The fair value of marketable securities is based on quoted market prices
for those or similar investments.
- Options to purchase marketable securities
The fair value of options to purchase marketable securities is based on
the terms and conditions of the underlying contracts, -i.e. strike price,
maturities, expected dividends and vesting period-, available market
information, -i.e. quoted market price of underlying shares and expected
volatility. The Company used the binomial tree valuation method to estimate fair
value.
F-116
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- Mortgages and leases receivable, net
The estimated fair value of mortgage notes receivable collateralized by
real property is based on discounting the future cash flows at a year-end risk
adjusted lending rate that the Company would utilize for loans of similar risk
and duration. It is not practicable to estimate the fair value of leases
receivable because of the inability to estimate it without incurring excessive
costs.
- Retained interest in transferred mortgage receivables
Fair value is estimated by discounting anticipated future cash flows
using a discount rate based on specific factors. The anticipated future cash
flows are projected on a "cash out" basis to reflect the restriction of cash
flows until the investors have been fully paid.
- Accounts payable
The carrying amount of accounts and notes payable reported in the balance
sheet approximates its fair value.
- Short-term debt
The carrying amount of short-term debt reported in the balance sheet
approximates fair value due to its short-term nature.
- Long-term debt
The fair values of the Company's long-term debt are based on quoted
market prices, where available, or discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
- Other receivables and other liabilities
The carrying amount of other receivables and other liabilities reported
in the balance sheet approximates fair value due to their short-term nature.
- Forward foreign currency exchange contracts
The fair value of the forward foreign currency exchange contracts is
based on the estimated amount at which they could be settled based on forward
market exchange rates.
F-117
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(H) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- Interest rate swap agreement
The fair value of the interest rate swap agreement was determined based
on the present value of the estimated future net cash flows using implied rates
in the applicable yield curve as of the valuation date.
- Seller financing
The fair value of the seller financing obtained in the acquisition of SMP
is estimated based on quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
The fair value of the seller financing obtained in the acquisition of an
additional interest in Puerto Retiro is estimated based on quoted market prices
for the same or similar issues or on current rates offered to the Company for
debt of the same remaining maturities.
The following table summarizes financial instruments by individual
balance sheet account:
June 30, 2002 June 30, 2001
------------------------------- -------------------------------
Carrying Carrying
Fair Value Amount Fair Value Amount
-------------- -------------- -------------- --------------
Financial assets:
Cash, banks and short term investments 61,627 61,627 100,237 100,237
Mortgages and leases receivable, net:
Mortgages receivable 8,122 8,771 90,146 92,233
Leases receivables (*) 1,125 (*) 2,484
Other receivables and prepaid expenses:
Retained interest in securitization 3,228 6,173 -- --
Receivable from the sale of Brazil
Realty 26,129 16,129 -- --
Foreign exchange forward contracts -- -- 522 939
-------------- -------------- -------------- --------------
Total financial assets 99,106 93,825 190,905 195,893
Financial liabilities:
Trade accounts payable 12,224 12,224 11,205 11,205
Loans 199,499 207,998 96,846 111,126
Other liabilities
Swap agreement -- -- 23 --
Foreign exchange forward contracts -- -- 22 1671
Seller financing 1,288 1,511 3,378 4,462
-------------- -------------- -------------- --------------
Total financial liabilities 213,011 221,733 111,673 127,464
(*) Not practicable to estimate fair value.
F-118
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(I) CONCENTRATION OF CREDIT RISK
In the normal course of its business, the Company grants mortgages to
individuals in connection with its sales of residential properties. These
properties are located principally in Buenos Aires, Argentina. The Company is
subject to credit risk in the event of non-performance by the counterparties to
the mortgages; however, in the opinion of management, the values of the
properties that collateralize the mortgages are presently adequate to protect
the Company from material losses resulting from such non-performance. The
company has not experienced any significant losses resulting from
non-performance of any counterpart to the mortgage contracts.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, accounts
receivable and short-term investments. The Company maintains cash and cash
equivalents, investments, and other financial investments with various high
credit quality financial institutions, thus mitigating the amount of credit
exposure to any one institution. The Company has not experienced any significant
losses in such accounts.
The Company's accounts receivable are primarily derived from real estate
revenues from customers located in Argentina. The Company is not dependent on
any single customer. The Company maintains reserves for potential credit losses
based on impaired accounts, historical charge-off patterns and management
judgement; historically such losses have not been significant and within
management's expectations.
F-119
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998 SFAS No. 133 was issued. This statement, 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 market value. SFAS No. 133 requires that changes in the
derivative's fair market value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. The Company adopted this statement on July 1, 2000. See Note
19.I.c. for details on the implementation of this standard.
In March 2000, FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of Accounting
Principles Board Opinion No. 25 ("APB No. 25")". This interpretation clarifies
the definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. The Company adopted this standard beginning July 1,
2000. The adoption of this pronouncement did not have a material impact on the
Company's results of operations and financial position.
In June 1999, the FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust That Raises or Holds
Contributions for Other". This Statement establishes standards for transactions
in which an entity -the donor- makes a contribution by transferring assets to a
not-for-profit organization or charitable trust -the recipient organization-
that accepts the assets from the donor and agrees to use those assets on behalf
of or transfer those assets, the return on investment of those assets, or both
to another entity -the beneficiary- that is specified by the donor. It also
establishes standards for transactions that take place in a similar manner but
are not contributions because the transfers are revocable, repayable, or
reciprocal. The Company adopted SFAS 136 effective July 1, 2000. Its adoption
did not have a material effect on its results of operations and financial
condition.
In June 2001, SFAS No. 141, "Business Combinations," was issued. This
statement eliminates pooling of interests accounting and requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company adopted this standard on July 1, 2001 and adoption
of this standard did not have a significant effect on the Company's financial
statements.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis.
An intangible asset that has a finite life should be amortized over its useful
life and evaluated for impairment on a regular basis. This statement is
effective for fiscal years beginning after December 15, 2001. The Company does
not anticipate that the adoption of SFAS No. 142 will have a significant impact
on the Company's financial statements.
In August, 2001, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets. The
Company is required to adopt the provisions of SFAS No. 143 for fiscal year
beginning on July 1, 2002. The Company does not anticipate that SFAS No. 143
will significantly impact the Company's consolidated financial statements.
F-120
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(J) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On October 3, 2001, FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of the Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The Company does not anticipate
that the initial adoption of SFAS No. 144 will have a significant impact on the
Company's financial statements.
On May 1, 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), which, among other things, eliminates the exception of applying APB
Opinion No. 30 (APB 30) to all gains and losses related to extinguishments of
debt (other than extinguishments of debt to satisfy sinking-fund requirements).
As a result, gains and losses from extinguishment of debt should be classified
as extraordinary items only if they meet the criteria set forth in APB 30. These
provisions are effective for fiscal years beginning after May 15, 2002, with
early application encouraged. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods that does not meet the
criteria in APB 30 for classification as an extraordinary item should be
reclassified. The Company adopted this standard on April 1, 2002. As such, gains
and losses on extinguisment of debt recorded in prior periods are no longer
reported as extraordinary items. See Note 19.II.b).
(K) NET (LOSS) INCOME PER SHARE
Under Argentine GAAP, the Company is not required to present earnings per
share information. Under US GAAP, basic and diluted net (loss) income per share
are presented in conformity with SFAS No. 128 "Earnings per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB No. 98") for all periods presented.
Basic net (loss) income per share is computed by dividing the net (loss)
income available to common shareholders for the period by the weighted average
shares of common stock outstanding during the period. Diluted net (loss) income
per share is computed by dividing the net (loss) income for the period by the
weighted average number of common and dilutive potential common shares then
outstanding during the period. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, ordinary shares and convertible
preferred shares issued or granted for nominal consideration prior to the
anticipated effective date of an initial public offering must be included in the
calculation of basic and diluted net loss per share as if they had been
outstanding for all periods presented. To date, the Company has not had any
issuance or grants for nominal consideration.
Since the Company has no dilutive potential common stock outstanding,
there are no dilutive earnings per share amounts as described in SFAS No. 128.
As discussed in Note 19.II.j), under US GAAP gains and losses on
extinguishment of debt recorded in prior periods are no longer reported as
extraordinary items. Thus, the Company reflected the impact of such
reclassification in the presentation of earnings per share.
F-121
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(K) NET (LOSS) INCOME PER SHARE (CONTINUED)
The following tables set forth the computation of basic and diluted net
income (loss) per share under US GAAP for the periods indicated:
YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Numerator:
---------
(Loss) income before accounting changes........... Ps. (650,948) Ps. (462) Ps. (16,898)
Accounting changes................................ -- 20,486 --
------------------ ------------------ ------------------
Net (loss) income available to common shareholders Ps. (650,948) Ps. 20,024 Ps. (16,898)
================== ================== ==================
Denominator:
-----------
Basic and diluted weighted average shares
outstanding....................................... 207,412 204,189 204,652
Basic and diluted earnings per share under US GAAP:
--------------------------------------------------
(Loss) income before accounting changes........... Ps. (3.138) Ps. (0.002) Ps. (0.083)
Accounting changes................................ -- 0.100 --
------------------ ------------------ ------------------
Basic and diluted net (loss) income per common
share............................................. Ps. (3.138) Ps. 0.098 Ps. (0.083)
================== ================== ==================
The following tables set forth the proforma effects of the retroactive
application of a change in accounting principle on earnings per share under US
GAAP:
YEAR ENDED JUNE 30,
--------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Basic and diluted net (loss) income per share......... Ps. (3.138) Ps. (0.002) Ps. (0.127)
F-122
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(L) RISKS AND UNCERTAINTIES
The Company is subject to certain business risks arising in connection
with its operations which include, among others:
Risks associated with Argentine operations. A substantial part of the
Company's operations and properties are located in Argentina. As a result,
the Company financial condition and results of operations depend to a
significant extent on macroeconomic and political conditions prevailing in
Argentina. The Argentine economy has experienced a persistent recession since
1988, and in recent months the recession has deepened into an unprecedented
political and economic crisis which has disrupted Argentina's financial system
and effectively paralyzed the economy.
Risks associated with office and other buildings leases: The Company's
lease sales from its real estate operations may be adversely affected by (i)
local or national economic conditions in the areas in which the properties are
located, (ii) oversupply of office space or a reduction in demand for such
space, (iii) increased competition from other real estate operators, (iv)
changes in the ability of the Company or the tenants to provide for adequate
maintenance and/or insurance, (v) increases in operating expenses, (vi) adverse
changes in the regional or national economy, (vii) the bankruptcy or insolvency
of, or a downturn in the business of, any of its major tenants, and/or (vii) the
possibility that such tenants will not renew their leases as they expire.
Unfavorable economic conditions could also result in the inability of tenants in
certain sectors to meet their lease obligations and otherwise could adversely
affect the Company's ability to attract and retain desirable tenants.
Risks associated with development properties activities: Include (i) the
potential abandonment of development opportunities; (ii) construction costs may
exceed the Company's original estimates, possibly making a project uneconomical;
(iii) occupancy rates and rents at a newly completed project may be insufficient
to make the project profitable; (iv) the Company's inability to obtain financing
on favorable terms for the development of the project; (v) construction and
lease-up may not be completed on schedule, resulting in increased debt service
expense and construction costs; and (vi) the Company's inability to obtain, or
the delays in obtaining, all necessary zoning, land-use, building, occupancy and
other required governmental permits and authorizations.
Risks associated with retail space leases: The Company has investments in
companies which business is the ownership and operation of shopping centers. The
Company is subject to certain business risks arising in this connection which
include, among others, (i) the bankruptcy or insolvency of, or a downturn in the
business of, any of its major tenants, (ii) the possibility that such tenants
will not renew their leases as they expire, (iii) vacated anchor space affecting
the entire shopping center because of the loss of the departed anchor tenant's
customer drawing power, (iv) unfavorable economic conditions could also result
in the inability of tenants in certain retail sectors to meet their lease
obligations and otherwise could adversely affect the Company's ability to
attract and retain desirable tenants. The Company believes that its shopping
centers are relatively well positioned to withstand adverse economic conditions
since they typically are anchored by grocery stores, drug stores and discount
department stores that offer day-to-day necessities rather than luxury goods.
Risks associated with the hotel industry. The success of the Company's
operated hotels will depend, in large part, upon the Company's ability to
compete in areas such as access, location, quality of accommodations, room rate
structure, quality and scope of food and beverage facilities and other services
and amenities. The Company's hotels may face additional competition if other
companies decide to build new hotels or improve their existing hotels such that
they are more attractive to potential guests. In addition, the profitability of
the Company's hotels depends on (i) the Company's ability to form successful
relationships with international operators to run the hotels; (ii) changes in
travel patterns, including seasonal changes; and (iii) taxes and governmental
regulations which influence or determine wages, prices, interest rates,
construction procedures and costs.
F-123
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(L) RISKS AND UNCERTAINTIES (CONTINUED)
Risks associated with international operations. A substantial part of the
Company's real estate activities is conducted through subsidiaries and strategic
alliances with other companies. As a result, the Company depends to a certain
extent on the successful operation of subsidiaries and strategic alliances and
upon income, dividends and other distributions from them to maintain the
Company's profitability, liquidity and growth. Conducting business in Brazil and
other Latin American countries involves economic conditions and regulatory
requirements that may be different from those in Argentina and subjects the
Company to risks that could have an adverse effect on the business. For example,
entering these markets subjects the Company to the risks of currency
fluctuation, exchange rate controls, inflation, restrictions on repatriation of
dividends and capital, political instability, and deteriorating economic
conditions. As described in Note 3.f. on February 28, 2002 the Company sold its
interests in Brazil Realty.
The Company, as well as the home-building industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land and construction costs. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. Inflation also increases the Company's interest costs
and costs of labor and materials. The Company attempts to pass through to its
customers any increases in its costs through increased selling prices and, to
date, inflation has not had a material adverse effect on the Company's results
of operations. However, there is no assurance that inflation will not have a
material adverse impact on the Company's future results of operations.
The Company's operations are interest-rate sensitive. Overall demand is
adversely affected by an increase in interest costs. If mortgage interest rate
increases significantly, this may negatively impact the ability of a homebuyer
to secure adequate financing. Such results of higher interest rates may result
in adversely affecting the Company's revenues, gross margins and net income.
(M) SELECTED UNAUDITED PRO-FORMA INFORMATION
The following selected unaudited pro forma information is being provided
to present a summary of the consolidated results of the Company as if the
acquisitions discussed in Note 3.e. had occurred as of the beginning of the
periods immediately preceding the respective acquisitions, giving effect to
purchase accounting adjustments. The pro forma data is for informational
purposes only and may not necessarily reflect the results of operations of the
Company had the acquired businesses operated as part of the Company for the
periods presented. This information has been prepared in accordance with
Argentine GAAP.
YEAR ENDED JUNE 30,
-----------------------------------------------
2001 2000
---------------------- -----------------------
Sales ....................... Ps. 339,843 Ps. 361,930
Net income................... (59,954) 11,551
Net (loss) income per share.. (0.29) 0.06
F-124
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(N) SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED EQUITY INVESTEES
Equity investments in unconsolidated affiliated companies, representing
between 20% and 50% of the capital stock in such companies, have been accounted
for under the equity method, wherein the investment is recorded at the amount of
the underlying equity in the net assets of the investments and adjusted to
recognize the Company's share of the undistributed earnings or losses. As
indicated in Note 3.b., the consolidated statements of operations were prepared
on a proportionate consolidation basis. The Company used the
"proportionate-consolidation method" of accounting for its investments in which
the Company exercises control and other jointly controlled investments. This
method has not been used for balance sheet and cash flows purposes.
The Company's share of the (loss) income of these affiliates was Ps. 21.1
million in 2002, Ps. 20.1 million in 2001 and Ps. 3.5 million in 2000, and its
investment in these companies totaled Ps. 307.2 million at June 30, 2002 and Ps.
452.3 million at June 30, 2001. The Company's share of undistributed losses of
these affiliates totaled Ps. 4.5 million at June 30, 2002 and Ps. 19.6 million
at June 30, 2001.
Summarized financial information of the Company's equity investees (on a
100% basis) is as follows:
As of and for the year As of and for the year ended June 30,
ended June 30, 2002 2001
-------------------------- ----------------------------------------
(in thousands of pesos) (in thousands of pesos)
-------------------------- ----------------------------------------
Brazil Brazil
APSA Realty APSA F.V.I. Realty
(i) (ii)
------------ ------------ ------------ ------------ ------------
Current assets............... 49,586 - - 160,350 - - 99,175
Non-current assets........... 969,934 - - 1,097,473 - - 323,002
Total assets................. 1,019,520 - - 1,257,823 - - 422,177
Current liabilities.......... 84,289 - - 190,418 - - 86,108
Non-current liabilities...... 319,441 - - 403,897 - - 82,892
Total liabilities............ 403,730 - - 594,315 - - 169,000
Minority interest............ 14,582 - - 19,898 - - - -
Retained earnings............ (9,079) - - 33,598 - - 7,269
Net sales.................... 169,828 - - 345,987 - - 133,104
Gross profit................. 84,486 - - 131,472 - - 69,208
Net income (loss)............ (42,403) - - 5,462 - - 25,309
(i) The Company sold its equity interest in Brazil Realty in February 2002.
Income statement line items reflect the results of operations of Brazil
Realty from July 1, 2001 through February 28, 2002.
(ii) The Company sold its equity interest in FVI in December 2000. Income
statement line items reflect the results of operations of FVI from July 1,
2000 through December 18, 2000.
(O) USE OF PROPORTIONATE CONSOLIDATION METHOD OF ACCOUNTING FOR CONTROLLED
AND JOINTLY CONTROLLED INVESTMENTS
As discussed in Note 3.b., under Argentine GAAP, the consolidated
statements of operations were prepared on a proportionate consolidation basis.
As from July 1, 1996, the Company uses the "proportionate-consolidation method"
of accounting for its investments in which the Company exercises control and
other jointly controlled investments. This method has not been used for balance
sheet and cash flows purposes. All notes to the consolidated financial
statements relating to income-statement items have been also prepared on a
proportionate consolidation basis. The Company calculates the
proportionate-consolidation method by applying its percentage ownership interest
to the financial statements of its equity method investments.
Under US GAAP, the equity in income (loss) of jointly controlled companies
would have been reported as a separate line item in the statement of operations.
For all the periods presented, the ownership percentages the Company does not
own in the majority-owned companies would have been reflected as minority
interest and the pro-rata gains or losses attributed to the minority holders.
F-125
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(O) USE OF PROPORTIONATE CONSOLIDATION METHOD OF ACCOUNTING FOR CONTROLLED
AND JOINTLY CONTROLLED INVESTMENTS (CONTINUED)
Although the use of the proportionate consolidation method as compared to
the equity method of accounting from a financial presentation perspective
impacts almost all areas of the Company's consolidated statements of operations,
it does not impact the Company's consolidated shareholders' equity or net
earnings. Note 14 presents the Company's statements of operations for the three
years in the period ended June 30, 2002 reporting (i) the jointly-controlled
investments accounted for by the equity method, with the earnings or losses
included as earnings or losses from equity investees, and (ii) minority interest
in earnings or losses of controlled subsidiaries.
(P) EQUITY INVESTMENTS IN LLR AND ITNV
As from June 30, 2002 and 2001, the Company had a 50% equity interest in
LLR. Under Argentine GAAP, the Company did not consolidate LLR for any of the
periods presented. For US GAAP purposes, and, in view of the guidance in SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries" and Rules 1-02 and
3A-02 of Regulation S-X of the Securities and Exchange Commission, the Company
possesses a controlling financial interest in LLR regardless its 50% ownership
interest. Accordingly, consolidation is appropriate under US GAAP.
In addition, the Company's investment in ITNV was not consolidated under
Argentine GAAP as of and for the years ended June 30, 2002 and 2001 as the
Company had a 49% equity interest in such company. Under US GAAP, this
investment would be consolidated considering that the issuance of mandatorily
redeemable preferred stock did not change the Company's ownership interest (See
Note 19.I.(a) (ii) for details).
Presented below is the consolidated condensed information of the Company,
LLR and ITNV as of June 30,:
2002
------------------------------------------------------------------------------
COMPANY LLR ITNV ELIMINATIONS CONSOLIDATED
Current assets.............. 136,308 4,272 5,719 (22) 146,277
Non-current assets.......... 1,008,407 25,527 1,431 (11,985) 1,023,380
Total assets................ 1,144,715 29,799 7,150 (12,007) 1,169,657
Current liabilities......... 606,060 11,136 1,773 (22) 618,947
Non-current liabilities..... 3,021 - - - - - - 3,021
Total liabilities........... 609,081 11,136 1,773 (22) 621,968
Minority interest........... 75,218 - - - - 12,055 87,273
2001
------------------------------------------------------------------------------
COMPANY LLR ITNV ELIMINATIONS CONSOLIDATED
Current assets.............. 221,875 3,914 8,631 (12) 234,408
Non-current assets.......... 1,272,674 27,966 2,547 (8,069) 1,295,118
Total assets................ 1,494,549 31,880 11,178 (8,081) 1,529,526
Current liabilities......... 385,661 22,518 4,315 (12) 412,482
Non-current liabilities..... 34,497 -- -- -- 34,497
Total liabilities........... 420,158 22,518 4,315 (12) 446,979
Minority interest........... 114,356 -- -- 8,155 122,511
F-126
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(Q) SEVERANCE INDEMNITIES
Under Argentine law and labor agreements, the Company is required to make
minimum severance payments to its dismissed employees without cause and
employees leaving its employment in certain other circumstances. Under Argentine
GAAP, severance payments are expensed as incurred. Under US GAAP, the Company
follows the guidelines established by SFAS No. 112, "Employers' Accounting for
Post-employment Benefits", and SFAS No. 43, "Accounting for Compensated
Absences", which requires the accrual of severance costs if they relate to
services already rendered, are related to rights that accumulate or vest, are
probable of payment and are reasonably estimable. While the Company expects to
make severance payments in the future, it is impossible to estimate the number
of employees that will be dismissed without proper cause in the future, if any,
and accordingly the Company has not recorded such liability.
(R) STATEMENTS OF CASH FLOWS
The Company has elected to present the statements of cash flows in the
primary financial statements using the guidance set forth in SFAS No. 95
"Statement of Cash Flows" but using Argentine GAAP numbers. As further described
in Note 4.b, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Under US GAAP, the total amounts of cash and cash equivalents at the
beginning and end of the periods shown in the statements of cash flows are
required to be the same amounts as similarly titled line items shown in the
balance sheets, as of those dates. The following table reconciles the balances
included as cash and banks in the balance sheet to the total amounts of cash and
cash equivalents at the beginning and end of the periods shown in the statements
of cash flows:
AS OF JUNE 30,
------------------------------------------------------------------
2002 2001 2000
--------------------- -------------------- --------------------
Cash and banks.......................... Ps. 24,831 Ps. 10,530 Ps. 11,254
Cash equivalents:
Time deposits........................ 422 22,741 18,021
--------------------- -------------------- --------------------
Total cash and cash equivalents......... Ps. 25,253 Ps. 33,271 Ps. 29,275
===================== ==================== ====================
As discussed in Note 19.II.(p), under Argentine GAAP, the Company's
investments in LLR and ITNV were not consolidated for any of the periods
presented. Under US GAAP, these investments would have been consolidated. As a
result, differences exist between cash flows reported in the primary financial
statements and cash flows that would be reported in a statement of cash flows
prepared using US GAAP numbers. In addition, under Argentine GAAP, cash flow
from purchases, sales and maturities of available-for-sale securities were
reported as operating activities. Under US GAAP, these transactions would be
classified as cash flows from investing activities. Also, under Argentine GAAP
nor the effect of exchange rate changes on cash and cash equivalents, neither
the effects of inflation were disclosed by presenting additional cash flow
statement categories as required by US GAAP. The following table presents the
cash flows from operating, investing and financing activities, the effects of
inflation accounting and exchange rate changes on cash and cash equivalents that
would be reported in the statement of cash flows, which contemplate
classification differences under US GAAP.
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Net cash provided by operating activities .............. Ps. 10,564 Ps. 87,478 Ps. 90,915
Net cash (used in) provided by investing activities .... (18,732) 71,841 (370)
Net cash used in financing activities................... (36,867) (154,808) (104,471)
Effect of exchange rate changes on cash and cash
equivalents............................................. 1,818 -- --
Effect of inflation accounting.......................... 34,808 -- --
------------------ ------------------ ------------------
Net (decrease) increase in cash and cash equivalents.... Ps. (8,409) Ps. 4,511 Ps. (13,926)
================== ================== ==================
F-127
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19 DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(S) COMPREHENSIVE INCOME
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes guidelines for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income represents the change in
shareholder's equity of the Company during the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The adoption of SFAS No. 130 had no impact on total
shareholders' equity. The following table summarizes the components of
comprehensive income for the years ended June 30, 2002, 2001 and 2000.
YEAR ENDED JUNE 30,
----------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
NET (LOSS) INCOME UNDER US GAAP.................. Ps. (650,948) Ps. 20,024 Ps. (16,898)
Other comprehensive income (loss):
Foreign currency translation adjustments......... 100,026 (67,921) 5,630
Unrealized loss on available-for-sale-securities. (7,560) (34,298) (18,179)
Unrealized loss on retained interest in
transferred mortgage receivables................. (575) - - - -
Unrealized gain on available-for-sale-securities
on equity investees.............................. (939) 947 - -
------------------ ------------------ ------------------
COMPREHENSIVE LOSS Ps. (559,996) Ps. (81,248) Ps. (29,447)
================== ================== ==================
Accumulated nonowner changes in equity (accumulated other comprehensive
income) at June 30 were as follows:
2002 2001 2000
------------------ ------------------ ------------------
Foreign currency translation adjustment......... Ps. - - Ps. (100,026) Ps. (32,105)
Unrealized (loss) gain on available-for-sale
securities...................................... (1,893) 5,667 39,965
Unrealized loss on retained interest in
transferred mortgage receivables................ (575) - - - -
Unrealized gain on available-for-sale-securities
on equity investees............................. 8 947 - -
------------------ ------------------ ------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS).. Ps. (2,460) Ps. (93,412) Ps. 7,860
================== ================== ==================
F-128
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(T) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a summary of the Company's investments in real estate as
of June 30, 2002 prepared in accordance with SEC Regulation S-X 12-28.
Buildings Net
and Total buildings and Accumulated carrying value as
Description Land improvement Improvements improvements Total depreciation of June 30
- --------------------- ------------ ------------ ------------ -------------------- ------------ ------------ ---------------------
Suipacha 652 Ps. 2,254 Ps. 5,668 Ps. 3,867 Ps. 9,535 Ps. 11,789 Ps. 2,768 Ps. 9,021
Av. de Mayo 595 604 878 3,488 4,366 4,970 1,232 3,738
Alsina 934 315 1,265 - - 1,265 1,580 233 1,347
Constitucion 1111 520 - - - - - - 520 148 372
Reconquista 823 4,398 14,460 - - 14,460 18,858 3,051 15,807
Sarmiento 517 41 192 35 227 268 39 229
Av. Madero 942 1,160 3,687 43 3,730 4,890 743 4,147
Libertador 602 622 1,926 - - 1,926 2,548 300 2,248
Maipu 1300 9,161 31,739 1,138 32,877 42,038 5,116 36,922
Madero 1020 5,537 4,800 104 4,904 10,441 1,416 9,025
Libertador 498 10,440 27,663 720 28,383 38,823 5,079 33,744
Laminar 5,869 20,163 617 20,780 26,649 1,306 25,343
Edificios Costeros 5,293 15,920 689 16,609 21,902 705 21,197
Intercontinental
Plaza 7,715 43,706 418 44,124 51,839 (6,076) 57,915
Alto Palermo Plaza 799 101 - - 101 900 146 754
Alto Palermo Park 687 64 - - 64 751 37 714
Hotel Libertador 2,694 53,750 190 53,940 56,634 24,955 31,679
Hotel
Intercontinental 7,717 26,622 23 26,645 34,362 (1,963) 36,325
Dock IV 2,426 13,763 - - 13,763 16,189 312 15,877
Advances payment on
Hotel Piscis 104 414 - - 414 518 - - 518
---------------------------------------------------------------------------------------------------------
Ps. 68,356 Ps. 266,781 Ps. 11,332 Ps. 278,113 Ps. 346,469 Ps. 39,547 Ps. 306,922
=========================================================================================================
Life on which depreciation
Date of in latest income statements
Description Construction Date acquired is computed
- ------------------- --------------------- --------------------- -------------------------------
Suipacha 652 April-June 1994 November 1991 50
Av. de Mayo 595 July 1992 March 1992 50
Alsina 934 - August 1991 50
Constitucion 1111 September 1994 June 1994 50
March 1995 January 1994
Reconquista 823 June 1995 November 1994 50
Sarmiento 517 March 1995 December 1994 50
July 1994
August 1994
Av. Madero 942 - July 1994 50
August 1994
Libertador 602 - May 1996 50
Maipu 1300 - September 1995 50
Madero 1020 - December 1995 50
Libertador 498 - December 1995 50
Laminar N/A March 1999 50
Edificios Costeros September 1998 March 1997 50
Intercontinental
Plaza June 1996 November 1997 50
Alto Palermo Plaza December 1996 November 1997 50
March 1997 -
September 1997 -
Alto Palermo Park June 1996 November 1997 50
Hotel Libertador October 1973 March 1998 50
November 1990 -
December 1997 -
Hotel
Intercontinental December 1994 November 1997 50
Dock IV June 2001
Advances payment on
Hotel Piscis May 2002
F-129
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(T) INVESTMENTS IN REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
2002 2001 2000
----------------------- ------------------------ -----------------------
Balance, beginning of the year......... Ps. 442,645 Ps. 465,493 Ps. 505,539
Additions during the year:
Improvements.................. 119 2,953 1,567
Transfers from real estate
inventory..................... - - 2,615 29,318
Advance payments on properties 18,863 - - - -
----------------------- ------------------------ -----------------------
461,627 471,061 536,424
----------------------- ------------------------ -----------------------
Deductions during the year:
Transfers to real estate
inventory..................... (41,799) (26,538) (23,479)
Impairment loss (73,359) - - - -
Sales......................... - - (1,878) (47,452)
----------------------- ----------------------- -----------------------
(115,158) (28,416) (70,931)
----------------------- ----------------------- ----------------------
Balance, end of the year............... Ps. 346,469 Ps. 442,645 Ps. 465,493
======================= ======================== =======================
F-130
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(U) MORTGAGE LOANS ON REAL ESTATE
Prepared in accordance with SEC Regulation S-X 12-29
Col. A. Col. B. Col. C. Col. D. Col. E. Col. F. Col. G. Col. H.
- ----------------- ---------- -------------- ------------ ------------- ------------------ ------------------- -----------------
Principal
amount of
loans subject to
delinquent
Interest Final maturity Periodic Face amount of Carrying amount of principal
Description Rate date payment term Prior liens mortgages mortgages or interest
- ----------------- ---------- -------------- ------------ ------------- ------------------ ------------------- -----------------
Customer A 10-15% July 2002 Monthly None 1,706 1,518 None
Customer B 10-15% July 2002 Monthly None 879 782 None
Customer C 10-15% June 2003 Monthly None 548 548 None
Customer D 10-15% March 2003 Monthly None 513 435 None
Customer E 10-15% December 2007 Monthly None 233 199 None
Customer F 10-15% June 2010 Monthly None 194 137 None
Mortgage loans
under US$ 20,000 10-15% May 2008 Monthly None Open 96 None
Mortgage loans
US$ 20,000-49,999 10-15% August 2014 Monthly None Open 92 None
Mortgage loans
US$ 50,000-99,999 10-15% May 2014 Monthly None Open 462 None
Mortgage loans
over US$ 100,000 10-15% May 2020 Monthly None Open 225 None
------------------ -------------------
Ps. 4,073 Ps. 4,494
================== ===================
F-131
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. DIFFERENCES BETWEEN ARGENTINE GAAP AND US GAAP (CONTINUED)
(U) MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
The summary of activity in mortgage receivables is as follows:
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- ---------------------
Balance, beginning of year................ Ps. 59,341 Ps. 69,848 Ps. 90,144
Additions during the year:
New mortgage loans................... 1,461 13,912 9,445
Deductions during the year:
Securitization....................... (38,374) - - - -
Collections of principal............. (17,934) (24,419) (29,741)
----------------------- ----------------------- ---------------------
Balance, end of year...................... Ps. 4,494 Ps. 59,341 Ps. 69,848
======================= ======================= =====================
20. OTHER FINANCIAL STATEMENT INFORMATION
The following tables present additional financial statement disclosures
required under Argentine GAAP:
a. Fixed assets, net
b. Intangible assets, net
c. Allowances and provisions
d. Cost of sales, leases and services
e. Foreign currency assets and liabilities
f. Other expenses
NOTE:
Schedules d. and f. have been prepared based on the Company's results
excluding the proportionate share of the income and expenses of unconsolidated
affiliated companies.
F-132
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION
A. FIXED ASSETS, NET
Original value Depreciation
----------------------------------------------------- ----------------------------------------
Current year
Deductions, -------------------------
transfers Accumulated Increases /
Value as of Additions and as of (decreases)
Beginning and impairment Value as of beginning and
Principal account of year transfers loss (i) end of year of year transfers Amount (ii)
- --------------------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Facilities................ Ps. 40,300 Ps. 782 Ps. (58) Ps. 41,024 Ps. 23,368 Ps. (10) Ps. 2,131
Furniture and fixtures.... 23,317 208 - - 23,525 16,458 - - 1,929
Computer equipment........ 6,635 519 - - 7,154 5,585 87 868
Leasehold improvements.... 6,201 162 - - 6,363 3,718 - - 580
Machinery and equipment... 3,664 2 - - 3,666 3,204 - - 195
Vehicles.................. 175 - - - - 175 175 - - - -
Advances to suppliers..... 920 5 (607) 318 12 1 - -
Properties:
- -----------
Suipacha 652.............. 15,138 - - (3,349) 11,789 2,112 - - 656
Montevideo 1975........... - - - - - - - - - - - - - -
Av. de Mayo 701........... - - - - - - - - - - - - - -
Av. de Mayo 595........... 6,531 - - (1,561) 4,970 868 - - 364
Alsina 934................ 1,581 - - (1) 1,580 209 - - 24
Rivadavia 2243............ 8,339 - - (8,339) - - 998 (1,069) 71
Rivadavia 2768............ 351 - - (352) (1) 50 (55) 4
Constitucion 1111......... 6,383 - - (5,863) 520 923 (908) 133
Florida 291............... - - - - - - - - - - - - - -
Reconquista 823........... 21,991 - - (3,133) 18,858 2,699 - - 352
Av. Santa Fe 1588......... 8,339 - - (8,340) (1) 881 (915) 33
Sarmiento 517............. 584 - - (316) 268 65 (34) 8
Av. Madero 942............ 5,847 - - (957) 4,890 646 - - 97
Puerto Madero Dock 5...... 2,392 - - (2,393) (1) 244 (309) 64
Puerto Madero Dock 6 ..... - - - - - - - - - - - - - -
Libertador 602............ 3,106 - - (558) 2,548 252 - - 48
Serrano 250............... - - - - - - - - - - - - - -
Maipu 1300................ 46,956 103 (5,021) 42,038 4,351 1 764
Madero 1020............... 20,248 - - (9,807) 10,441 1,787 (693) 322
Libertador 498............ 52,920 16 (14,113) 38,823 4,757 (513) 835
Laminar Plaza............. 29,961 - - (3,312) 26,649 828 - - 478
Dock II - A and B building 18,910 - - (1,960) 16,950 280 - - 425
Dock II - C and D
buildings................. 5,475 - - (523) 4,952 - - - - - -
Dock IV................... 2,425 18,345 (4,581) 16,189 - - - - 312
Intercontinental Plaza.... 71,242 - - (19,403) 51,839 6,417 (13,936) 1,443
Alto Palermo Plaza........ 4,191 - - (3,291) 900 444 (383) 85
Alto Palermo Park......... 2,804 - - (2,053) 751 68 (64) 33
Hotel Libertador.......... 56,730 - - (96) 56,634 24,148 (100) 907
Hotel Intercontinental.... 50,191 - - (15,829) 34,362 7,174 (10,101) 964
Advances payments on
properties
Hotel Piscis........... - - 518 - - 518 - - - - - -
Other..................... 10,367 398 (218) 10,547 2,118 (429) 910
------------ ------------ ------------ ------------ ------------ ----------- ------------
Total as of June 30, 2002. Ps. 534,214 Ps. 21,058 (116,034) Ps. 439,238 Ps. 114,839 Ps.(29,430) Ps. 15,035
============ ============ ============ ============ ============ =========== ============
Total as of June 30, 2001. Ps. 553,479 Ps. 9,489 Ps. (28,754) Ps. 534,214 Ps. 101,996 Ps.(2,830) Ps. 15,673
============ ============ ============ ============ ============ =========== ============
Total as of June 30, 2000. Ps. 608,335 Ps. 39,537 Ps. (94,393) Ps. 553,479 Ps. 101,544 Ps.(16,207) Ps. 16,659
============ ============ ============ ============ ============ =========== ============
Depreciation Net carrying value as of June 30,
-------------- --------------------------------------
Accumulated
as of end
Principal account of year 2002 2001 2000
- --------------------------- ------------ ------------ ------------ -----------
Facilities................ Ps. 25,489 Ps. 15,535 Ps. 16,932 Ps. 18,578
Furniture and fixtures.... 18,387 5,138 6.859 8,120
Computer equipment........ 6,540 614 1,050 1,164
Leasehold improvements.... 4,298 2,065 2,483 3,112
Machinery and equipment... 3,399 267 460 786
Vehicles.................. 175 - - - - --
Advances to suppliers..... 13 305 908 653
Properties:
- -----------
Suipacha 652.............. 2,768 9,021 13,026 13,285
Montevideo 1975........... - - - - - - 1,635
Av. de Mayo 701........... - - - - - - 2,760
Av. de Mayo 595........... 1,232 3,738 5,663 5,779
Alsina 934................ 233 1,347 1,372 1,395
Rivadavia 2243............ - - - - 7,341 7,481
Rivadavia 2768............ (1) - - 301 606
Constitucion 1111......... 148 372 5,460 7,479
Florida 291............... - - - - - - 10,335
Reconquista 823........... 3,051 15,807 19,292 19,644
Av. Santa Fe 1588......... (1) - - 7,458 7,598
Sarmiento 517............. 39 229 519 528
Av. Madero 942............ 743 4,147 5,201 5,297
Puerto Madero Dock 5...... (1) - - 2,148 2,195
Puerto Madero Dock 6 ..... - - - - - - 274
Libertador 602............ 300 2,248 2,854 2,901
Serrano 250............... - - - - - - 2,525
Maipu 1300................ 5,116 36,922 42,605 43,240
Madero 1020............... 1,416 9,025 18,461 20,697
Libertador 498............ 5,079 33,744 48,163 49,009
Laminar Plaza............. 1,306 25,343 29,133 29,556
Dock II - A and B building 705 16,245 18,630 23,989
Dock II - C and D
buildings................. - - 4,952 5,475 -
Dock IV................... 312 15,877 2,425 - -
Intercontinental Plaza.... (6,076) 57,915 64,825 66,188
Alto Palermo Plaza........ 146 754 3,747 5,029
Alto Palermo Park......... 37 714 2,736 3,513
Hotel Libertador.......... 24,955 31,679 32,582 33,510
Hotel Intercontinental.... (1,963) 36,325 43,017 43,821
Advances payments on
properties
Hotel Piscis........... - - 518 - - - -
Other..................... 2,599 7,948 8,249 8,801
------------ ------------ ------------ ------------
Total as of June 30, 2002. Ps. 100,444 Ps. 338,794 - - - -
============ ============ ============ ============
Total as of June 30, 2001. Ps. 114,839 - - Ps. 419,375 - -
============ ============ ============ ============
Total as of June 30, 2000. Ps. 101,996 - - . - - Ps. 451,483
============ ============ ============ ============
(i) The book value of fixed assets at June 30, 2002 are net of the impairment
loss mentioned in Note 4.d.
(ii) See notes 20 (f) Other expenses and 20 (b) Intangible assets, net.
F-133
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
B. INTANGIBLE ASSETS, NET:
Original value Amortization
----------------------------------------------- --------------------------------------------
For the year
----------------------------
Accumulated
Value as of Value as of as of
beginning Additions/ End beginning Increases/
Principal account Of year (Deductions) of year of year (decreases) Amount (i)
- --------------------------------------- ---------------- -------------- -------------- -------------- ------------ --------------
Fees and expenses relating to the
issuance of PARCKS.................. Ps. 7,182 Ps. - - Ps. 7,182 Ps. 7,182 Ps. - - Ps. - -
Preoperating and organization expenses. 10,988 (9,050) 1,938 10,601 (9,051) 232
Deferred financing costs .............. 13,996 3,029 17,025 9,415 - - 5,081
Selling and advertising expenses....... 6,887 2 6,889 4,938 - - 685
---------------- -------------- -------------- -------------- ------------ --------------
Total as of June 30, 2002.............. Ps. 39,053 Ps. (6,019) Ps. 33,034 Ps. 32,136 Ps. (9,051) Ps. 5,998
================ ============== ============== ============== ============ ==============
Total as of June 30, 2001.............. Ps. 34,245 Ps. 4,808 Ps. 39,053 Ps. 24,703 Ps. 3 Ps. 7,430
================ ============== ============== ============== ============ ==============
Total as of June 30, 2000.............. Ps. 26,385 Ps. 10,481 Ps. 36,866 Ps. 17,960 Ps. -- Ps. 9,364
================ ============== ============== ============== ============ ==============
Amortization Net carrying value as of June 30,
------------ ----------------------------------
Accumulated
as of end
Principal account of year 2002 2001 2000
- ----------------------------------------- ------------ ----------- ----------------------
Fees and expenses relating to the
issuance of PARCKS.................. Ps. 7,182 Ps. - - Ps. -- Ps. --
Preoperating and organization expenses.. 1,782 156 387 745
Deferred financing costs ............... 14,496 2,529 4,581 5,745
Selling and advertising expenses........ 5,623 1,266 1,949 3,052
------------ ----------- --------- -----------
Total as of June 30, 2002............... Ps. 29,083 Ps. 3,951 Ps. -- Ps. --
============ =========== ========= ===========
Total as of June 30, 2001............... Ps. 32,136 Ps. - - Ps. 6,917 Ps. --
============ =========== ========= ===========
Total as of June 30, 2000............... Ps. 27,324 Ps. -- Ps. -- Ps. 9,542
============ =========== ========= ===========
(i) The allocation of amortization charges in the consolidated statement of
income is included in Note 20.f., except for Ps. 85, Ps. 172 and Ps. 2,347,
for the years ended June 30, 2002, 2001 and 2000, respectively, included in
Other income (expenses), net.
F-134
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
C. ALLOWANCES AND PROVISIONS
CARRYING VALUE
OF JUNE 30,
-----------------
BALANCES AS OF
BEGINNING OF
ITEM YEAR ADDITIONS (I) DEDUCTIONS 2002
- ------------------------------------------------ ----------------- ----------------- ----------------- ---------------
DEDUCTED FROM CURRENT ASSETS:
Allowance for doubtful accounts................ Ps. 1,796 Ps. 472 Ps. (1,047) Ps. 1,221
Allowance for impairment of fixed assets....... - - 49,743 - - 49,743
Allowance for impairment of inventories........ - - 15,494 (4,262) 11,232
Allowance for impairment of undeveloped plots
of land........................................ - - 8,301 - - 8,301
----------------- ----------------- ----------------- ---------------
Total as of June 30, 2002...................... Ps. 1,796 Ps. 74,010 Ps. (5,309) Ps. 70,497
================= ================= ================= ===============
Total as of June 30, 2001...................... Ps. 1,641 Ps. 413 Ps. (258) - -
================= ================= ================= ===============
Total as of June 30, 2000...................... Ps. 880 Ps. 1,195 Ps. (434) - -
================= ================= ================= ===============
INCLUDED IN CURRENT LIABILITIES:
Provision for contingencies................... Ps. 133 Ps. 512 Ps. (205) Ps. 440
----------------- ----------------- ----------------- ---------------
Total as of June 30, 2002...................... Ps. 133 Ps. 512 Ps. (205) Ps. 440
================= ================= ================= ===============
Total as of June 30, 2001...................... Ps. 88 Ps. 514 Ps. (469) - -
================= ================= ================= ===============
Total as of June 30, 2000...................... Ps. 473 Ps. 401 Ps. (786) - -
================= ================= ================= ===============
INCLUDED IN NON-CURRENT LIABILITIES:
Provision for contingencies................... Ps. 207 Ps. 330 Ps. (180) Ps. 357
----------------- ----------------- ----------------- ---------------
Total as of June 30, 2002...................... Ps. 207 Ps. 330 Ps. (180) Ps. 357
================= ================= ================= ===============
Total as of June 30, 2001...................... Ps. 2,113 Ps. 66 Ps. (1,972) - -
================= ================= ================= ===============
Total as of June 30, 2000...................... Ps. 7,973 Ps. - - Ps. (5,860) - -
================= ================= ================= ===============
CARRYING VALUE OF JUNE 30,
---------------------------------
ITEM 2001 2000
- ------------------------------------------------ ---------------- ---------------
DEDUCTED FROM CURRENT ASSETS:
Allowance for doubtful accounts................ Ps. 1,796 Ps. 1,641
Allowance for impairment of fixed assets....... - - - -
Allowance for impairment of inventories........ - - - -
Allowance for impairment of undeveloped plots
of land........................................ - - - -
---------------- ---------------
Total as of June 30, 2002...................... - - - -
================ ===============
Total as of June 30, 2001...................... Ps. 1,796 - -
================ ===============
Total as of June 30, 2000...................... - - Ps. 1,641
================ ===============
INCLUDED IN CURRENT LIABILITIES:
Provision for contingencies................... Ps. 133 Ps. 88
---------------- ---------------
Total as of June 30, 2002...................... - - - -
================ ===============
Total as of June 30, 2001...................... Ps. 133 - -
================ ===============
Total as of June 30, 2000...................... - - Ps. 88
================ ===============
INCLUDED IN NON-CURRENT LIABILITIES:
Provision for contingencies................... Ps. 207 Ps. 2,113
---------------- ---------------
Total as of June 30, 2002...................... - - - -
================ ===============
Total as of June 30, 2001...................... Ps. 207 - -
================ ===============
Total as of June 30, 2000...................... - - Ps. 2,113
================ ===============
(i) The accounting allocation of the charges for the year ended June 30, 2002,
2001 and 2000 is a follows:
- Doubtful accounts are deducted of leases
- Debtors under legal proceedings is disclosed in Note 20.f.
- Impairment of assets are included in Gain (loss) from operations and
holdings of real estate assets.
F-135
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
D. COST OF SALES, LEASES AND SERVICES (I)
YEAR ENDED JUNE 30,
------------------------------------------------------------
2002 2001 2000
----------------- ------------------- --------------------
I. COST OF SALES
Stock as of beginning of year.......................... Ps. 91,750 Ps. 129,203 Ps. 153,094
Plus:
Purchase of the year................................... - - 687 13,967
Expenses (Note 20.f.).................................. 8,803 9,155 10,532
Transfers to fixed assets.............................. - - (2,408) (29,181)
Transfers to intangible assets......................... - - (595) (2,655)
Transfers from fixed assets............................ 36,860 23,809 23,214
Transfers from plots of land........................... - - - - 2,973
Less:
Adjustment to purchase price of inventory.............. (12,745) - - - -
Stock as of end of year................................ (70,445) (91,750) (129,203)
----------------- ------------------- --------------------
Subtotal............................................... 54,223 68,101 42,741
----------------- ------------------- --------------------
Plus:
Cost of sale of Llao Llao resorts...................... - - - - 11,725
Cost of sale of fixed assets (ii) - - - - 290
Results from holding of real estate assets............. (15,494) (3,830) (743)
----------------- ------------------- --------------------
COST OF PROPERTIES SOLD......................... 38,729 64,271 54,013
----------------- ------------------- --------------------
II. COST OF LEASES
Expenses (Notes 20.f.)................................. 11,028 10,035 8,805
----------------- ------------------- --------------------
COST OF PROPERTIES LEASED....................... 11,028 10,035 8,805
----------------- ------------------- --------------------
III. COST OF FEES FOR SERVICES
Expenses (note 20.f)................................... 683 3,779 980
----------------- ------------------- --------------------
COST OF FEES FOR SERVICES....................... 683 3,779 980
----------------- ------------------- --------------------
IV. COST OF HOTEL ACTIVITIESS
Stock as of beginning of year.......................... 432 648 1,103
Plus:
Purchases of the year.................................. - - 215 1,223
Expenses (Note 20.f)................................... 24,207 32,862 51,779
Stock as of end of year................................ (243) (432) (648)
----------------- ------------------- --------------------
COST OF HOTEL ACTIVITIES........................ 24,396 33,293 53,457
----------------- ------------------- --------------------
TOTAL COSTS............................................ 74,836 111,378 117,255
================= =================== ====================
(i) The book value of inventories at June 30, 2002 are net of the impairment
loss mentioned in Note 4.d.
(ii) Included in this Schedule as it corresponds to transactions involving
properties sold.
F-136
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
E. FOREIGN CURRENCY ASSETS AND LIABILITIES
Total as of June 30,
-----------------------------------
Amount of Current
foreign Exchange
Captions Currency currency rate (i) 2002 2001
- ------------------------------------------------ ----------- ------------- ------------------- ------------------
ASSETS
CURRENT ASSETS
Cash and banks:
Cash .......................... US$ 2,022,416 0.0037 Ps. 7,483 Ps. 49
Bank accounts ................. US$ 517,047 0.0037 1,913 6,945
Checks to be deposited ........ US$ 511,595 0.0037 1,893 57
Investments:
Time deposits ................. US$ - - 0.0037 - - 19,715
Banco Hipotecario S.A. ("BHSA") US$ - - 0.0037 - - 21,051
Mutual funds .................. US$ 1,985,022 0.0037 7,345 13,545
Commercial bonds .............. US$ - - 0.0037 - - 1,414
Mortgages and leases receivable, net:
Mortgages and leases
receivable ........................ US$ - - 0.0037 - - 57,328
Other receivables and prepaid
expenses:
Stock operations............... US$ - - 0.0037 - - 13,459
Debtors under legal proceedings US$ - - 0.0037 - - 25
Prepaid expenses .............. US$ 4,138 0.0037 15 96
Personnel loans and prepayments US$ - - 0.0037 - - 651
Other.......................... US$ - - 0.0037 - - 571
------------------- ------------------
TOTAL CURRENT ASSETS Ps. 18,649 Ps. 134,906
------------------- ------------------
NON-CURRENT ASSETS Mortgages and leases receivable, net:
Mortgages receivable .......... US$ - - 0.0037 - - 44,326
Other receivables and prepaid
expenses:
Related parties................ US$ 9,643,556 0.0038 36,646 - -
Personnel loans................ US$ - - 0.0037 - - 2,541
Other.......................... US$ - - 0.0037 - - 74
Investments:
Brazil Realty ................. US$ - - 0.0037 - - 133,800
BHSA........................... US$ - - 0.0037 - - 32,015
Latin American Econetworks N.V. US$ - - 0.0037 - - 9,658
IRSA Telecomunicaciones S.A.... US$ - - 0.0037 - - 3,388
Fixed assets....................... US$ 140,000 0.0037 518 - -
------------------- ------------------
TOTAL NON-CURRENT ASSETS........... Ps. 37,164 Ps. 225,802
------------------- ------------------
TOTAL ASSETS AS OF JUNE 30, 2002... Ps. 55,813 - -
=================== ==================
TOTAL ASSETS AS OF JUNE 30, 2001... - - Ps. 360,708
=================== ==================
(i) Official exchange rate prevailing as of June 30, 2002, except otherwise
indicated.
F-137
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20 OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
E. FOREIGN CURRENCY ASSETS AND LIABILITIES (CONTINUED)
Total as of June 30,
--------------------------------------
Amount of Current
foreign Exchange
Captions Currency currency rate (i) 2002 2001
- ------------------------------------------------- ---------- ------------- ----------------- -------------------
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable.............. US$ 54,947 0.0038 Ps. 209 Ps. 802
Customer advances................... US$ - - 0.0038 - - 3,181
Short term debt..................... US$ 147,684,628 0.0038 561,202 330,140
Taxes payable ...................... US$ 1,665,402 0.0038 6,329 - -
Other liabilities:
Customer advances............... US$ - - 0.0038 - - 2,306
Deferred gain................... US$ - - 0.0038 - - 1,958
Seller financing ............... US$ - - 0.0038 - - 1,626
Lessee deposits ................ US$ - - 0.0038 - - 1,240
Collections on behalf of third
parties ........................ US$ - - 0.0038 - - 188
Accruals........................ US$ - - 0.0038 - - 671
Other .......................... US$ 213,674 0.0038 812 135
----------------- -------------------
TOTAL CURRENT LIABILITIES Ps. 568,552 Ps. 342,247
----------------- -------------------
NON-CURRENT LIABILITIES
Trade accounts payable.............. US$ - - 0.0038 - - 374
Long term debt...................... US$ - - 0.0038 - - 26,012
Customer advances................... US$ - - 0.0038 - - 360
Other liabilities:
Lessee deposits................. US$ - - 0.0038 - - 3,468
Seller financing ............... US$ - - 0.0038 - - 2,836
Deferred gain................... US$ - - 0.0038 - - 370
Other .......................... US$ - - 0.0038 - - 831
----------------- -------------------
TOTAL NON-CURRENT LIABILITIES....... Ps. - - Ps. 34,251
----------------- -------------------
TOTAL LIABILITIES AS OF JUNE 30, 2002 Ps. 568,552 - -
================= ===================
TOTAL LIABILITIES AS OF JUNE 30, 2001 - - Ps. 376,498
================= ===================
(i) Official exchange rate prevailing as of June 30, 2002
F-138
IRSA INVERSIONES Y REPRESENTACIONES SOCIEDAD ANONIMA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. OTHER FINANCIAL STATEMENT INFORMATION (CONTINUED)
F. OTHER EXPENSES
EXPENSES
- ---------------------------------- ------------------------------------------------------------------------------------------------
Cost of Cost of Cost of Cost of Administrative Selling Financing
Items properties properties fees for hotel
sold leased services activities
- ---------------------------------- ------------ ------------ ----------------------------------------- ------------ -----------
Interest and index - adjustment.. Ps. - - Ps. - - Ps. - - Ps. - - Ps. 425 Ps. - - Ps. 47,100
Salaries and bonuses............. 277 - - - - 7,269 10,567 1,470 - -
Depreciation and amortization.... 272 7,865 - - 4,247 3,040 596 4,928
Fees and payments for services... 60 - - - - 1,618 7,040 130 - -
Lease expense.................... - - - - - - - - 451 - - - -
Maintenance of buildings......... 3,184 3,163 - - 1,864 335 33 - -
Social security contributions.... 61 - - - - 1,669 565 267 - -
Commissions and property sales
charges.......................... 3,350 - - - - 1,711 794 2,255 - -
Advertising ..................... - - - - - - - - 74 2,161 - -
Taxes, rates and contributions... 9 - - - - 917 994 - - - -
Mail and telephone............... - - - - - - 1,005 162 66 - -
Travel expenses.................. - - - - - - 2,320 168 16 - -
Bank charges..................... 27 - - - - - - - - - - 677
Safe deposits box................ - - - - - - - - 138 - - 43
Allowance for doubtful accounts.. - - - - - - - - 106 366 - -
Freight and transportation ...... - - - - - - 329 312 115 - -
Director's fees.................. - - - - - - - - 1,037 - - - -
Bids lost........................ - - - - - - - - - - - - - -
Other............................ 1,563 - - 683 1,258 2,320 503 4,469
------------ ------------ ------------ ------------- -------------- ------------ -----------
Total as of June 30, 2002........ Ps. 8,803 Ps. 11,028 Ps. 683 Ps. 24,207 Ps. 28,528 Ps. 7,978 Ps. 57,217
============ ============ ============ ============= ============== ============ ===========
Total as of June 30, 2001........ Ps. 9,155 Ps. 10,035 Ps. 3,779 Ps. 32,862 Ps. 35,593 Ps. 15,546 Ps. 63,697
============ ============ ============ ============= ============== ============ ===========
Total as of June 30, 2000........ Ps. 10,532 Ps. 8,805 Ps. 980 Ps. 51,779 Ps. 42,156 Ps. 14,679 Ps. 46,943
============ ============ ============ ============= ============== ============ ===========
- ------------------------------------ ------------- ------------ --------------
Total for Total for Total for
Items the year the year the year 2000
2002 2001
- ------------------------------------ ------------- ------------ --------------
Interest and index - adjustment.... Ps. 47,525 Ps. 56,826 Ps. 40,926
Salaries and bonuses............... 19,583 27,684 34,926
Depreciation and amortization...... 20,948 22,931 23,676
Fees and payments for services..... 8,848 10,747 12,126
Lease expense...................... 451 1,049 280
Maintenance of buildings........... 8,579 15,028 17,322
Social security contributions...... 2,562 3,822 7,672
Commissions and property sales
charges............................ 8,110 9,329 4,873
Advertising ....................... 2,235 3,347 5,004
Taxes, rates and contributions..... 1,920 3,052 2,338
Mail and telephone................. 1,233 976 3,899
Travel expenses.................... 2,504 2,670 5,014
Bank charges....................... 704 806 1,491
Safe deposits box.................. 181 356 540
Allowance for doubtful accounts.... 472 407 1,017
Freight and transportation ........ 756 1,092 781
Director's fees.................... 1,037 1,410 1,457
Bids lost.......................... - - - - 184
Other.............................. 10,796 9,135 12,348
------------- ------------ --------------
Total as of June 30, 2002.......... Ps. 138,444 - - - -
============= ============ ==============
Total as of June 30, 2001.......... - - Ps. 170,667 - -
============= ============ ==============
Total as of June 30, 2000.......... - - - - Ps. 175,874
============= ============ ==============
F-139
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authotized
the undersigned to signed this annual report on its behalf.
CRESUD S.A.C.I.F. Y A.
/s/ David A. Perednik
------------------------
By: David A. Perednik
Administrative Officer
December 9, 2002.
CERTIFICATION
I, Alejandro G. Elsztain, certify that:
1. I have reviewed this annual report on Form 20-F of Cresud Sociedad
Anonima Comercial Inmobiliaria Financiera y Agropecuaria;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
/s/ Alejandro G. Elsztain
- ----------------------------
By: Alejandro G. Elsztain
Chief Executive Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION
-------------
I, Clarisa D. Lifsic, certify that:
1. I have reviewed this annual report on Form 20-F of Cresud Sociedad
Anonima Comercial Inmobiliaria Financiera y Agropecuaria;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
/s/ Clarisa D. Lifsic
- -----------------------
By: Clarisa D. Lifsic
Chief Financial Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Cresud Sociedad
Anonima Comercial Inmobiliaria Financiera y Agropecuaria (the "Company") for the
year ended June 30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), Alejandro G. Elsztain, as Chief Executive
Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of his knowledge;
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Alejandro G. Elsztain
- --------------------------
By: Alejandro G. Elsztain
Chief Executive Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F of Cresud Sociedad
Anonima Comercial Inmobiliaria Financiera y Agropecuaria (the "Company") for the
year ended June 30, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), Clarisa D. Lifsic, as Chief Financial Officer of
the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
his knowledge;
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Clarisa D. Lifsic
- ------------------------
By: Clarisa D. Lifsic
Chief Financial Officer
December 9, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except as to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities and Exchange Act of 1934, as amended.