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Desc SA de CV – ‘20-F/A’ for 12/31/00

On:  Friday, 8/24/01   ·   For:  12/31/00   ·   Accession #:  909518-1-500265   ·   File #:  1-13196

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/24/01  Desc SA de CV                     20-F/A     12/31/00    2:449K                                   Weil Gotshal & Ma… 04/FA

Amendment to Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F/A      Amendment to Annual Report of a Foreign Private      144    631K 
                          Issuer                                                 
 2: EX-1.1      Underwriting Agreement                                16     58K 


20-F/A   —   Amendment to Annual Report of a Foreign Private Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Desc, S.A. de C.V
6Part I
"Item 1. Identity of Directors, Senior Management and Advisers
"Item 2. Offer Statistics and Expected Timetable
"Item 3. Key Information
11Noon Buying Rate
"Risk Factors Relating to Our Operations
"Dependence on dividends from subsidiaries
20Item 4. Information on our Company
"Business Overview
34Food
40Bosques de Santa Fe
41Nafta
44Item 5. Operating and Financial Review and Prospects
60Item 6. Directors, Senior Management and Employees
63Compensation of Directors and Officers
64Item 7. Major Shareholders and Related Party Transactions
65Item 8. Financial Information
"Item 9. The Offer and Listing
68Item 10. Additional Information
"Share Capital
"Bylaws
70Stockholders' Meetings
72Dividends and Distributions
88Non-U.S. Holders
"Information Reporting and Back-up Withholding
89Dividends and Paying Agent
92Item 11. Quantitative and Qualitative Disclosures About Market Risk
93Item 12. Description of Securities Other than Equity Securities
94Part Ii
"Item 13. Defaults, Dividend Arrearages and Delinquencies
"Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
"Item 15. [Reserved]
95Part Iii
"Item 17. Financial Statements
"Item 19. Exhibits
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F/A (Mark One) |_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(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 December 31, 2000 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 1-13196 DESC, S.A. DE C.V. -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Not Applicable -------------------------------------------------------------------------------- (Translation of Registrant's name into English) United Mexican States -------------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) Paseo de los Tamarindos 400-B, Bosques de las Lomas, 05120 Mexico, D.F. -------------------------------------------------------------------------------- (Address of principal executive offices) 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 -------------------------------------------------------------------------------- American Depositary Shares, each New York Stock Exchange, Inc. representing Twenty Series C Shares(1) Series C Shares, without expression of par New York Stock Exchange, Inc. value(2) (1) Evidenced by American Depositary Receipts (ADRs). (2) Not for trading, but only in connection with the registration of the American Depositary Shares. Securities registered or to be registered pursuant to Section 12(g) of the Act: None -------------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Dine, S.A. de C.V.'s 8-3/4% Guaranteed Notes due 2007 -------------------------------------------------------------------------------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Series A Common Stock: 587,479,900 ---------------------------------- Series B Common Stock: 506,176,760 ---------------------------------- Series C Common Stock: 275,341,610 ---------------------------------- 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. |X| Yes |_| No Indicate by check mark which financial statement item the registrant has elected to follow. |_| Item 17 |X| Item 18
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TABLE OF CONTENTS Page PART I ........................................................................4 Item 1. Identity of Directors, Senior Management and Advisers.................4 Item 2. Offer Statistics and Expected Timetable...............................4 Item 3. Key Information.......................................................4 Item 4. Information on our Company...........................................17 Item 5. Operating and Financial Review and Prospects.........................41 Item 6. Directors, Senior Management and Employees...........................57 Item 7. Major Shareholders and Related Party Transactions....................61 Item 8. Financial Information................................................62 Item 9. The Offer and Listing................................................62 Item 10. Additional Information...............................................65 Item 11. Quantitative and Qualitative Disclosures About Market Risk...........89 Item 12. Description of Securities Other than Equity Securities...............90 PART II ......................................................................91 Item 13. Defaults, Dividend Arrearages and Delinquencies......................91 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds......................................................91 Item 15. [RESERVED]...........................................................91 Item 16. [RESERVED]...........................................................91 PART III .....................................................................92 Item 17. Financial Statements.................................................92 Item 18. Financial Statements.................................................92 Item 19. Exhibits.............................................................92 i
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Presentation of Information In this annual report: o "Depositary" means Citibank, N.A., as depositary, under that certain Amended and Restated Deposit Agreement, dated as of June 29, 1994, effective as of July 20, 1994, amended as of July 15, 1996, among Desc, Citibank, and all holders and beneficial owners from time to time of American Depositary Receipts ("ADRs"), evidencing American Depositary Sharers ("ADSs"), issued thereunder. Each ADS currently represents twenty Series C shares. o "Dine" means Dine, S.A. de C.V., a wholly owned subsidiary of Desc engaged in the real estate business; o "Dollars" and "$" refer to the currency of the United States of America; o "Financial Statements" means Desc's audited consolidated financial statements for the years ended December 31, 2000, 1999 and 1998; o "GAAP" means generally accepted accounting principles in the indicated country; o "Girsa" means Girsa, S.A. de C.V., a wholly owned subsidiary of Desc engaged in the chemicals business; o "Mexico" means the United Mexican States; o "Mexican government" means the Mexican federal government; o "NCPI" means the Mexican National Consumers Price Index, a measure of inflation in Mexico; o "Noon Buying Rate" means the noon buying rate in New York City for cable transfers in Pesos as certified for customs purposes by the U.S. Federal Reserve Bank, expressed in Pesos per $1.00; o "Pesos" and "Ps." refer to the currency of Mexico. Except as otherwise indicated, all Peso amounts reflect thousands of Pesos; o "SEC" means the U.S. Securities and Exchange Commission; o "Unik" means Unik, S.A. de C.V., a wholly owned subsidiary of Desc engaged in the automotive parts business; and o "we," "our," "us" and similar terms, as well as "Desc," mean Desc, S.A. de C.V. and its consolidated subsidiaries, unless the context indicates otherwise.
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Our fiscal year ends on December 31 of each year, and references to "fiscal year" reflect a 52-week period. Our Financial Statements are expressed in Pesos and prepared in accordance with Mexican GAAP, which differ from U.S. GAAP in significant respects, in particular by requiring Mexican companies to recognize effects of inflation. Please see notes 19 and 20 to our Financial Statements for a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Desc. The Mexican Institute of Public Accountants has issued Bulletin B-10, "Recognition of the Effects of Inflation on Financial Information", as amended, and Bulletin B-12, "Statement of Changes in Financial Position". These bulletins outline the inflation accounting methodology mandatory for all Mexican companies reporting under Mexican GAAP. Mexican GAAP provide for the recognition of effects of inflation by restating nonmonetary assets and liabilities using the NCPI, restating the components of stockholders' equity using the NCPI and recording gains or losses in purchasing power due to the holding of monetary liabilities or assets. Mexican GAAP also require that all financial information be presented in constant Pesos, having the same purchasing power for each period indicated taking into account inflation, as of the date of the most recent balance sheet presented. The effect of these inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP. The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 27.7% in 1996, 15.7% in 1997, 18.6% in 1998, 12.3% in 1999 and 9.0% in 2000. In this annual report, all financial data presented in Pesos for all periods in the Financial Statements, unless otherwise indicated, have been restated in constant Pesos as of December 31, 2000. Dollar amounts, unless otherwise indicated, are stated on a nominal, that is, noninflation adjusted, basis, except for convenience translations of Peso amounts. Solely for your convenience, this annual report contains translations of Peso amounts into Dollars. We have used an exchange rate of Ps.9.65 per Dollar for these translations, which is the exchange rate quoted by Banco de Mexico on December 31, 2000. The Noon Buying Rate was Ps.9.62 per $1.00 on December 31, 2000. Translations contained in this annual report do not constitute representations that the stated Peso amounts actually represent Dollar amounts or vice versa, or that amounts could be or could have been converted into Dollars or Pesos, as the case may be, at any particular rate. Prior to December 8, 1999, we conducted our food business through our wholly owned subsidiary Agrobios, S.A. de C.V. On December 8, 1999, we merged Agrobios with and into Desc, with Desc being the surviving company of the merger. As a result, each of Agroken, S.A. de C.V., which conducts our pork business, Grupo Corfuerte, S.A. de C.V., which conducts our branded food business in Mexico, Authentic Acquisition Corporation, Inc., which conducts our branded food business in the U.S., and Aquanova, S.A. de C.V., which conducts our development-stage shrimp business), became a direct subsidiary of Desc. As of the second half of 2000, we restructured the management of our food sector to address that sector's relatively poor results and appointed Girsa's 2
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management team to manage our branded food business and appointed Ernesto Vega Velasco, our senior vice president, and his management team to manage our commodity food business, which consists of pork and shrimp. Beginning in 2000, we combined our diversified products segment, which includes adhesives, glues, waterproofing, additives and sealants, with our petrochemicals segment. These businesses are operated under Girsa, and are now reported together as our chemicals segment. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 This annual report includes "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology such as "estimate," "project," "believe," "anticipate," "intend," "expect," "plan," "may," "will," "would," "could," or "should" or the negative of these words or other variations of these words or other similar expressions. These forward-looking statements reflect the views of our management with respect to our future financial performance and future events. All forward-looking statements contained in this annual report, including those presented with numerical specificity, however, are uncertain. They are based on assumptions and affected by risks and uncertainties that could cause actual results to differ materially from our expectations described in these forward-looking statements. These factors include, among other things, the following: o changes in the Mexican economy or in other economies in which our products are sold, including rates of inflation, economic growth and currency fluctuations; o Mexican political instability, including the reversal of market-oriented reforms and economic recovery measures or the failure of those reforms and measures to achieve their goals; o adverse changes in the prices of our products or of the prices of other products in which our products are incorporated, in the international markets or on the costs of our inputs; o competitive product and pricing pressures in both the domestic and international markets; and o foreign currency rate fluctuations and fluctuations in other market rate sensitive instruments to which we are a party. We caution readers not to place undue reliance on these forward-looking statements. We do not undertake any obligation or intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3
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PART I Item 1. Identity of Directors, Senior Management and Advisers Not Applicable. Item 2. Offer Statistics and Expected Timetable Not Applicable. Item 3. Key Information Selected Financial Data The following table presents selected consolidated financial data of Desc for the fiscal years 1996, 1997, 1998, 1999 and 2000. You should read this information in conjunction with the Financial Statements included elsewhere in this annual report. The Financial Statements have been audited by Arthur Andersen, our independent public accountants. The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S. GAAP, in particular by requiring Mexican companies to recognize effects of inflation. Notes 19 and 20 to the Financial Statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to Desc, and a reconciliation to U.S. GAAP of Desc's net income and stockholders' equity. The effect of inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP. Net income information included in the following tables consists of "majority net income," as referred to in the Financial Statements, and therefore is net of minority interests attributable to third party equity interests in some of our subsidiaries, unless the context otherwise requires. Mexico experienced high inflation in some of the periods covered by the Financial Statements. The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 27.7% in 1996, 15.7% in 1997, 18.6% in 1998, 12.3% in 1999 and 9.0% in 2000. In accordance with Mexican GAAP rules on inflation accounting, the Financial Statements recognize effects of inflation and restate data for prior periods in constant Pesos of December 31, 2000. Accordingly, financial data for all periods in the selected consolidated financial information derived from the Financial Statements and presented below have been restated in constant Pesos of December 31, 2000. 4
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Selected Consolidated Financial Information [Enlarge/Download Table] Year ended December 31, -------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 -------------- -------------- -------------- -------------- -------------- (In thousands, except for net income (loss) per share/ADS) Income statement data: Mexican GAAP: Net sales ................................ Ps. 20,131,034 Ps. 23,451,558 Ps. 26,176,034 Ps. 25,329,850 Ps. 23,439,306 Cost of sales ............................ 14,239,685 17,075,451 18,859,146 18,255,984 17,444,972 Gross profit ............................. 5,891,349 6,376,107 7,316,888 7,073,866 5,994,334 Operating expenses ....................... 2,648,623 2,830,700 3,541,180 3,738,732 3,731,019 Operating income ......................... 3,242,726 3,545,407 3,775,708 3,335,134 2,263,315 Comprehensive financial result ........... 1,171,239 69,199 (1,442,325) 446,528 (689,957) Equity in associated companies and unconsolidated subsidiaries ......... 52,472 (60,575) (132,380) 46,483 (10,302) Impairment of fixed assets ............... -- (32,202) (37,739) (220,736) (152,026) Other income (expense), net .............. (34,329) 14,302 (97,655) (241,242) (428,102) Provision for income taxes and employee profit sharing ............. 394,143 364,162 532,003 889,843 554,016 Income before extraordinary items ........ 4,037,965 3,171,969 1,533,606 2,476,324 428,912 Profit on the sale of subsidiaries ....... -- -- 119,517 153,746 -- Extraordinary items ...................... (272,795) -- -- -- 191,465 Net Income before minority interest ...... 3,765,170 3,171,969 1,653,123 2,630,070 620,377 Minority interest ........................ (575,264) (544,219) (521,317) (694,997) (345,482) Majority net income ...................... 3,189,906 2,627,750 1,131,806 1,935,073 274,895 Majority net income per share(1) ......... 2.21 1.73 0.75 1.30 0.19 Majority net income per ADS(2) ........... 44.20 34.60 15.00 26.00 3.80 Dividends per share ...................... 0.00 0.17 0.63 0.00 0.59 Dividends per ADS ........................ 0.00 3.40 12.60 0.00 2.36 Approximate U.S. GAAP amounts: Net sales ................................ Ps. 20,180,032 Ps. 23,452,030 Ps. 26,173,807 Ps. 25,330,232 Ps. 23,445,839 Operating income ......................... 3,229,881 3,041,979 3,543,969 2,685,595 1,666,729 Majority income (loss) from continuing operations .......................... 3,301,106 1,487,512 1,405,990 1,732,027 495,344 Majority net income (loss) ............... 3,301,106 1,487,512 1,405,990 1,732,027 495,344 Majority net income (loss) per share(1) .. 2.29 0.98 0.93 1.16 0.35 Majority net income (loss) per ADS(2) .... 45.80 19.60 18.60 23.20 7.00 Balance sheet data (at period end): Mexican GAAP: Assets: Total current assets ..................... Ps. 7,083,885 Ps. 9,281,683 Ps. 9,770,951 Ps. 10,046,232 Ps. 10,984,099 Land held for development and real estate projects in progress ......... 3,743,073 3,240,542 4,180,083 3,765,789 3,737,802 Investment in shares ..................... 523,161 484,147 153,926 422,491 392,378 Property, plant and equipment, net ....... 14,978,818 15,026,323 16,707,303 15,537,372 14,147,921 Total assets ............................. 26,974,454 29,477,137 33,699,369 32,310,966 32,112,150 Liabilities: Short-term debt(3) ....................... 2,638,919 3,626,673 4,284,606 4,082,850 3,738,874 Long-term debt(4) ........................ 5,731,055 6,525,420 8,403,162 7,024,513 8,472,697 Total liabilities ........................ 11,663,608 13,429,770 16,624,591 14,799,669 18,370,875 Stockholders' equity: Capital Stock ............................ 9,958,710 10,064,907 10,062,627 10,062,431 10,060,941 Total stockholders' equity including minority interest(5) ................ 15,310,846 16,047,367 17,074,779 17,511,297 13,741,275 Total liabilities and stockholders' equity(5)(6) ........................ 26,974,454 29,477,137 33,699,369 32,310,966 32,112,150 Approximate U.S. GAAP amounts: Property, plant and equipment, net ....... Ps. 14,549,409 Ps. 15,539,675 Ps. 17,399,222 Ps. 16,582,156 Ps. 15,256,529 Total assets ............................. 26,804,653 30,452,004 34,760,219 34,137,351 33,795,608 Short-term debt .......................... 2,638,918 3,626,673 4,284,606 4,082,850 3,738,874 Long-term debt ........................... 5,731,055 6,525,420 8,403,162 7,024,513 8,472,697 Stockholders' equity(5) .................. 9,458,946 10,510,439 10,126,988 10,628,162 9,443,503
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2000 -------------- Income statement data: Mexican GAAP: Net sales ................................ $ 2,428,944 Cost of sales ............................ 1,807,769 Gross profit ............................. 621,175 Operating expenses ....................... 386,635 Operating income ......................... 234,540 Comprehensive financial result ........... (71,498) Equity in associated companies and unconsolidated subsidiaries ......... (1,067) Impairment of fixed assets ............... (15,753) Other income (expense), net .............. (44,363) Provision for income taxes and employee profit sharing ............. 57,411 Income before extraordinary items ........ 44,448 Profit on the sale of subsidiaries ....... -- Extraordinary items ...................... 19,840 Net Income before minority interest ...... 64,288 Minority interest ........................ (35,802) Majority net income ...................... 28,486 Majority net income per share(1) ......... 0.02 Majority net income per ADS(2) ........... 0.40 Dividends per share ...................... 0.07 Dividends per ADS ........................ 0.28 Approximate U.S. GAAP amounts: Net sales ................................ $ 2,429,620 Operating income ......................... 172,718 Majority income (loss) from continuing operations .......................... 51,331 Majority net income (loss) ............... 51,331 Majority net income (loss) per share(1) .. .04 Majority net income (loss) per ADS(2) .... 0.80 Balance sheet data (at period end): Mexican GAAP: Assets: Total current assets ..................... $ 1,138,248 Land held for development and real estate projects in progress ......... 387,337 Investment in shares ..................... 40,661 Property, plant and equipment, net ....... 1,466,106 Total assets ............................. 3,327,684 Liabilities: Short-term debt(3) ....................... 387,448 Long-term debt(4) ........................ 878,000 Total liabilities ........................ 1,903,717 Stockholders' equity: Capital Stock ............................ 1,042,584 Total stockholders' equity including minority interest(5) ................ 1,423,967 Total liabilities and stockholders' equity(5)(6) ........................ 3,327,684 Approximate U.S. GAAP amounts: Property, plant and equipment, net ....... $ 1,580,987 Total assets ............................. 3,502,136 Short-term debt .......................... 387,448 Long-term debt ........................... 878,001 Stockholders' equity(5) .................. 978,602
5
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Selected Consolidated Financial Information (continued) [Enlarge/Download Table] Year ended December 31, -------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 -------------- -------------- -------------- -------------- -------------- (In thousands, except for net income (loss) per share/ADS) Other data: Working capital(7) ....................... Ps. 2,247,323 Ps. 4,309,707 Ps. 4,662,759 Ps. 4,660,813 Ps. 5,792,322 Depreciation and amortization(8) ......... 992,670 961,098 1,140,587 1,139,098 1,183,778 Operating cash flow (EBITDA)(9) .......... 4,235,396 4,506,505 4,916,295 4,474,232 3,447,093 Capital expenditures(10) ................. 2,308,386 3,031,812 4,445,987 3,073,424 1,842,228 Investment in real estate projects(11) ... 340,921 161,481 544,951 396,836 668,611 Dividends paid ........................... -- 260,746 953,207 0 408,848 Dividends paid to minority interest ...... (11,609) (241,734) (293,990) 0 (44,662) Number of employees ...................... 18,880 22,152 23,664 20,878 22,320 Weighted average shares outstanding ...... 1,443,300 1,515,183 1,506,981 1,489,733 1,418,126 Net sales: Automotive Parts (UNIK) .................. Ps. 7,400,731 Ps. 9,594,182 Ps. 10,876,582 Ps. 10,854,485 Ps. 10,935,622 Chemicals (GIRSA) ........................ 9,670,030 8,714,972 8,456,287 7,595,856 7,914,807 Food ..................................... 2,738,087 4,576,970 5,923,063 5,973,442 3,575,823 Real Estate (DINE) ....................... 322,186 540,438 895,370 876,452 995,668 Desc(12) ................................. 0 24,996 24,732 29,615 17,386 -------------- -------------- -------------- -------------- -------------- Total .................................... Ps. 20,131,034 Ps. 23,451,558 Ps. 26,176,034 Ps. 25,329,850 Ps. 23,439,306 Cost of sales and operating expenses: Automotive Parts (UNIK) .................. Ps. 6,163,824 Ps. 8,153,493 Ps. 9,219,483 Ps. 9,122,457 Ps. 9,335,897 Chemicals (GIRSA) ........................ 7,959,121 7,308,387 7,154,159 6,660,882 7,393,422 Food ..................................... 2,488,077 3,979,541 5,389,632 5,568,288 3,536,204 Real Estate (DINE) ....................... 245,814 402,265 575,045 567,619 840,693 Desc(13) ................................. 31,472 62,065 62,007 75,470 69,775 -------------- -------------- -------------- -------------- -------------- Total ............................... Ps. 16,888,308 Ps. 19,906,151 Ps. 22,400,326 Ps. 21,994,716 Ps. 21,175,991 Operating income: Automotive Parts (UNIK) .................. Ps. 1,236,907 Ps. 1,440,689 Ps. 1,657,099 Ps. 1,732,028 Ps. 1,599,725 Chemicals (GIRSA) ........................ 1,710,909 1,406,185 1,302,128 934,974 521,385 Food ..................................... 250,010 597,429 533,431 405,154 39,619 Real Estate (DINE) ....................... 76,372 138,173 320,325 308,833 154,975 Desc ..................................... (31,472) (37,069) (37,275) (45,855) (52,389) -------------- -------------- -------------- -------------- Total ............................... Ps. 3,242,726 Ps. 3,545,407 Ps. 3,775,708 Ps. 3,335,134 Ps. 2,263,315 Equity in associated companies and unconsolidated subsidiaries(14) ..... Ps. 52,472 Ps. (60,575) Ps. (132,380) Ps. 46,483 Ps. (10,302) 2000 -------------- Other data: Working capital(7) ....................... $ 600,242 Depreciation and amortization(8) ......... 122,671 Operating cash flow (EBITDA)(9) .......... 357,211 Capital expenditures(10) ................. 190,904 Investment in real estate projects(11) ... 69,286 Dividends paid ........................... 42,471 Dividends paid to minority interest ...... (4,628) Number of employees ...................... 22,320 Weighted average shares outstanding ...... 1,418,126 Net sales: Automotive Parts (UNIK) .................. $ 1,110,927 Chemicals (GIRSA) ........................ 805,153 Food ..................................... 364,293 Real Estate (DINE) ....................... 102,050 Desc(12) ................................. 1,780 -------------- Total .................................... $ 2,428,944 Cost of sales and operating expenses: Automotive Parts (UNIK) .................. $ 967,450 Chemicals (GIRSA) ........................ 766,157 Food ..................................... 366,446 Real Estate (DINE) ....................... 87,118 Desc(13) ................................. 7,233 -------------- Total ............................... $ 2,194,404 Operating income: Automotive Parts (UNIK) .................. $162,142 Chemicals (GIRSA) ........................ 52,856 Food ..................................... 3,935 Real Estate (DINE) ....................... 15,637 Desc ..................................... (5,322) -------------- Total ............................... $ 234,540 Equity in associated companies and unconsolidated subsidiaries(14) ..... $ (1,067) --------- (1) Net income per share was calculated by dividing net income by the weighted average number of shares outstanding during the period retroactively reflecting the 5:1 stock split effected on September 8, 1998. (2) Calculated as if the applicable number of outstanding shares were all represented by ADSs at a ratio of 20 shares per ADS. (3) At December 31, 2000, Ps.3,338,757 of short-term debt represented the Peso equivalent of Dollar-denominated borrowing and the balance of Ps.400,117 of short-term debt represented Peso-denominated borrowings. (4) Excludes current portion of long-term debt. At December 31, 2000, Ps.6,435,463 of long-term debt represented the Peso equivalent of Dollar-denominated borrowings, and the balance of Ps.2,037,234 of long-term debt represented Peso-denominated borrowings. (5) Includes variable capital shares. See Note 15 to the Financial Statements for more information about stockholders' equity. (6) Includes minority interest which does not constitute stockholders' equity under U.S. GAAP. (7) Defined as current assets except for cash, less current liabilities except for short-term bank loans and current portion of long-term debt and notes payable. (8) Does not include amortization of goodwill or amortization of an inactive automotive parts sector plant. (9) Defined as earnings before interest expense, tax, depreciation and amortization. We have included EBITDA data as a convenience only, because some investors and analysts use it to measure a company's ability to service debt. EBITDA is not a measure of financial performance under either Mexican GAAP or U.S. GAAP and should not be considered an alternative to net income as a measure of operating performance. In evaluating EBITDA, investors should consider that the methodology applied in calculating EBITDA may differ among companies and analysts. Investors relying on EBITDA should take into account that the amount of EBITDA may not be available for debt service due to other commitments and uncertainties in the operation of business. (10) Includes expenditures related to the Santa Fe shopping mall in which we have a 50.1% interest, including acquisitions of land, construction costs, permits, architects' and engineering fees and related items. Does not include expenditures for other projects in our real estate sector. (11) Includes expenditures made during the relevant period for acquisitions of land, construction costs, permits, architects' and engineering fees and related items, other than expenditures related to the Santa Fe shopping mall. (12) Represents sales by services company. (13) Represents operating expenses allocable to the holding company. (14) For 1996, reflects primarily the corporate services company and a special-purpose company whose only asset is an aircraft. For 1997, 1998 and 1999, reflects primarily the adjustment to market value of our investment in Grupo Financiero Santander Mexicano, which we sold in 2000. For 2000, reflects principally the equity in Paratec, S.A. de C.V. and Dynasol Elastomeros. 6
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Exchange Rates Since November 1991, Mexico has had a free market for foreign exchange. Until December 21, 1994, Banco de Mexico, the Mexican Central Bank, kept the Peso-Dollar exchange rate within a range prescribed by the Mexican government through intervention in the foreign exchange market. Within the range, the Banco de Mexico generally intervened to reduce day-to-day fluctuations in the exchange rate. On December 21, 1994, the Mexican government announced its decision to suspend intervention by Banco de Mexico and to allow the Peso to float freely against the Dollar. The Peso declined sharply in December 1994 and continued to fall under conditions of high volatility in 1995. During 1996 and 1997, the Peso did not fall as quickly and was less volatile. In the last quarter of 1997 and for most of 1998, the foreign exchange markets were affected significantly by the financial crises in Asia and Russia and financial turmoil in various other countries, including Brazil and Venezuela. Although the Peso declined during this period, it was relatively stable in 1999 and 2000. There can be no assurance that the Mexican government will maintain its current policies concerning the Peso or that the Peso will not experience a significant depreciation or appreciation in the future. Except for the period from September through December 1982 during the Mexican liquidity crisis, Banco de Mexico consistently has made foreign currency available to Mexican private sector entities, such as Desc, to meet their foreign currency obligations and has not adopted any measure to control the availability of foreign currency since November 1991. Nevertheless, if there were renewed shortages of foreign currency, Banco de Mexico might not continue to make foreign currency available to private sector companies, and foreign currency needed by Desc to service foreign currency obligations might be available for purchase in the open market only at substantial additional cost. The following table lists, for the periods indicated, the period-end, average, high and low Noon Buying Rate for the purchase and sale of Dollars, presented in each case as the average between the purchase and sale rates, expressed in Pesos per Dollar: 7
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Noon Buying Rate ---------------------------------------------- Year Ended High Low Average(1) Period End December 31, ---- --- ---------- ---------- ------------ 1996........................ 8.05 7.33 7.63 7.88 1997........................ 8.41 7.72 7.97 8.07 1998 ....................... 10.63 8.04 9.24 9.90 1999 ....................... 10.60 9.24 9.56 9.48 2000........................ 10.09 9.18 9.47 9.62 Most Recent 6 months: --------------------- December 2000............... 9.61 9.37 January 2001................ 9.97 9.66 February 2001............... 9.78 9.65 March 2001.................. 9.71 9.48 April 2001.................. 9.42 9.18 May 2001.................... 9.29 8.94 ---------- (1) Average of month-end rates. On June 28, 2001, the Noon Buying Rate was Ps. 9.08 to $1.00. Fluctuations in the exchange rate between the Peso and the Dollar will affect the price of the ADSs on the NYSE. To the extent Desc pays cash dividends and other cash distributions (including the net proceeds from any sale of securities, property or rights distributed to the owners of Series C shares) denominated in Pesos, the Depositary must convert or cause to be converted, as soon as possible, such amounts into Dollars, to the extent that the Depositary in its judgment can do so on a reasonable basis and in accordance with applicable law. As a result, any exchange rate fluctuations will affect the Dollar amounts received by the holders of the ADSs upon conversion of any such Peso-denominated dividend payment or distribution. RISK FACTORS Our business, operating results and financial condition could be seriously harmed due to any of the following risks. If we do not successfully address any of the risks described below, we could experience a material adverse effect on our business, operating results and financial condition and the ADS price of Desc may decline. We cannot assure you that we will successfully address all of these risks. Risk Factors Relating to Our Operations Dependence on dividends from subsidiaries We are structured as a holding company that operates through more than 100 direct and indirect subsidiaries. Accordingly, we rely on dividends from our subsidiaries to generate the funds necessary to meet debt service obligations at Desc. The ability of our subsidiaries to pay dividends is subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits reflected in its year-end financial statements (approved by its stockholders), only if such payment is 8
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approved by its stockholders, and then only after the creation of a required legal reserve and the set off or satisfaction of losses, if any, suffered in previous fiscal years. Dividends and other payments by some of our direct and indirect subsidiaries are shared with substantial minority stockholders of those subsidiaries. Technological assistance and licensing agreements may not be renewed A number of our subsidiaries conduct all or a portion of their businesses through joint ventures or technological alliances with Mexican and non-Mexican partners. Certain of these partners and other Mexican and non-Mexican companies also license technology and other intellectual property (e.g., trade names) to these subsidiaries for use in the manufacture and sale of various products, including most automotive parts. We believe that these ventures, alliances and license arrangements give us access to advanced technology that we otherwise would not be able to develop and provide us with important competitive advantages. However, we cannot assure that in the future certain of these partners will not prefer to conduct business directly in Mexico and terminate their relationships with us in view of the easing of the limitations on foreign investment, the reduction of import duties and tariffs that has occurred in recent years and as a result of the continued implementation of the North American Free Trade Agreement or for other reasons. Accordingly, we cannot assure you that we will be successful in renewing any of our technology, license, joint venture or other agreements or arrangements upon their expiration, in renewing these agreements or arrangements on terms as favorable as the present ones, in forming similar alliances with other partners or in developing equivalent technologies independently. Environmental laws could lead to added expenditures or liabilities Our operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The fundamental environmental law in the Mexican federal system is the Ley General del Equilibrio Ecologico y la Proteccion al Ambiente (the Mexican General Law of Ecological Balance and Environmental Protection or the "Ecological Law"). Under the Ecological Law, the Mexican government has implemented an aggressive program to protect the environment by promulgating rules concerning water, land, air and noise pollution, and hazardous substances. The Mexican government also has enacted regulations concerning the importation and exportation of hazardous materials and hazardous waste.In addition, Mexican regulatory authorities have promulgated various health and environmental regulations and standards, which are applicable to our pork business, in order to control and eliminate the spread of infections and other types of diseases in the Mexican Bajio region. We, and particularly our chemicals business, use and produce a substantial amount of substances and emissions that are or could become subject to regulatory control. We believe that all of our facilities and real estate investments presently are in substantial compliance with applicable environmental laws and regulations as currently enforced. However, we have no basis for predicting what effect, if any, stricter enforcement of existing laws and regulations or the adoption of additional environmental 9
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laws and regulations would have on our results of operations, cash flows or financial condition. Risks Relating to Girsa Our chemicals business is cyclical and may be adversely affected by events and conditions beyond our control The chemicals industry is a highly cyclical business. Ethylene and ethylene derivative products, such as petrochemicals, are particularly heavily impacted by the business cycles of the chemicals industry. Our chemicals business may also be affected by other events or conditions that are beyond our control, including changes or developments in domestic or foreign economic markets, increases in natural gas prices or the cost of raw materials, competition from other chemicals manufacturers, changes in the availability or supply of chemical products generally and unscheduled downtime of plants. These external factors may cause fluctuations in the demand for our chemical products and fluctuations in our prices and our margins, which may adversely affect our income and cash flow. Girsa's principal raw material, styrene monomer, is subject to substantial price fluctuations, which may adversely affect Girsa's financial results; however, the current depressed price of this commodity has had a positive effect on our margins for synthetic rubber and polystyrene. We cannot predict when the price of styrene monomer will recover. Material events at our customers affect Girsa Our sales volumes of synthetic rubber and carbon black have decreased because of the shutdown of two tire manufacturing facilities in Mexico, one of which occurred in 2000 and the other earlier this year. We have partly offset the reduced sales volume by increasing our sales to new and existing customers. We are unable to predict and, therefore, cannot plan for events such as these. In addition, the slowdown of the U.S. economy has increased competition from U.S. and other chemical manufacturers, which has put added pressure on the pricing of our products. Risks Relating to our Food Sector A decrease in the supply of tomatoes and hot peppers may affect our branded food operations Our domestic and U.S. branded food operations may be adversely affected if there is a shortfall in the tomato harvests in Mexico or the United States and, to a lesser extent, the hot pepper harvests in Mexico. The size of the harvest of these products varies based upon weather conditions and other factors, none of which is within our control. However, we believe we could minimize the impact of a significant tomato or hot pepper shortfall through integrated planning and by optimizing the purchase of these affected crops in various markets. 10
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Our food business has been affected by the power crisis in the state of California The current power crisis in the state of California has increased operating costs at our Rosemead plant. We cannot predict when the power crisis will end or make any assurances that the power crisis will not become more severe. Risks Relating to Dine The value of our real estate investments is subject to factors and conditions outside of our control Our revenue from real estate operations and the value of our real estate properties are affected by many factors outside of our control, including the overall economic conditions of our country and the conditions of the real estate sector. Our real estate business would be adversely affected if these external factors led to reduced demand for our properties or to increased costs and we were not able to reflect this increase in the price of our projects. Risks Relating to Unik The automotive industry is highly cyclical Our automotive parts sector is directly affected by domestic and foreign automotive sales and production. Automotive sales and production are highly cyclical and impacted by the strength of the economy generally, by prevailing interest rates and by other factors. The largest U.S. and foreign automobile manufacturers have been affected by the current slowdown of the U.S. economy and, therefore, have reduced or delayed their output, which has adversely affected the automotive parts industry in Mexico and Unik. We cannot predict when the slowdown will end or make any assurances that it will not become more severe. We are dependent on a small group of principal customers and the sales of certain products Our largest customers in the automotive parts sector are DaimlerChrysler, Ford, General Motors, Volkswagen and Nissan. In 2000, these customers represented 63% of our total sales, of which DaimlerChrysler accounted for 21%, General Motors accounted for 17%, Ford accounted for 13%, Volkswagen accounted for 6% and Nissan accounted for 6%, and aggregate sales to Original Equipment Manufacturers ("OEMs") represented 75% of our total automotive parts sales. Although we have had a long-standing relationship with each of these customers, if we lost any significant portion of our sales to any of these customers, it would adversely affect our business and operating results. In 2000, a significant percentage of our sales were derived from the following products: transmissions (30%), front and rear axles (16%), pickup boxes and stamping products (11%), constant velocity joints (10%), pistons, valves and tappets (8%), cardan shafts (6%) and aluminum and steel wheels (6%). A significant decrease in the sales of any these products could also adversely affect our business and operating results. 11
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The OEM supplier industry is highly competitive The automotive industry is characterized by a small number of OEMs that are able to exert considerable pressure on automotive parts suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. In addition, the OEM supplier industry is highly competitive, with price, quality and technological innovation as the primary elements of competition. We cannot assure you that our business will not be adversely affected by increased competition in the markets in which we operate. Labor relations may affect our operations We consider our relations with our employees and their union representatives to be good, but cannot assure you that future contract negotiations with union representatives will be favorable to us or that a change in the nature of these relationships would not cause labor interruptions, or that work stoppages or other labor unrest will not occur in the ordinary course of these relationships. Risks Relating to Our Controlling Stockholder and Capital Structure Certain members of the Senderos family effectively control our management and their interests may differ from those of other securityholders As of April 26, 2001, the date of our last general stockholders' meeting, Fernando Senderos Mestre, our chairman and chief executive officer, and his immediate family approximately own (beneficially or of record) 54.81% of our Series A shares, 0.35% of our Series B shares and 1.80% of our Series C shares. As a result of the shares owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre exercises voting control (see Item 6. "-Compensation of Directors and Officers" for information about these additional shares), the Senderos family has the power to elect a majority of our board of directors, to control the general management of Desc and to determine the outcome of substantially all matters requiring stockholder approval, including the payment of dividends, except in those limited instances requiring the vote of the holders of the Series C shares. Future sales of our shares by the controlling stockholder may affect the stock prices of our securities Sales of our shares held by the Senderos family may adversely affect the trading price of the Series A and Series B shares on the Bolsa Mexicana de Valores, S.A. de C.V. (the "Mexican Stock Exchange") and the price of the ADSs on the New York Stock Exchange ("NYSE"). The Senderos family is not subject to any contractual restrictions that limit their right to dispose of their Series A, B and C shares. Market for the ADSs and the Series C shares is limited The Series C shares are listed on the Mexican Stock Exchange, which is Mexico's only stock exchange. There is no public market outside of Mexico for the Series C shares. The ADSs are listed on the NYSE. The Mexican securities market is not as large 12
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or as active as securities markets in the United States and certain other developed market economies. As a result, the Mexican securities market has experienced less liquidity and more volatility than has been experienced in such other markets. These market characteristics may limit the ability of the a holder of ADSs to sell the underlying Series C shares and may also affect the market price of the Series C shares and the ADSs. Desc is subject to different corporate disclosure and accounting standards than U.S. companies As a listed company, we are required to provide annual audited and quarterly unaudited financial information to the Mexican Stock Exchange and the Comision Nacional Bancaria y de Valores (the National Banking and Securities Commission or the "CNBV") and to file certain information with the SEC pursuant to U.S. law. However, you may not be able to obtain as much publicly available information about foreign issuers of securities traded in the United States as is regularly published by or about U.S. issuers of publicly traded securities. Holders of ADSs are not entitled to attend stockholders' meetings, and they may only vote through the Depositary Under our bylaws, a stockholder must deposit its shares with our secretary or with a Mexican custodian in order to attend a stockholders' meeting. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to attend stockholders' meetings. A holder of ADSs also will not be permitted to vote its shares directly at a stockholders' meeting or to appoint a proxy to do so. Rather, a holder of ADSs is entitled to instruct the Depositary as to how to vote its shares represented by the ADS in accordance with the procedures provided in the deposit agreement with respect to the ADSs. You may not be entitled to participate in any future preemptive rights offering, which may result in a dilution of your equity interest in Desc Under Mexican law, if we issue new shares for cash as a part of a capital increase, we generally must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in Desc. Rights to purchase shares in these circumstances are commonly referred to as preemptive rights. We may not legally be permitted to allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase unless (1) we file a registration statement with the SEC with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of the any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of ADS in the United States and any other factors that we consider important in determining whether to file a registration statement. We cannot make any assurances that we will file a registration statement with the SEC to allow holders of ADSs in the United States to participate in a preemptive rights offering or that an exemption from the registration requirements of the U.S. Securities 13
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Act of 1933 will be available. As a result, the equity interests of holders of ADSs would be diluted to the extent that ADS holders cannot participate in a preemptive rights offering. See Item 10. "Additional Information--Bylaws--Share Capital" for additional information concerning the ability of holders of Series C shares to participate in preemptive offerings. Minority stockholder protections in Mexico are different from those in the United States Under Mexican law, the protections provided to minority stockholders are different from those in the United States. Specifically, the law respecting fiduciary duties of directors is not well developed, there is no procedure for class actions or stockholder derivative actions and the procedural requirements for bringing stockholder lawsuits are different. Therefore, it may be more difficult for minority stockholders to enforce their rights against us, our directors or our controlling stockholder than it would be for minority stockholders in the United States. Risks Relating to Mexico Economic and political developments in Mexico may adversely affect our business We are a Mexican corporation and substantially all of our assets (including our manufacturing facilities) are located in Mexico. For this reason, our financial condition, results of operations, prospects and ability to pay amounts when due on our indebtedness may be affected by factors, such as inflation, interest rates, currency fluctuations, taxation, social instability, new regulatory environments and other political or economic developments, in or affecting Mexico, over which we have no control. A downturn in the Mexican economy may adversely affect Desc Beginning in December 1994, Mexico experienced an economic crisis characterized by exchange rate instability and devaluation of the Peso, high inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemployment. The economic crisis was caused in part from a series of internal disruptions and political and economic events that adversely affected the Mexican economy and undermined the confidence of investors in Mexico. In the second half of 1997 and in 1998, economic crises in Asia, Russia, and Brazil resulted in very volatile global financial conditions, large outflows of capital from emerging market countries such as Mexico, and volatile exchange rates for emerging markets' currencies such as the Peso. As a result, Mexico experienced higher interest rates, slower economic growth and higher inflation during the second half of 1997 and during all of 1998. Mexican interest rates, which had declined to an average of 19.7% per annum in 1997, increased in 1998 to an average of 24.7% per annum. Gross Domestic Product, or "GDP", growth declined from 6.76% in 1997, to 4.83% in 1998. Inflation, which had declined to 15.7% in 1997 increased to 18.6% in 1998. During 1999 and 2000, economic conditions in Mexico improved. However, the current slowdown in the U.S. economy has adversely affected the Mexican economy and 14
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our businesses. In particular, the slowing U.S. economy has led to a decrease in automotive production in the United States, which has affected our automotive parts business. Although we believe that the actions taken by the U.S. Federal Reserve Board in lowering interest rates may accelerate a recovery of the U.S. economy, we cannot provide any assurance that this downturn will not continue or become more severe. If the Mexican economy experiences a recession or if inflation and interest rates increase significantly or other adverse economic conditions affect Mexico, such as those experienced beginning in December 1994, our business, financial condition and results of operation could suffer. Political events in Mexico may affect the financial condition and results of operations of Desc Since the Mexican federal government has exercised and continues to exercise significant influence over many aspects of the Mexican economy, its actions concerning the economy or regulating certain industries could have a significant effect on Mexican private sector entities, including Desc, and on market conditions, prices and returns on Mexican securities. In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition National Action Party (Partido Accion Nacional or "PAN") won the presidency, and he assumed office on December 1, 2000. His victory ended more than 70 years of presidential rule by the Institutional Revolutionary Party (the Partido Revolucionario Institutional or "PRI"). Neither the PRI nor the PAN succeeded in securing a majority in the Mexican Congress or Senate. We cannot assure you that future developments in the Mexican political or social environment or that the policies of the Mexican government, over which we have no control, will not adversely affect our financial condition, results of operations or prospects. Devaluations or changes of the Peso relative to the Dollar may adversely affect our financial condition and results of operation In the past, the value of the Peso has been subject to significant fluctuations with respect to the Dollar, and it may fluctuate significantly in the future. For example, in 1998, the Peso depreciated at year end by approximately 22% and on average by 16.6% against the Dollar, resulting in a net foreign exchange loss of Ps.5,020 million for 1998. Fluctuations in the exchange rate between the Peso and the Dollar will affect the Dollar value of an investment in our equity securities and of dividend and other distribution payments on those securities. As of March 31, 2001, almost all of our indebtedness was denominated in currencies other than Pesos, and we may incur additional non-Pesos-denominated indebtedness in the future. In addition, the price we pay for certain raw materials is set by reference to international prices fixed in currencies other than Pesos, and the majority of our purchases of equipment are Dollar-denominated. Consequently, declines in the value of the Peso relative to other currencies will increase our interest costs in Pesos and 15
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result in foreign exchange losses, and will increase the Peso cost of certain of our raw materials and capital expenditures. We generally do not hedge against the risk of exchange rate fluctuations. Foreign currency availability may impair our ability to make Dollar-denominated payments Except for the period from September through December 1982 during the Mexican liquidity crisis, Banco de Mexico consistently has made foreign currency available to Mexican private sector entities, such as Desc, to meet their foreign currency obligations and has not adopted any measure to control the availability of foreign currency since November 11, 1991. Nevertheless, if there were renewed shortages of foreign currency, Banco de Mexico might not continue to make foreign currency available to private sector companies, and foreign currency needed by Desc to service its foreign currency obligations might be available for purchase in the open market only at a substantial additional cost. An increase in inflation may adversely affect our financial condition and results of operation During most of the 1980s and since 1995, Mexico experienced high levels of inflation. In the past, inflation has led to high interest rates, devaluations of the Peso and (during the 1980s) substantial government controls over exchange rates and prices, which at times adversely affected our operating revenues and margins. High rates of inflation relative to the rate of devaluation of the Peso against the Dollar reduce our operating margins in business segments where costs are generally denominated in Pesos while sales are denominated in Dollars, such as automotive parts. The annual rates of inflation, as measured by changes in the NCPI, were 18.6%, 12.3% and 9.0% for the years 1998, 1999 and 2000, respectively. We cannot assure you that Mexico will not experience high inflation in the future. Developments in other emerging market countries may affect our business or the market price of our securities The market value of securities of Mexican companies to varying degrees is affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors' reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. For example, in October 1997, prices of both Mexican debt securities and Mexican equity securities dropped substantially due to a sharp drop in the value of Asian markets. Similarly, during the second half of 1998, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil. Thus, we can make no assurance that the market value of our securities would not be adversely affected by events elsewhere, especially in emerging market countries. 16
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Item 4. Information on our Company History and Development of our Company Desc is a corporation (sociedad anonima de capital variable) organized under the laws of Mexico in 1973 under the name "Desc, Sociedad de Fomento Industrial, S.A. de C.V." On April 28, 1994, we changed our name to "Desc, S.A. de C.V." The duration of Desc is 99 years from the date of its incorporation. Our executive offices are located at Paseo de los Tamarindos 400-B, Bosques de las Lomas, 05120 Mexico, D.F., Mexico, and our telephone number at that address is (525) 261-8000. Principal Capital Expenditures and Divestitures The following table lists our capital expenditures and other investments by business segment for the periods shown. Capital expenditures and other investments may include investments in or acquisitions of assets or the capital stock of existing businesses. A more-detailed explanation of Desc's principal capital expenditures and divestitures is described under each of the business segments below. Year ended December 31, ----------------------------------------------- 1998 1999 2000 ------------ ------------ ------------ (In millions) Automotive Parts............ Ps. 1,015.5 Ps. 868.7 Ps. 1,097.3 Chemicals .................. 498.4 1,187.0 336.0 Food(1)..................... 2,407.6 772.0 317.3 Real Estate(2).............. 979.9 611.6 758.4 Desc(3)..................... 89.5 30.9 1.8 ------------ ------------ ------------ Total.................... Ps. 4,990.9 Ps. 3,470.2 Ps. 2,510.8 ============ ============ ============ ---------- (1) For 1998, includes the acquisitions of ASF and Nair. (2) Includes investments in real estate projects and investments in real estate for rent. (3) Reflects the investment of Desc in Arcos Bosques Corporativo, an office complex developed by Dine. Business Overview General We are a diversified holding company and one of the largest companies in Mexico. We are engaged in four principal lines of business: automotive parts, chemicals, food and real estate. With the exception of the food business, these businesses are conducted through our principal wholly-owned subsidiaries: Unik, Girsa and Dine, each of which is a holding company with no significant operations. Our food business was conducted through our wholly-owned subsidiary, Agrobios, S.A. de C.V. until December 1999, when Agrobios was merged with and into Desc. As a result of the merger, our food business now is conducted through four principal operating subsidiaries: 17
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Agroken, S.A. de C.V. (pork), Aquanova, S.A. de C.V. (shrimp), Grupo Corfuerte, S.A. de C.V. (branded foods in Mexico) and Authentic Acquisition Corporation, Inc. (branded foods in the U.S.). The following charts depict the percentage of our 2000 consolidated net sales and operating income by business segment: 2000 Net Sales by Segment as a Percentage of Consolidated Net Sales [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Automotive Parts 47% Chemicals 34% Food 15% Real Estate 4% Total Ps. 23,439,306 2000 Operating Income by Segment as a Percentage of Consolidated Operating Income [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Automotive Parts 69% Chemicals 22% Real Estate 7% Food 2% Total Ps. 2,263,315 18
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The following chart depicts the percentage of book value of our investments in each of our business segments at December 31, 2000: Desc Portfolio at Book Value [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Dine (Real Estate) 34% Unik (Automotive Parts) 29% Food Subsidiaries (Food) 20% Girsa (Chemicals) 17% Total Ps. 3,212,150 Sales information by geographic market The following table shows the approximate aggregate sales of Desc's products for each of the past three years by geographic region: Net sales for the years ended December 31, ---------------------------- ------------------------------------------------ Region 1998 1999 2000 ---------------------------- -------------- -------------- -------------- (Pesos in thousands) Continental Europe.......... Ps. 476,519 Ps. 361,349 Ps. 382,893 North America............... 8,264,226 8,794,547 8,741,707 Asia........................ 447,549 528,749 611,220 Mexico(1)................... 16,133,776 15,216,948 13,164,998 Rest of the world........... 853,964 428,257 538,488 -------------- -------------- -------------- Total.................. Ps. 26,176,034 Ps. 25,329,850 Ps. 23,439,306 ============== ============== ============== ---------- (1) In 1999, we divested our poultry business. Automotive Parts Our automotive parts business, which is conducted through our wholly-owned subsidiary Unik, manufactures 43 different types of automotive products, including light, medium and heavy duty manual transmissions and clutches, constant velocity joints, rear 19
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and front traction axles, motor valves and tappets, pistons and piston pins, pick-up truck bodies and other stamped metal products, propeller shafts, steel and aluminum wheels, gears, gaskets, seals, alternators, ignition coils and spark plugs. We are one of the largest independent manufacturers of automotive parts in Mexico. For the years ended December 31, 1998, 1999 and 2000, our automotive parts business contributed 43.9%, 51.9% and 69.1%, respectively, of our consolidated operating income and 41.6%, 42.9% and 46.7%, respectively, of our consolidated net sales. The following table presents the net sales generated by our principal automotive parts products for the years ended December 31, 1998, 1999 and 2000, and the percentage of this segment's 2000 net sales that is represented by these products: [Enlarge/Download Table] % of net Net sales sales ------------------------------------------------ ------------- 1998 1999 2000 2000 -------------- -------------- -------------- ------------- (Pesos in thousands) Transmissions and clutches.................. Ps. 3,598,877 Ps. 3,835,013 Ps. 3,248,724 29.7% Rear and front traction axles............... 1,219,900 1,552,176 1,729,403 15.8 Pick-up truck bodies and other stamped metal products...................... 865,605 935,359 1,235,179 11.3 Constant velocity joints.................... 1,273,132 1,025,224 1,124,490 10.3 Motor valves and tappets, pistons and piston pins............................. 1,131,785 1,058,233 885,042 8.1 Propeller shafts............................ 632,599 697,628 678,607 6.2 Steel and aluminum wheels................... 418,557 465,601 636,957 5.8 Gears....................................... 416,504 441,082 421,012 3.9 Other automotive parts...................... 1,319,623 844,168 970,208 8.9 -------------- -------------- -------------- ------------- Total.................................. Ps. 10,876,582 Ps. 10,854,485 Ps. 10,935,622 100.0% ============== ============== ============== ============= -------------------------------------------------------------------------------- Unik's capital expenditures during 2000 were $111.5 million. These funds were used mainly to (i) modernize and automate our plants for axles, propeller shafts, gears, metal casting and spark plugs; (ii) expand the capacity of our plants for pick-up truck stamped and painted bodies and of our assembly lines for propeller shafts, constant velocity joints and steel and aluminum wheels; (iii) add new lines of valves for export and constant velocity joints which utilize state of the art technology; and (iv) complete the transfer of our piston operations in the Mexico City metropolitan area to our piston plant in Celaya, Guanajuato. Our automotive parts businesses have received numerous quality awards from the Mexican government, clients and joint venture partners. Transmisiones y Equipos Mecanicos S.A. de C.V. ("Tremec"), our subsidiary which manufactures manual transmissions, received the National Export Award from the Mexican government in both 2000 and 1998 and received a "Supplier of the Year" award from General Motors in 1997. Cardanes, S.A. de C.V., our subsidiary that manufactures propeller shafts and 20
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universal joints, Pemsa, our subsidiary that manufactures pick-up bodies and other stamped metal products, and Velcon, S.A. de C.V., our subsidiary that manufactures constant velocity joints, each received a "Supplier of the Year" award from General Motors in 2000, and Pistones Moresa, S.A. de C.V., our subsidiary which manufactures pistons, received this award in 1998. In addition, in 1998 Tremec was awarded a Shingo Prize for Excellence in Manufacturing, which recognizes manufacturing excellence in the United States, Canada and Mexico and is considered one of the "Triple Crown" of industrial excellence awards, along with the Baldridge National Quality Award and the Deming Prize. The Shingo Prize is administered by the College of Business at Utah State University in partnership with the National Association of Manufacturers of the U.S. We believe that these awards have resulted, among other things, from the ongoing implementation of Unik's total quality improvement efforts. All of our plants that supply OEMs are QS-9000 certified, which qualifies them as approved suppliers to DaimlerChrysler, Ford and General Motors, and Tremec and TF Victor have received 1S0-14001 certification, which is an international standard for environmental management. Market overview; competition We sell automotive products to domestic OEMs for installation in new cars and trucks, as well as to distributors for resale in the automotive parts aftermarket. Our significant OEM customers include DaimlerChrysler, Ford, Freightliner, General Motors, John Deere, Kenworth, Navistar, Nissan, Renault-Nissan, Ssangyong, Volkswagen, Volvo and ZF-Meritor. Both the OEM market and the aftermarket for automotive parts are highly competitive with regard to price and quality. We compete with numerous domestic and foreign manufacturers of automotive parts. We continually seek to maintain a competitive advantage over other manufacturers with respect to productivity and product quality. We accomplish this in part through technical assistance and license agreements with leading foreign manufacturers of automotive parts, the development of our own technology, our knowledge of the markets in which we compete and our ability to achieve manufacturing efficiencies. The table below presents information concerning our domestic and export sales of automotive parts. Approximately 93% of our exports of automotive parts are to the United States and Canada. % of net sales ---------------------------------- 1998 1999 2000 ------- ------- ------- Domestic market OEMs................................... 21% 19% 21% Aftermarket............................ 18% 17% 17% Export market(1).......................... 61% 64% 62% Total export sales ($ in millions)........ $ 550.4 $ 638.1 $ 686.6 ---------- (1) Includes "indirect" exports by OEMs that purchase parts from us. 21
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Technological assistance and licensing agreements Most of our major automotive parts are produced using technology and licenses from leading international automobile manufacturers and automotive parts producers. Through these arrangements, we have access to up-to-date technology necessary to manufacture automotive components competitively in world markets. In many cases, these arrangements not only provide us with technological information, but also give us access to worldwide markets and customers. The following are the most significant of these arrangements: Licensor Product -------- ------- Dana Propeller shafts and universal joints Dana Rear and front traction axles Delphi Automotive Systems Corporation Spark plugs Eaton Heavy-duty clutches GKN Constant velocity joints and shafts Hayes Lemmerz Steel wheels and aluminum wheels TRW Engine valves In general, under technology and license agreements, these foreign manufacturers provide us with technological assistance or license their proprietary technology to us in return for a fee based upon a percentage of sales. These technology assistance and license agreements typically were entered into for initial fixed terms, however, many are renewed on an annual or biannual basis, and could now be terminated by either party on relatively short notice. We also develop our own technology with respect to some automotive products, such as transmissions, pistons, piston pins, stamping products and tappets, and work with our partners to jointly develop technologies for specific applications. We also are partners with some of these foreign manufacturers in joint venture companies that produce various automobile parts utilizing technology licensed by the foreign joint venture partner. In the fourth quarter of 2000, we restructured the ownership of Velcon, our joint venture with Dana and GKN, which manufactures constant velocity joints. As a result of this restructure, Unik increased its ownership to 51%, GKN increased its ownership to 49% and Dana exited this subsidiary. The following is a list of the most significant of our joint ventures and the percentage ownership of the foreign partner in the joint venture: 22
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[Download Table] % ownership by joint Joint venture partner Joint venture company venture partner --------------------- --------------------- --------------- Delphi Automotive Systems Corporation Bujias Mexicanas, S.A. de C.V. 40.0% Dana Spicer, S.A. de C.V. 49.0 GKN Velcon, S.A. de C.V. 49.0 Hayes Lemmerz Hayes Wheels de Mexico, S.A. de C.V. 40.0 TRW Moresa, S.A. de C.V. 40.0 Distribution arrangements Our automotive parts products generally are sold by means of purchase orders which require us to supply products for particular model releases during finite terms of up to six months. We have been seeking to increase our participation in the export market, and our automotive parts exports have increased 148.5% from $276.3 million in 1996 to $686.6 million in 2000. In 1996, exports represented 53% of Unik's total sales, while in 2000 exports represented 62% of its total sales. Suppliers The primary raw materials for the automotive parts products that we manufacture are iron castings, steel and aluminum. We believe that the markets for these materials are highly price competitive, and we have never experienced difficulty in obtaining these commodities. We believe that there will continue to be a large number of producers of the requisite castings, steel and aluminum, and adequate worldwide supplies of these materials, for the foreseeable future. Properties/plants During the past few years, we have implemented a modernization program to improve our existing automotive parts facilities and also build new facilities to replace outdated facilities. We invested approximately Ps.1,015,542 in this program in 1998, Ps.868,664 in 1999 and Ps.1,097,298 in 2000. We believe that the resulting improvements in efficiency, the increased flexibility in utilizing excess plant capacity and decreases in fixed costs derived from the plants' modernization program, have enabled us to improve operating margins from 1996 levels, although the improved margins also reflect the increase of capacity utilization from 66% in 1996 to 75% in 2000. We produce our automotive parts at 24 plants located throughout Mexico and one plant located in the United States. The following table presents the principal products produced at each of the most significant of these plants and their locations and their respective rates of utilization: 23
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Products Location of plant Utilization -------- ----------------- ----------- Front and rear axles La Presa, Estado de Mexico 75% Heavy-duty transmissions Pedro Escobedo, Queretaro; 48% and clutches Knoxville, Tennessee Light and medium-duty Queretaro, Queretaro 78% manual transmissions Steel wheels Tlalnepantla, Estado de 79% Mexico Aluminum wheels Chihuahua, Chihuahua 43% Pistons Celaya, Guanajuato; 52% Saltillo, Coahuila 70% Pick-up truck bodies and Celaya, Guanajuato 80% other stamped metal parts Constant velocity joints Celaya, Guanajuato 99% Ignition coils, alternators Tlalnepantla, Estado de 100% Mexico Spark plugs Tlalnepantla, Estado de 84% Mexico Propeller shafts and Queretaro, Queretaro 82% universal joints Steel forging Tlaxcala, Tlaxcala; 72% Queretaro, Queretaro Engine valves Aguascalientes, 75% Aguascalientes Gears Queretaro, Queretaro 95% Gaskets and seals Naucalpan, Estado de 66% Mexico Piston pins Celaya, Guanajuato 52% Tappets Aguascalientes, 62% Aguascalientes Chemicals Our chemicals business, which we conduct through Girsa, produces and sells chemicals and is the leading (and in some cases the only) producer of some of these products in Mexico. Our main chemical products include synthetic rubber, polystyrene, carbon black, phenol, methyl methacrylate or MMA, specialty lattices, phosphates, acrylics, natural pigments, laminates, particle board, adhesives and glues, waterproofing additives and sealants. For the years ended December 31, 1998, 1999 and 2000, our chemicals business contributed 35.7%, 28.0% and 23.0%, respectively, of our 24
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consolidated operating income, and 31.1%, 30.0% and 33.8%, respectively, of our consolidated net sales. The following table presents the net sales generated by our principal chemicals sector products for the years ended December 31, 1998, 1999 and 2000, and the percentage of this segment's 2000 net sales that is represented by these products: [Enlarge/Download Table] % of net Net sales sales ----------------------------------------------- ---------- 1998 1999 2000 2000 ------------- ------------- ------------- ---------- (Pesos in thousands) Synthetic rubber....................... Ps. 1,834,849 Ps. 1,459,171 Ps. 1,996,851 25.2% Phosphate.............................. 1,741,768 1,428,641 1,270,833 16.1 Polystyrene............................ 818,328 841,377 1,268,229 16.0 Carbon black........................... 771,412 687,930 666,265 8.4 Particle board & laminates............. 589,701 616,034 605,447 7.6 Fester products (mainly asphalt coatings) and Acriton Products (mainly acrylic waterproofing)................. 492,881 539,787 465,272 5.9 Acrylics sheet......................... 463,126 429,795 462,743 5.9 Adhesives and sealants................. 406,707 391,108 431,569 5.5 Natural pigments....................... 578,948 567,133 319,143 4.0 Phenol................................. 618,047 493,802 310,913 3.9 Emulsions (specialty lattices)......... 140,520 141,078 117,542 1.5 ------------- ------------- ------------- ------ Total............................... Ps. 8,456,287 Ps. 7,595,856 Ps. 7,914,807 100.0% ============= ============= ============= ====== Our chemical products are used in the manufacture of a wide variety of other products, including asphalt and plastic modifiers, disposable packaging, tires and other industrial rubber goods, automotive rubber parts, footwear and carpeting. We sell our chemical products in the Mexican and export markets, exporting products to over 50 countries in 2000. Our export sales were $253.6 million in 2000 and $198.8 million in 1999. Resirene, S.A. de C.V. ("Resirene"), a Girsa subsidiary which manufactures polystyrene, won the National Quality Award in 2000. We are the only business in Mexico that has received this award for five years (with our automotive parts subsidiary Engranes Conicos having received the award in 1994, our automotive parts subsidiary Velcon having received the award in 1995, our chemicals subsidiary Industrias Negromex, S.A. de C.V. ("INSA"), which manufactures synthetic rubber, having received the award in 1996 and our chemicals subsidiary Nhumo S.A. de C.V. ("Nhumo"), which manufactures carbon black, having received the award in 1997). In addition, INSA, Nhumo, and Resirene and our subsidiaries Laboratorios Bioquimex, S.A. de C.V., Plastiglas de Mexico, S.A. de C.V., Rexcel, S.A. de C.V., Quimir, S.A. de C.V. and Productos de Consumo Resistol, S.A de C.V., each has received ISO-9002 or ISO-9001 certification, which are international standards for quality management and 25
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assurance adopted by more than 90 countries, thus enhancing Girsa's reputation as a reliable, high quality supplier. In 1997, Nhumo became the first carbon black business in the world to receive ISO-14001 certification, an international standard for environmental management. Market overview; competition Girsa is Mexico's only producer of synthetic rubber, phenol, methyl methacrylate and carbon black, and has a leadership position in the production of polystyrene. The majority of our chemical products are sold in both the domestic and export markets. The domestic market accounted for 69% of our chemicals sales in 2000, and the export market accounted for 31% of such sales. We compete with foreign companies in chemicals such as Shell, Dow Chemical, ICI, BASF, Degussa, Georgia Gulf, Firestone, Albright & Wilson, FMC, Cyro, Wilson Art International, McMillan and Helm in both the Mexican and international markets. Certain of our products, such as low-pressure laminates, glues, adhesives, acrylic and asphalt roofing systems, however, are sold primarily in the domestic market, where we compete with companies such as National Starch, HB Fuller, Henkel, Alkoat, Johns Mansville and Comex. We believe that we have a leadership position in the production of phosphates, acrylic laminates, natural pigments and laminated plastics and that we are the national leader in adhesives, glues and sealants. Our Resistol brand name is the most widely-recognized brand name for adhesives and glues throughout Mexico. We consider our Resistol, Fester, Acriton and Resikon brand names and the extensive national distribution systems for these lines of products to be significant competitive advantages. The chemicals industry is a cyclical business that has experienced depressed conditions since 1998 resulting in lower prices. Although we believe that the chemicals industry has begun to recover and that our focus on specialty products, low-cost production and plant capacity increase during the last few years are likely to mitigate the effects of adverse conditions in the global chemicals market, this might not be the case. Technology With respect to the majority of our chemical businesses, we utilize proprietary technology that we have developed or acquired from third parties. Our carbon black business, for example, utilizes technology developed by Cabot Corporation, our partner in this business and a world leader in carbon black research, development and production. Our polysterene business utilizes technology originally licensed from Monsanto which Girsa has improved and adapted over the years. Similarly, our synthetic rubber business utilizes technology originally licensed from Phillips Petroleum which Girsa has improved and adapted over the years. More recently, we have entered into reciprocal technological exchange agreements in connection with our two joint ventures in synthetic rubber with Repsol Quimica and Uniroyal Chemical, both of which are world leaders in synthetic rubber research, development and production. 26
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Supply arrangements and suppliers Petroleos Mexicanos ("Pemex") is one of the principal suppliers of raw materials to our chemical businesses. We have executed agreements with Pemex with respect to styrene monomer, hydrogen cyanide, carbon black feedstock, natural gas and methanol. These agreements contain contractual assurances as to product quality and volumes and provide for competitive pricing. We also purchase raw materials from numerous other domestic and foreign suppliers. The market for these raw materials is highly price competitive and we believe that there generally is an adequate supply of them. Products The following table presents information with respect to our chemical products: [Enlarge/Download Table] Raw Materials Necessary Product Principal Uses to Produce Product ------- -------------- ----------------------- Synthetic rubber Production of tires, footwear, asphalt and Butadiene and styrene plastic modifiers, adhesives, industrial rubber products, automotive engines and other automotive parts Polystyrene Production of plastics for disposable Styrene monomer packaging, home appliances, cassettes, compact discs, light fixtures, school supplies and office equipment Carbon black Production of tires, ink, hoses, belts and Carbon black feedstock other products using rubber and natural gas Phenol/acetone Production of phenolic resins, methyl Cumene methacrylate, additives, paints, paper, foundry and aspirin Specialty lattices Production of carpeting, chewing gum, rubber, Butadiene and styrene paper and tissues monomer Phosphates Detergents, water treatment and soft drink Phosphoric acid and soda production ash Natural pigments Coloring of poultry, egg yolks, and shrimp skin Paprika meal, Marigold meal, Oleoresin Acrylic sheets Manufacturing of signs, displays, MMA advertisements and safety devices. Particle boards and Manufacturing of furniture, office and home Wood shavings, Melanin, laminates products, kitchen countertops and tabletops, Urea and floors Adhesives and glues School, home and office supplies, shoe Cloroprene, vinyl acetate manufacturing, furniture manufacturing and carpentry Waterproofing sealants Manufacturing of construction-related products Monomer acrylic resins and additives 27
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The synthetic rubber business is the largest business in our chemicals division. In 2000, the synthetic rubber business contributed 25.2% of the chemical sector's net sales. We are the only manufacturer of synthetic rubber in Mexico. We produce both solution rubber and emulsion rubber, as well as elastomers, thermoplastics and specialty rubbers. We are a leader in the manufacture of asphalt modifying rubbers, which we sell to highway paving companies in the United States and more recently also in Europe. Our synthetic rubber products are exported to over 40 countries, principally the United States, Canada and countries in Europe, South America and the Far East. In 2000, exports accounted for approximately 70% of our synthetic rubber sales. In November 1998, Girsa and Uniroyal Chemical Company, a subsidiary of Crompton and Knowles Corporation, formed a joint venture, Paratec, S.A. de C.V. to produce and market Uniroyal's Paracril(R) nitrile rubber products, which are highly resistant to heat and used in automotive engines and other automotive parts. The joint venture is 50% owned by Girsa and 50% owned by Uniroyal. The joint venture relocated Uniroyal's Paracryl(R) production facilities to a newly-built 40,000 metric tons per year, state-of-the-art production plant in Altamira, Mexico. Prior to the formation of this joint venture, Uniroyal and Girsa were parties to a 1996 manufacturing agreement to produce Paracryl(R) rubbers in Mexico. In July 1999, Girsa and Repsol Quimica, a subsidiary of Spain's Repsol, S.A., formed a joint venture to produce and market solution synthetic rubbers used in the manufacturing of products such as asphalt, adhesives and footwear. This joint venture created significant synergies due to Girsa's and Repsol Quimica's complementary products and geographic markets, and these synergies have significantly boosted the competitiveness of this business. The joint venture is 50% owned by Girsa and 50% owned by Repsol Quimica and operates under the name Dynasol Elastomeros. Repsol Quimica contributed to the joint venture its styrene-butadiene solution rubber plant in Santander, Spain with a capacity of 110,000 metric tons per year, its strong presence in the European market, particularly in the thermoplastic rubber segment, and a hydrogenated thermoplastics solution rubber plant in Santander, Spain, which had recently begun operations. Girsa contributed to the joint venture its production facility in Altamira, Mexico which produces styrene butadiene and thermoplastic solution rubbers and has a capacity of 90,000 metric tons per year, as well as its strong presence in the NAFTA region, particularly in the diblock copolymer specialties. We believe Dynasol Elastomeros is one of the three largest global producers of special solution styrene-butadiene rubbers and the second largest global producer of hydrogenated thermoplastic rubbers. Our polystyrene business produces crystal polystyrene (GPPS) and impact polystyrene (HIPS), which are used in the disposable packaging and packing industries, lighting fixtures, school supplies, office equipment, and home appliances, including audio and video equipment and refrigerators. In 2000, our polystyrene business contributed 16% of the chemical sector's net sales. Most of our polystyrene sales are to the domestic market, where we estimate that our market share in 2000 was approximately 50%. We attribute our dominance in the domestic polystyrene market to our ability to customize products, the quality of our service and our timely delivery. 28
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We are the only manufacturer of carbon black in Mexico. Carbon black is principally used by the tire industry and we produce it utilizing technology licensed from Cabot, a world leader in carbon black research, development and production. Cabot owns a 40% interest in our carbon black business. We believe that our share of the domestic carbon black market in 2000 exceeded 95% and attribute our dominance to our technology, our large installed plant capacity, our focus on those carbon black varieties which have the highest demand, our continuous development of carbon black varieties with specific competitive advantages for their application, and our low production costs which enable us to price our products competitively. Approximately 20% of our carbon black sales in 2000 were exports, primarily to the United States, Canada and Latin America. We are the only domestic manufacturer of phenol, acetone, and methyl methacrylate ("MMA") in Mexico. These products are used in the manufacture of acrylic sheets, aniline, bisphenol A, fertilizers, phenolic resins, polymethyl methacrylate and water treatment products. Approximately 64% of the sales of this business in 2000 were to the domestic market and 49% of our phenol sales and 9% of our MMA sales were exports to the United States and South America. We believe that due to our competitive prices, reliability, customer service and support, we have been able to establish long term relationships and supply contracts with many of our international customers and suppliers. Phosphates. Our phosphates business produces chemicals for use in the manufacturing of household detergents, in soft drinks and for water treatment. In 2000, our phosphates business contributed 16.1% of the chemicals sector's net sales. We are the largest manufacturer of phosphates in Mexico, and rank third in rated capacity of industrial sodium phosphates worldwide. In 2000, our exports reached 20 countries in the Americas and accounted for 12% of our total sales of phosphates. Natural pigments. We produce natural yellow and red food pigments, and believe that we are one of the largest producers of these pigments in Mexico. Yellow pigments are used primarily to color poultry through poultry feed, and red pigments are used to color poultry, egg yolks and shrimp skins. Approximately, 58% of our sales of these products in 2000 were exports to 22 countries. Our customers include Bayer and Perdue. The raw materials used to produce these products primarily are imported. Our manufacturing technology permits us to work closely with our customers to tailor our products to meet the specific needs of each customer. Acrylic sheet. We are the leading manufacturer of acrylic sheets in Mexico. These products are used in the manufacture of signs, displays, advertisements and safety devices. Approximately 53% of our sales of these products in 2000 were to the United States, Canada, Europe, Central and South America. Our principal raw materials are supplied by Fenoquimia, S.A. de C.V., another Girsa subsidiary. Our manufacturing technology allows us to develop differentiated products targeted at greater value-added markets in the different countries where our products are sold. Particle board and laminates. We manufacture particle board and laminates using formaldehyde, urea, resins and natural wood shavings. We sell these products to 29
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manufacturers in the furniture and construction industries. Ninety-five percent of our sales of these products in 2000 were to the domestic market, with the balance being exported principally to North, Central and South America. Adhesives and glues (Resistol). We produce a line of adhesives and glues which we sell under the brand name "Resistol" to retail merchandisers and industrial users throughout Mexico. In addition to household glues, our products include polyvinyl acetate (white glue), contact and acrylic adhesives, sealants and hot melts (specialized adhesives). We sell these products to a variety of industries including shoe manufacturers, the wood and furniture industries, artisans and the automotive industry. We distribute these products to more than 45,000 points of sale throughout Mexico, such as supermarkets, hardware stores and retail outlets as well as to industrial purchasers. The market for these products is highly fragmented. In 1998 we acquired Simon, the Mexican leader in polyurethane adhesives, to strengthen our market share in the shoe industry. Waterproofing sealants and additives (Fester, Acriton and Resikon). We produce waterproofing additives and sealants under the brand names Fester, Acriton and Resikon, as well as cement additives and construction coatings, under the Fester brand name, which is a widely recognized brand name in Mexico. We sell these products to manufacturers in the construction industry and to manufacturers of products for household use. We distribute these products through approximately 2,000 distributors located throughout Mexico, many of which carry Fester products exclusively. All of the distributors sell construction-related products and provide homeowners and others with maintenance and repair services using Fester products. Properties/plants. The table below presents the location of the facilities at which our chemical products are manufactured and their respective rates of utilization: [Enlarge/Download Table] Products Location Utilization -------- -------- ----------- Synthetic rubber Altamira, Tamaulipas (two sites) 78% Polystyrene Coatzacoalcos, Veracruz; 89% Xicohtzingo, Tlaxcala; 100% Carbon black Altamira, Tamaulipas 89% Phenol/acetone and methyl methacrylate Cosoleacaque, Veracruz; Tula, Hidalgo 63% 100% Specialty lattices Lecheria, Estado de Mexico 100% Phosphates/phosphorus derivatives Coatzacoalcos, Veracruz; 99% Tultitlan, Estado de Mexico; 86% Lecheria, Estado de Mexico 70% Natural pigments and additives Queretaro, Queretaro 62% Acrylic sheet Ocoyoacac, Estado de Mexico; 100% San Luis Potosi, San Luis Potosi 82% Laminates/particle board Lerma, Estado de Mexico; 87% Zitacuaro, Michoacan 100% Glues/waterproofing sealants Salamanca, Guanajuato; Mexico City (2 sites) 59% 30
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Food Our food operations principally involve the production and sale of pork, shelf-stable branded products and, to a lesser extent, shrimp. For the years ended December 31, 1998, 1999 and 2000, our food segment contributed 14.1%, 12.1% and 1.8%, respectively, to our consolidated operating income, and 22.6%, 23.6% and 15.3%, respectively, to our consolidated net sales. Our strategy for our food sector business has been to gradually shift its product mix away from commodity products to branded products which have more stable margins. To that end, we acquired Grupo Corfuerte, S.A. de C.V. ("Corfuerte") in September 1997, Authentic Specialty Foods Inc. ("ASF") in June 1998, and a 60% interest in Grupo Nair, S.A. de C.V., a Mexican producer of canned tuna and other seafood products ("Nair") in December 1998, and divested our poultry operations (which historically had been the largest component of our food sector) and our animal feed operations in December 1999. We are developing our branded food products operations in partnership with J.P. Morgan Capital Corporation, which purchased an 18.6% interest in each of Corfuerte and Authentic Acquisition Corporation, the direct parent of ASF, for an aggregate purchase price of $50 million in 1998. We intend to use Corfuerte as our vehicle for the expansion of our branded food products business in Mexico and Authentic Acquisition Corporation for the expansion of this business in the United States. As of the second half of 2000, we restructured the management of our food sector to address that sector's relatively poor results and appointed Girsa's management team to manage our branded food business and appointed Ernesto Vega Velasco, our senior vice president, and his management team to manage our commodity food business, which consists of pork and shrimp. The following table presents the net sales generated by each product line in our food segment for the years ended December 31, 1998, 1999 and 2000 and the percentage of this segment's 2000 net sales that is represented by each product line: [Enlarge/Download Table] % of net Net sales sales ----------------------------------------------------- ----------- 1998 1999 2000 2000 ------------- ------------- ------------- ----------- (Pesos in thousands) Poultry(1)......................... Ps. 2,035,159 Ps. 1,574,442 Ps. 0 0.0% Shelf-stable branded products...... 1,781,563 2,159,770 1,806,595 50.5 Pork............................... 1,497,446 1,637,093 1,689,523 47.2 Animal Feed(1)..................... 495,701 542,640 0 0.0 Shrimp............................. 113,194 59,497 79,705 2.3 ------------- ------------- ------------- ----------- Total........................ Ps. 5,923,063 Ps. 5,973,442 Ps. 3,575,823 100.0% ============= ============= ============= =========== ---------- (1) We divested these businesses in December 1999. 31
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Products Pork. Our pork business is conducted through our wholly-owned subsidiary Agroken, S.A. de C.V. and is concentrated principally in the southeastern region of Mexico as well as in the central region, which includes Mexico City. As a result of our acquisition of AgroYuc's production facilities in 1999, we increased our number of sows in production from 12,000 to approximately 49,000 in 1999 and 54,000 in 2000. We have a slaughterhouse and a processing plant for hogs close to the city of Merida, Yucatan, and a slaughterhouse in the central region of Mexico. To satisfy increased domestic demand and to supply growing exports of pork to Japan, we have increased the cutting capacity of our processing plant in recent years. Our sales strategy seeks to reduce the intermediary channels between producers like us and consumers by establishing distribution centers where consumers can buy different pork products directly from us. We currently operate 25 distribution centers and plan to open 24 more in 2001. Our pork products are marketed under the "Keken" brand name. Shelf-stable branded products. Our branded food product operations are conducted in Mexico through Corfuerte and in the United States through Authentic Acquisition Corporation. With our "Del Fuerte" brand, we are a domestic leader in the production of tomato sauce and related products and canned vegetables. We also have a large share of the domestic corn oil and gelatin with our "La Gloria" brand of products. We participate in the canned jalapeno peppers market and in the salsa market with our "La Victoria" and "La Cumbre" brands, in the coffee market with our "Blason" and "Latino" brands, and in the canned tuna market with our "Nair" brand. Gourmet products are marketed under our "Perigord" brand We also have exclusive distribution rights in Mexico for "Reynolds" aluminum foil and "Smuckers" jams, which have been embraced by the domestic market and continue to increase in market share. In the United States, we manufacture and/or distribute a wide variety of high quality, authentic Mexican food products such as salsas, taco sauces, other Mexican sauces, and items such as jalapeno peppers under labels that include La Victoria(TM) and Embasa(TM). Our products are targeted principally at the U.S. Hispanic market, and our brands have strong market positions in the southwestern and western regions of the United States, particularly in Texas and California. Shrimp. Our shrimp business remains in the development stage with no substantial sales having been made to date. It is conducted through Aquanova. Market overview; competition Pork. The pork industry in Mexico is highly fragmented, but smaller, inefficient growers in Mexico are being replaced by larger, higher quality, more efficient, integrated companies, principally located in the states of Sonora, Sinaloa and Yucatan. We have developed a fully integrated business with high quality genetics and advanced farming techniques, composed of breeding farms and facilities for raising, slaughtering, cutting and processing hogs. We have a greater than 50% market share in the Southeastern region of Mexico and have continued to gain market share in the important central region, which includes Mexico City. In August 1999, we acquired the production 32
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facilities of Agroindustrias Yucatan ("AgroYuc"), our partner in the pork business, and contributed these production facilities to Grupo Porcicola Mexicano, our joint venture with AgroYuc, raising our participation in this joint venture to 66% from 51%. AgroYuk owns the remaining 34% of this joint venture. As a result of these transactions, we became the leader in the marketing of pork in Mexico. Since 1998, we also have exported pork to Japan. Shelf-stable branded products. The shelf-stable branded food industry in Mexico is highly competitive. Corfuerte has significant market shares in Mexico with respect to tomato sauce and related products, canned vegetables and corn oil. Its principal competitors are Del Monte, Herdez, La Costena and Clemente Jacques. The principal competitors of Nair's products are Herdez, Dolores, Tuny, Calmex and Ybarra. In the United States, our products compete principally with Mexican food products that are distributed in the southwestern and western regions of the United States and are targeted principally to the Hispanic market. Our brands have strong market positions in these regions, particularly Calidad(TM) in Texas. Properties/plants Below is a list of the principal production facilities of our food segment and their respective rates of utilization: Activity Location Utilization -------- -------- ----------- Pork production / Yucatan, Guanajuato and 100% slaughterhouse Quintana Roo Pork processing Yucatan 100% Canning Sinaloa, Tlaxcala, Oaxaca and California (USA) 47% Shrimp production Sinaloa and Nayarit 100% Shrimp laboratory 100% In addition, Corfuerte has nine distribution centers in Mexico. Real Estate Through Dine, we acquire and develop land for commercial (office buildings and shopping malls), residential and tourism/resort uses. We have over 20 years of experience in this sector and believe that we are the largest diversified real estate developer in Mexico. Dine owns large land reserves for residential development in the Mexico City metropolitan area as well as properties for tourism development along the Pacific coast of Mexico. We focus on the upper income segments of the real estate market, developing high quality projects that are unique in their respective market segments. Dine was the developer during the late 1960s, 1970s and early 1980s of "Bosques de las Lomas," a five million square meter upper-income residential and commercial development in Mexico City and of "La Estadia," a high-income residential suburb of Mexico City. Our more recent projects include the Centro Comercial Santa Fe in Mexico City, which is Mexico's largest regional shopping mall, Arcos Bosques 33
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Corporativo, which is Mexico City's largest office complex, Punta Mita, which is an upscale tourist resort that includes a new hotel and championship golf course developed in partnership with Four Seasons Hotels, and La Punta Bosques and Bosques de Santa Fe, both of which are high-income residential projects in Mexico City. For the years ended December 31, 1998, 1999 and 2000, our real estate business contributed 8.5%, 9.3% and 6.8%, respectively, of our consolidated operating income and 3.4%, 3.5% and 4.2%, respectively, of our consolidated net sales. As part of our strategy for this sector, we continue to assess the profitability of each of our real estate projects. As a result of these assessments, in December 2000 we sold our land holdings in Xaac, which consisted of 515,000 square meters of beachfront property in the state of Quintana Roo, to a Spanish hotel group for $7.3 million in cash, and in February 2001 we sold our participation in the Four Seasons Punta Mita Hotel to Strategic Hotel Capital ("SHC") for an aggregate consideration of $52 million (including the assumption by the buyer of $11 million of net debt). We currently are in the process of seeking a buyer for our 50.1% interest in Centro Comercial Santa Fe. The following is a list of the major properties being developed by Dine, which are discussed in greater detail below: [Enlarge/Download Table] Ownership by Name and location Land area Dine Other partners ----------------- --------- ---- -------------- (square (%) meters) Commercial development projects(1) Arcos Bosques Corporativo, Mexico, D.F. 72,570 100 None Centro Comercial Santa Fe, Mexico, D.F. 300,000 50.1 El Puerto de Liverpool, El Palacio de Hierro and others Residential development projects La Punta Bosques, Mexico, D.F. 293,000(2) 100 None Bosques de Santa Fe, Mexico, D.F. 1,100,000 50 Several individuals Tourist/resort development projects Punta Ixtapa, Guerrero 390,000 100 None Punta Mita, Nayarit (Phase I)(3) 1,030,000 85 Four Seasons Hotels Other properties Bosques de la Estadia, Estado de Mexico(4) 6,269,086 63 Fernando Senderos Mestre, Victor de la Lama Cortina 34
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[Enlarge/Download Table] Ownership by Name and location Land area Dine Other partners ----------------- --------- ---- -------------- (square (%) meters) and members of their families Los Cabos, Baja California Sur(5) 38,521 15 Grupo Casa, S.A. de C.V. Punta Gorda, Baja California Sur 4,000,000 25 Grupo Casa, S.A. de C.V. Tepeji del Rio, Hidalgo 3,850,000 59 Several individuals Punta Mita, Nayarit (other than Phase I) 5,740,000 100 None ---------- (1) In addition to the commercial development projects listed above, Dine owns a 33% interest in 89,000 square meters adjacent to the Santa Fe shopping mall project that are held for commercial development. (2) Dine has seven lots that remain to be sold for this project. (3) Punta Mita Phase I consisted of a world class luxury hotel, an 18-hole championship golf course and clubhouse and a timeshare resort development. Four Seasons Hotels participated in each of these components with an ownership interest of 30.77% in the hotel, 12.31% in the golf course, and 30.77% in the timeshare resort. In February 2001, Dine and the Four Seasons Hotels sold their participation in the hotel. Based on the relative sizes of the two components of this development still owned by Dine and the Four Seasons Hotels, the total participation of Four Seasons Hotels in Phase I is approximately 16%. (4) Dine owns 77.3% of Club Ecuestre Chiluca, S. de R.L., a Mexican company that owns 3,750,000 square meters of undeveloped land and 106,514 square meters of partially developed land on this site. Club Ecuestre Chiluca, S. de R.L. also owns 51% of another company which owns 2,412,572 square meters of adjacent undeveloped land. (5) Dine owns 100% of the land and has entered into a joint venture agreement with Grupo Casa pursuant to which Dine contributed the land, Grupo Casa developed it, and Dine is entitled to 15% of both the time-share units developed and the net income of the hotel built on the site. We invested approximately Ps.979,873 in 1998, Ps.611,684 in 1999, and Ps.758,375 in 2000 to develop our real estate properties for commercial, residential and resort use. Strategy for the real estate sector We intend to continue to sell our existing inventory of developed properties, so long as conditions in the real estate market in Mexico remain favorable. We also intend to continue to seek partnerships through which to develop our land reserves in order to reduce our risk and increase the margins and market share of our real estate sector. We also continue to evaluate the profitability of each of our remaining real estate projects and may decide to divest additional properties in the future. We believe that our real estate products, aimed at the high-end market, generally offer superior quality, amenities and value. In evaluating all of our opportunities for new real estate projects, we generally pursue projects that we expect to yield an internal rate of return of at least 30%, although we might not actually achieve that target. Our land acquisitions fall into two categories: strategic purchases, where land is acquired and retained for future development, and current development purchases, where land is purchased in connection with a planned development. All of our projects are organized into a predetermined number of phases designed to reduce our risk and exposure to market conditions and shifts in the economy. When market indicators project 35
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a downturn in the industry, a project can be stopped in a logical and cost-efficient manner at the end of a phase of construction and delayed until market conditions improve, and when these indicators predict high growth at an accelerated pace, two or more phases can be constructed simultaneously. We generally subcontract the responsibilities of designing and building projects, including, but not limited to, hiring independent project managers, architects, construction companies and project supervisors. Commercial developments Arcos Bosques Corporativo. This project consists of a five-phase development of office space located in Bosques de las Lomas near the Mexico City-Toluca highway. Each phase includes the construction of a separate building. We completed the construction of the East building (Phase 1) in July 1993 and of the East Tower (Phase 2) in June 1996. We relocated our headquarters to the East Tower in 1997 and purchased 15,000 square meters of this development (approximately 25% of the available space in the East Tower) for this purpose. All of the space in the East Tower has been sold. We began the construction of the North building (Phase 3) in 1997 to meet existing demand for office space which recovered in 1997, and plan to complete it in 3 stages. We completed and sold all of the available space in stage 1 of the North building in 1998 and began constructing stage 2 in November 1999 pursuant to a 50/50 partnership with Ingenieros Civiles Asociados ("ICA") which is Mexico's largest construction company. Stage 2 will consist of approximately 18,000 square meters of office space. Pursuant to our partnership agreement with ICA, Dine contributed the land and permits, valued in the aggregate at approximately $7.5 million, and ICA agreed to contribute an equal amount in construction labor and services. Each partner thereafter is required to contribute 50% of the cash required to complete Stage 2. We estimate that the total cost for Stage 2, including the contributions already made by the partners, will be $21 million. Phases 4 and 5 of Arcos Bosques Corporativo consist of the construction of the West building and the West Tower, respectively. The timetable for these phases has not been established. The total investment budget allocated to all five phases of Arcos Bosques Corporativo is $340 million, of which approximately $160 million already has been invested. Centro Comercial Santa Fe. In association with El Palacio de Hierro, El Puerto de Liverpool and others, we entered into a contract with the government of Mexico City pursuant to which we developed a shopping mall in the Santa Fe zone in Mexico City, near Bosques de las Lomas. We believe that the shopping mall is the largest development of this type in Mexico. Construction of the first phase was completed in November 1993, when the Santa Fe shopping mall officially opened, at a total cost of $102 million. A second phase was completed in October 1995 at a total cost of $13 million. This additional phase consists of an entertainment complex with movie theaters and a children's center, a fitness center and additional retail space including one medium-sized department store which has not yet been leased. The shopping mall encompasses a total of approximately 100,000 square meters of retail space, as well as approximately 200,000 square meters of additional space for parking, tunnels and access roads. We retained 50.1% ownership of this project, excluding the department stores, which are owned by El Palacio de Hierro, El Puerto de Liverpool, Sears and Sanborn's, and we are entitled to receive retail income from future leasing activity. As of December 31, 2000, 99.7% of the available space in this project was leased. 36
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Approximately 89,000 square meters of undeveloped land adjacent to the Santa Fe project remains available for future commercial development, of which we own 33%. We generate additional income from the collection of parking fees at this project. In November 2000, we decided to divest this project and we are currently seeking a buyer for it. Residential developments Bosques de las Lomas--La Punta. We completed construction of the infrastructure for a 293,000 square meter high-income residential community in Bosques de las Lomas. Sales of undeveloped lots in this project commenced in September 1993 and approximately 88% of the properties had been sold by the end of 2000. We own 100% of the project and are the sole developer and manager. The total investment was approximately $40 million, including the cost of constructing a bridge that connects the development to Bosques de las Lomas. A new phase of La Punta, La Punta Peninsula, is expected to result in the construction of four twelve-story residential buildings, each containing 25 condominiums. We entered into an agreement in principle with Terrum, a Mexican real estate company, under which we contributed the land for the Peninsula project and Terrum agreed to construct and sell the units. The construction of one of the buildings in the Peninsula project was completed in 2000. The first 14 units of this building have been sold and we expect to sell the remaining units in 2001. Bosques de Santa Fe. This 1,100,000 square meter development, located two miles south from the Santa Fe shopping mall, is currently being developed in partnership with private investors. The current plans call for the development of a high-income residential community with a nine-hole golf course. We own 50% of this land. We began building the infrastructure for this project in 1998 and commenced selling lots in June 1998. As of December 31, 2000, we had sold approximately 50% of the lots available. Tourist/resort developments Punta Ixtapa. This development is a resort encompassing approximately 390,000 square meters located in the western side of the hotel zone of Ixtapa. As currently planned, the total project will consist of a residential area containing lots for private construction, finished homes, villas and condominiums, a recreation center and two beach clubs. This project is intended to be developed in five phases over an eight-year period. The first phase, consisting of the construction of finished homes and villas on a site of approximately 63,000 square meters, has been fully sold and construction is completed. The second and third phases, consisting of the development and sale of undeveloped residential lots on a site of approximately 153,000 square meters, commenced in June 1993, and approximately 80% of the lots were sold as of December 31, 2000. The remaining land is available for two additional phases of development for which firm plans have not yet been formulated. The total cost of the development is currently projected at $85 million, of which $65 million has been allocated for the first three phases. 37
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Punta Mita. We commenced in early 1997 the development of a 7.1 million square meter resort project located on beach front property in Costa Banderas, Nayarit, which is near Puerto Vallarta on the Pacific coast of Mexico. This project is intended to be developed in seven phases over a 15-year period. The first phase was developed in partnership with Four Seasons Hotels and includes a world class luxury hotel consisting of 100 guest rooms, together with restaurants, bars, banquet, meeting and other public rooms, an 18-hole championship golf course and clubhouse, a tennis and sports complex, a fitness club, a spa facility, timeshare units, and residential lots. We invested $100 million in the first phase of this project. We completed the construction of the golf course in 1998, under the supervision of Jack Nicklaus and completed the construction of the hotel in 1999. The hotel and golf course opened for business on September 1, 1999. The hotel was expanded to 140 rooms in 2000. We sold our participation in the hotel to SHC in February 2001, as the hotel had already achieved our objective of anchoring the project. We received consideration of $52 million in the sale (including the assumption by the buyer of $11 million of net debt) of which we used $26.5 million to reduce consolidated debt. The hotel will continue to be operated by Four Seasons Hotels Ltd. pursuant to a long term contract. Other properties Bosques de La Estadia. We own 77.3% of Club Ecuestre Chiluca, S. de R.L., an entity which holds 3,750,000 square meters of undeveloped land and an additional 106,514 square meters of partially developed land located on the northern border of Mexico City. Fernando Senderos Mestre and members of his family are the owners of the remaining 22.7% of Club Ecuestre. An additional 2,412,572 square meters of adjacent undeveloped land is held by an entity that is 51%-owned by Club Ecuestre. During 1994, a private construction company completed a toll-road providing access directly to this area. We believe this land is suitable for the development of condominiums. We have postponed development of this land at this time. Tepeji del Rio. We have a 59% interest in approximately 3,850,000 square meters of land located approximately fifty miles north of Mexico City. We believe this land is suitable for the development of a weekend resort targeted to Mexico City residents but have postponed development of this land at this time. Competition We believe that Dine is one of the largest real estate developer in the commercial, retail and residential real estate markets in Mexico City. We compete with many smaller Mexican real estate developers and at least two large real estate developers. NAFTA The North American Free Trade Agreement ("NAFTA") became effective on January 1, 1994. Under NAFTA, Mexico, the United States and Canada agreed to phase out tariffs and other trade barriers on each other's products, as well as to liberalize or eliminate many barriers to investment. The lowering of U.S. and Canadian trade barriers has facilitated access to those markets while the lowering of Mexican barriers to U.S. and 38
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Canadian products, and in some cases investments, also has increased the competition in the Mexican market. While most changes required by NAFTA had to be implemented during the first six years of operation of the agreement, tariff and non-tariff restrictions on the most sensitive products will continue to be phased down until 2003, or in the case of a few products, 2008. In the automotive sector, NAFTA required Mexico to reduce its tariff on most parts by 50% in 1994, and the remainder is being phased out over ten years, ending in 2003. The United States has phased out its tariffs on automotive parts exported from Mexico as of January 1, 1998. NAFTA also obligates Mexico to gradually phase out the trade balancing and domestic value-added requirements imposed on original equipment manufacturers (OEMs), eliminating those requirements by 2004. While those requirements in part have protected and, to a diminishing extent, continue to protect Mexican parts producers, the phasing out of artificial restrictions is facilitating the integration of the North American industry, with beneficial effects for efficient Mexican parts producers such as Desc. We believe these and other changes could increase demand for Mexican automotive parts among U.S., Mexican and Canadian OEMs during the next ten years. However, these changes also could increase competition among automotive parts manufacturers in Mexico. In the chemicals industry, NAFTA requires Mexico to phase out its tariffs to reduce barriers to foreign investment in Mexico, and imposes requirements that prohibit Pemex from discriminating against U.S. or Canadian persons in the supply of raw materials over which Pemex has a monopoly. Most of these changes with respect to Pemex already have been implemented by the Mexican government, and therefore NAFTA is unlikely to have a significant new effect on the businesses conducted by Girsa. In the food sector, NAFTA requires Mexico gradually to phase out tariffs on imported feed products used by us. Since the enactment of NAFTA special regulations enacted by the Mexican government have permitted livestock growers to import feed products duty-free when domestic feed consumption is projected to exceed domestic feed production. Therefore, NAFTA's effect on the importation of feed products has not been significant, though NAFTA's requirements help assure that the more liberal import policy will likely be continued. In the food sector, NAFTA also implements procedures for certification of conformity with health and sanitary requirements to facilitate the export of Mexican pork and other agricultural products to the United States. The regulatory clearing procedures for importing pork products from Mexico's Yucatan Peninsula and the Northwest region into the United States have been put in place and these areas have been certified as disease-free areas by the U.S. Department of Agriculture. The state of Sonora has already begun exporting pork products to the United States. It is expected that products from the other areas will start entering the United States by the end of 2001. The Mexican, U.S. and Canadian governments have had a generally good record of compliance with NAFTA requirements to date and all three governments have expressed their continued support for the agreement and its implementation. 39
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Nevertheless, we cannot assure you that this compliance will continue. This compliance is only one factor affecting the competitive conditions in which we operate. Environmental Regulation Both Mexican federal and state laws and regulations relating to the protection of the environment apply to our operations. The fundamental environmental law in the Mexican federal system is the Ley General del Equilibrio Ecologico y la Proteccion al Ambiente (the Mexican General Law of Ecological Balance and Environmental Protection or the "Ecological Law"). The Mexican federal agency in charge of overseeing compliance with, and enforcing the federal environmental laws is the Secretaria del Medio Ambiente, Recursos Naturales y Pesca (the Ministry of Environmental Protection, Natural Resources and Fishing, or the "Semarnap"). As part of its enforcement powers, the Semarnap is empowered to bring administrative proceedings against companies that violate environmental laws, impose economic sanctions and close temporarily or permanently non-complying facilities. Under the Ecological Law, the Mexican government has implemented an aggressive program to protect the environment by promulgating rules concerning water, land, air and noise pollution, and hazardous substances. Additionally, the Mexican government has enacted regulations concerning the importation and exportation of hazardous materials and hazardous waste. We believe that all of our facilities are in substantial compliance with government regulations relating to the protection of the environment. In addition, our subsidiary Nhumo, which manufactures carbon black, became the first carbon black business in the world to receive ISO-14001 certification in 1997 and our subsidiaries TREMEC, which manufactures transmissions, and TF Victor, which manufactures gaskets and seals, also received this certification in 2000. ISO-14001 is an international environmental management standard first adopted in 1996 by the International Organization for Standardization that requires commitment to continuous environmental improvement and compliance with all applicable environmental laws. Patents and Trademarks We have a number of Mexican, U.S. and foreign patents, registered trademarks, trade names and trade secrets and applications for, or licenses in respect of, the same that relate to various businesses. We believe that certain of these intellectual property rights are of material importance to the businesses to which they relate. We also believe that the material patents, trademarks, trade names and trade secrets of its operating subsidiaries and divisions are adequately protected. Seasonality Our business is subject to seasonal effects and we have generally experienced the highest level of business for our real estate sector in the second quarter and the fourth quarter, for our food sector in the third quarter and the fourth quarter, for our chemicals sector in the second quarter and the third quarter and for our automotive parts in the second quarter and the fourth quarter. 40
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Organizational Structure Desc is a holding company and its operations are carried out by its direct and indirect wholly owned subsidiaries. Set forth below is a list of our significant subsidiaries, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held. [Enlarge/Download Table] ================================================================================================ Name of Entity Country of Incorporation Proportion of Ownership or Residence Interest or Proportion of Voting Power Held ================================================================================================ Unik, S.A. de C.V................... Mexico 99.9% Girsa, S.A. de C.V.................. Mexico 99.9% Dine, S.A. de C.V................... Mexico 99.9% Agroken, S.A. de C.V................ Mexico 99.9% Aquanova, S.A. de C.V............... Mexico 99.9% Grupo Corfuerte, S.A. de C.V........ Mexico 77.2% Authentic Acquisition Corporation, Inc................................. Delaware, U.S.A. 81.3% ------------------------------------------------------------------------------------------------ Collectively, Unik, Girsa, Dine, Agroken, Aquanova, Grupo Corfuerte and Authentic Acquisition Corporation control or own majority interests in more than 100 companies. Property, Plants and Equipment Our corporate headquarters and executive offices, which we own, are located in Mexico City, Mexico and measure approximately 7,200 square meters. We believe that all our current properties and facilities are adequate for our present needs. For a description of our properties and plants, please reference each of the business segment descriptions set forth above under the heading "--Business Overview." Item 5. Operating and Financial Review and Prospects You should read the following discussion in conjunction with the Financial Statements included elsewhere in this annual report. The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S. GAAP, in particular by requiring Mexican companies to recognize effects of inflation. Notes 19 and 20 to the Financial Statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Desc and a reconciliation to U.S. GAAP of our net income and stockholders' equity. Net income information included in this section consists of "majority net income," as referred to in the Financial Statements, and therefore is net of minority interests attributable to third party equity interests in some of our subsidiaries, unless the context otherwise requires. 41
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Mexico experienced high inflation in some of the periods covered by the Financial Statements. The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 27.7% in 1996, 15.7% in 1997, 18.6% in 1998, 12.3% in 1999 and 9.0% in 2000. Mexican GAAP requires that the Financial Statements recognize the effects of inflation. Financial statements are adjusted by applying NCPI factors. As a result, financial statements prepared under Mexican GAAP are stated in constant terms, that is, with adjustment for inflation, rather than in nominal terms. Therefore, all data for all periods in the Financial Statements, and the financial information derived from the Financial Statements and presented in this section, unless otherwise indicated, have been restated in constant Pesos as of December 31, 2000. Increases or decreases shown as percentages reflect variations in constant Pesos. Peso figures are in thousands of constant Pesos, unless otherwise noted. Recent Developments As part of our strategy to improve the operating results of our food sector, we appointed Mr. Enrique Ochoa Vega as the Chief Executive Officer of the branded products business of Agrobios (Corfuerte, ASF and Nair). Mr. Ochoa will continue to serve in his current position as Chief Executive Officer of Girsa. On January 18, 2001, we announced the creation of an Executive Committee, which reports directly to our board of directors. See "Item 6. Directors, Senior Management and Employers-Committees of the Board of Directors" for additional information concerning the Executive Committee. All of Desc's corporate departments will report directly to Luis Tellez Kuenzler and each of our sectors will report to the Executive Committee. The purpose of the Executive Committee is to facilitate the decision-making process and management of Desc. On February 27, 2001, Desc sold the Four Seasons Resort located in Punta Mita, Nayarit, to Strategic Hotel Capital LLC for $52 millon. The Four Seasons Resort Punta Mita, which performed exceptionally during its first year of operations, represents a very important anchor for Dine's Punta Mita project, which has become a top tourist attraction in the Bahia de Banderas region. On May 9, 2001, we named Arturo D'Acosta Ruiz as our new chief financial officer. Mr. D'Acosta, who was most recently our director of corporate treasury, will report directly to Mr. Tellez. 42
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Results of Operations for Years Ended December 31, 2000, 1999 and 1998 The following table provides information derived from our Financial Statements: [Enlarge/Download Table] Year ended December 31, ----------------------------------------------------- 1998 1999 2000 --------------- --------------- --------------- (In thousands, except percentages) Net sales.................................. Ps. 26,176,034 Ps. 25,329,850 Ps. 23,439,306 Cost of sales.............................. 18,859,146 18,255,984 17,444,972 Gross margin............................... 28.0% 27.9% 25.6% Operating expense.......................... Ps. 3,541,180 Ps. 3,738,732 Ps. 3,731,019 Operating income........................... 3,775,708 3,335,134 2,263,315 Operating margin........................... 14.4% 13.2% 9.7% Comprehensive financial result............. Ps. (1,442,325) Ps. 446,528 Ps. (689,957) Equity in associated companies and unconsolidated subsidiaries............. (132,380) 46,483 (10,302) Impairment of fixed assets................. (37,739) (220,736) (152,026) Other income (expenses), net............... (97,655) (241,242) (428,102) Provisions for income taxes and employee profit sharing............... 532,003 889,843 554,016 Profit on the sale of subsidiaries......... 119,517 153,746 0 Net majority income........................ 1,131,806 1,935,073 274,895 Depreciation and amortization.............. 1,140,587 1,139,098 1,183,778 Capital expenditures(1).................... 4,990,938 3,470,260 2,510,839 Exports ($ in millions).................... $ 822.3 $ 933.1 $ 1,037.7 ---------- (1) Includes investments in real estate projects. The following table presents financial data from our consolidated statements of income expressed as a percentage of net sales: Year ended December 31, ------------------------------- 1998 1999 2000 ----- ----- ----- Net sales.................................. 100.0% 100.0% 100.0% Cost of sales.............................. 72.0 72.1 74.4 Gross margin............................... 28.0 27.9 25.6 Operating expenses......................... 13.5 14.8 15.9 Operating margin........................... 14.4 13.2 9.7 Comprehensive financial result............. (5.5) (1.8) (2.9) Equity in associated companies and unconsolidated subsidiaries............. (0.5) 0.2 (0.0) Other expenses, net........................ (0.4) (1.0) (1.8) Majority income ........................... 4.3 7.6 1.2 43
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Our business operations have been adversely affected by the continued weakness of the U.S. economy. To address this challenge, we have adopted various measures that are designed to reduce our cash expenditures. These measures include reducing our net debt, and thereby reducing our total financial expenses, divesting various underperforming assets, decreasing capital expenditures (our target for 2001 is approximately $100 million excluding the Velcon business), and keeping salary increases below the rate of inflation. We can make no assurance that these measures will be sufficient to prevent our business from continuing to be adversely affected by the U.S. economy. 2000 and 1999 compared. Consolidated net sales for 2000 decreased 7.5% to Ps.23,439,306 compared to Ps.25,329,850 in 1999. This decrease was mainly due to a 40.1% reduction in the sales of our food sector in 2000, which resulted from the divestiture of our poultry business in December 1999, and to the appreciation of the Peso relative to the Dollar during the course of 2000 which reduced the Peso value of our 2000 Dollar-denominated sales. Historically, the poultry business had been the largest component of our food sector. Our automotive parts sector's sales increased slightly in 2000 by 0.7% despite the slowdown in the U.S. economy in the fourth quarter of 2000. Our chemical sector's sales rose 4.2%, reflecting price increases for most products, while our real estate sector registered an increase of 13.6% in sales due to our Punta Mita and Bosques de Santa Fe projects. Exports reached $1,037.7 million during 2000, an increase of 11.2% when compared to the $933.1 million registered in 1999, due to the significant increase in exports of automotive parts and chemicals, which increased 7.6% and 27.6% in 2000, respectively. Cost of sales decreased 4.4% to Ps.17,444,972 during 2000, from Ps.18,255,984 in 1999. The decrease in cost of sales was lower than the decrease in sales due to higher raw material prices in our chemicals sector and the significant rise in natural gas prices. As a result, gross margin was 25.6%, 2.3% below the gross margin for 1999. Operating expenses decreased 0.2% to Ps.3,731,019 in 2000, compared to Ps.3,738,732 in 1999 mainly as a result of the savings resulting from the sale of the poultry business, which partly offset operating expense increases of 11.1% and 50.1% respectively, in our automotive parts and real estate sectors in 2000 as well as salary increases above inflation. Our operating margin decreased from 13.2% in 1999 to 9.7% in 2000 as a result of these factors. Net majority income decreased 85.8% from Ps.1,935,073 in 1999 to Ps.274,895 in 2000. This decrease was mainly due to lower operating profit, higher foreign exchange losses, and extraordinary charges principally related to the restructuring of the food sector. 1999 and 1998 compared. Consolidated net sales decreased 3.2% in 1999, to Ps.25,329,850 from Ps.26,176,034 in 1998. This decrease was due mainly to lower sales in the chemicals sector, which resulted from lower prices. Export sales increased by 13.5% in 1999 to $933.1 million from $822.3 million in 1998, primarily due to increased exports of automotive parts and food products. Cost of sales decreased 3.2% in 1999 to Ps.18,255,984 from Ps.18,859,146 in 1998, in line with the decrease in net sales. Consequently, gross margin decreased only slightly to 27.9% in 1999 from 28.0% in 1998. Operating expenses increased 5.6% in 1999 to Ps.3,738,732 from Ps.3,541,180 in 1998, mainly due to increased operating expenses in the food sector, as a result of including Nair for the full year and increased distribution costs in our poultry and pork 44
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businesses in 1999, and in the real estate sector, as a result of the commencement of operations of the Four Seasons Hotel that we built in Punta Mita in 1999. These factors led to an 11.7% decrease in operating income from Ps.3,775,708 in 1998 to Ps.3,335,134 in 1999. Our operating margin was 13.2% in 1999 compared to 14.4% in 1998 due to lower margins in the chemicals sector and in the poultry and pork businesses of our food sector and the appreciation of the Peso against the Dollar in 1999 which increased our Peso costs and reduced the benefit of our Dollar-denominated sales. Net majority income during 1999 increased 71.0% from Ps.1,131,806 in 1998 to Ps.1,935,073 primarily due to foreign exchange gains that resulted from the appreciation of the Peso relative to the Dollar during 1999. Automotive Parts The following table presents selected operating data for our automotive parts segment: [Enlarge/Download Table] Year ended December 31, ------------------------------------------------ 1998 1999 2000 -------------- -------------- -------------- (In thousands, except percentages) Net sales............................ Ps. 10,876,582 Ps. 10,854,485 Ps. 10,935,622 Cost of sales........................ 8,048,929 7,942,089 8,024,381 Gross margin......................... 26.0% 26.8% 26.6% Operating expenses................... Ps. 1,170,554 Ps. 1,180,368 Ps. 1,311,516 Operating income..................... 1,657,099 1,732,028 1,599,725 Operating margin..................... 15.2% 16.0% 14.6% Depreciation and amortization........ Ps. 535,403 Ps. 561,554 Ps. 574,020 Capital expenditures................. 1,015,542 868,664 1,097,298 2000 and 1999 compared. The automotive parts sector's net sales for 2000 increased 0.7% to Ps.10,935,622 from Ps.10,854,485 in 1999. While we were able to sustain our sales growth in the domestic market and increase our exports by 7.6% in 2000, to $686.6 million from $638.1 million in 1999, the appreciation of the Peso relative to the Dollar reduced the Peso value of our 2000 Dollar-denominated sales resulting in only a 0.7% net sales increase. During 2000, exports represented 61.8% of the sales of this sector, while in 1999 they represented 63.8%. The decrease in the percentage of our sales that is represented by exports was mainly due to the growth in the production of automobiles in the domestic market, which reached record levels. Costs of sales increased 1.0% to Ps.8,024,381 in 2000. Operating expenses increased 11.1% in 2000 to Ps.1,311,516 from Ps.1,180,368 in 1999, reflecting salary increases in 2000 which were above the rate of inflation. As a result, operating profit decreased 7.6% in 2000 to Ps.1,599,725 from Ps.1,732,028 in 1999. Operating margin for 2000 was 14.6%, compared to 16% in 1999. 1999 and 1998 compared. The automotive parts sector's net sales for 1999 decreased 0.2% to Ps.10,854,485 from Ps.10,876,582 in 1998, principally due to the appreciation of the Peso relative to the Dollar during 1999 which lowered the Peso value of our Dollar-denominated sales. Exports were $638.1 million in 1999, representing an 45
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increase of 15.9% from $550.4 million in 1998, and accounted for 64% of this sector's sales in 1999 as compared to 61% in 1998. This increase in exports was primarily due to increased sales of transmissions in the U.S. Cost of sales decreased 1.3% in 1999 to Ps.7,942,089 from Ps.8,048,929 in 1998 principally as a result of the implementation of operational improvements and cost-cutting programs and lower costs of raw materials. Operating expenses increased 0.8% in 1999 to Ps.1,180,368 from Ps.1,170,554 due principally to the payment of higher sales commissions and increased promotional expenditures. All of the above boosted operating income by 4.5% from Ps.1,657,099 in 1998 to Ps.1,732,028 in 1999. Operating margin increased to 16.0% in 1999 from 15.2% in 1998. Chemicals Beginning in 2000, we combined our diversified products segment, which includes adhesives, glues, waterproofing, additives and sealants, with our petrochemicals segment. These businesses are operated under Girsa, and are now reported together as our chemicals segment. Prior years results have been restated to reflect this change. The following table presents selected operating data for our chemicals segment: Year ended December 31, ------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- (In thousands, except percentages) Net sales......................... Ps. 8,456,287 Ps. 7,595,856 Ps. 7,914,807 Cost of goods sold................ 5,874,834 5,433,964 6,177,172 Gross margin...................... 30.5% 28.5% 22.0% Operating expenses................ Ps. 1,279,325 Ps. 1,226,918 Ps. 1,216,250 Operating income.................. 1,302,128 934,974 521,385 Operating margin.................. 15.4% 12.3% 6.6% Depreciation and amortization..... Ps. 324,322 Ps. 311,442 Ps. 300,119 Capital expenditures.............. 498,449 1,186,956 336,001 2000 and 1999 compared. During 2000, net sales increased 4.2% to Ps.7,914,807 from Ps.7,595,856 in 1999. The increase in sales was mainly due to higher international prices for synthetic rubber, carbon black and phenol, and higher volumes sold of polystyrene, acrylics, synthetic rubber and decorative laminates in 2000. Cost of sales increased 13.7% in 2000 to Ps.6,177,172 from Ps.5,433,964 in 1999, reflecting significant price increases in 2000 for some of our raw materials such as butadiene, styrene and cumene (some of which increased up to 100%) and significantly higher natural gas prices. We implemented various initiatives to offset the negative environment in the chemicals cycle, including aggressive cost reduction and productivity programs in all of our chemicals businesses. These included programs aimed at increasing the efficiency and volume of our synthetic rubber and polystyrene production processes and the optimization of our installed capacity. As a result of these initiatives, operating expenses decreased 0.9% to Ps.1,216,250 during 2000, compared to Ps.1,226,918 in 1999. The previously-mentioned factors and our inability to pass the increases in the cost of raw materials and natural gas to our customers, caused our operating profit to decrease 46
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44.2% from Ps.934,974 in 1999 to Ps.521,385 in 2000, and our operating margin to decrease to 6.6% in 2000 compared to 12.3% in 1999. 1999 and 1998 compared. During 1999, net sales declined by 10.2%, from Ps.8,456,287 in 1998 to Ps.7,595,856. The decline in sales was due to continued lower international prices for chemicals in general and lower demand for these products in Asian countries, which were only partially offset by a shift in our product mix toward specialty products which are less affected by the chemicals cycle. In addition the decline in sales reflects lower sales volumes and prices for phosphates in 1999 which resulted from a price war in the international markets, and the appreciation of the Peso relative to the Dollar in 1999 which reduced the Peso value of our 1999 Dollar-denominated sales. Exports were $198.8 million in 1999, representing a decrease of 2.6% from $204.2 million in 1998, and accounted for 28.4% of this sector's sales in 1999 as compared to 29.3% in 1998. Although the cost of raw materials increased significantly in Dollar terms as a result of the recovery of the chemicals cycle in primary products and the rise in oil prices, our cost of sales actually decreased 7.5% from Ps.5,874,834 in 1998 to Ps.5,433,964 in 1999, primarily due to the appreciation of the Peso relative to the Dollar and the implementation of measures to improve the yield of raw materials. Gross margin decreased from 30.5% in 1998 to 28.5% in 1999 as a result of these factors. Operating expenses decreased 10.6% from Ps.1,279,325 in 1998, to Ps.1,226,918 in 1999 principally as a result of reductions in administrative personnel and the implementation of tighter controls on operating expenses. Operating income declined 28.2% from Ps.1,302,128 in 1998 to Ps.934,974 in 1999 and operating margin decreased to 12.3% in 1999 from 15.4% in 1998. Food The following table presents selected operating data for our food segment: [Download Table] Year ended December 31, --------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- (In thousands, except percentages) Net sales........................... Ps. 5,923,063 Ps. 5,973,442 Ps. 3,575,823 Cost of sales....................... 4,478,700 4,518,991 2,712,857 Gross margin........................ 24.4% 24.3% 24.1% Operating expenses.................. Ps. 910,932 Ps. 1,049,297 Ps. 823,347 Operating income.................... 533,431 405,154 39,619 Operating margin.................... 9.0% 6.8% 1.1% Depreciation and amortization....... Ps. 220,692 Ps. 197,842 Ps. 211,085 Capital expenditures ............... 2,407,653 771,972 317,315 2000 and 1999 compared. During 2000, net sales decreased 40.1% to Ps.3,575,823 from Ps.5,973,442 in 1999. This decrease was mainly due to the divestiture of the poultry business in December 1999 and to lower sales of branded food products in 2000. Cost of sales decreased 40.0% to Ps.2,712,857 in 2000 compared to Ps.4,518,991 in 1999, and operating expenses decreased 21.5% from Ps.1,049,297 in 1999 to 47
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Ps.823,347 in 2000 due to the divestiture of our poultry business. Operating profit contracted 90.2% due to the sale of the poultry business and the extraordinary charges related to the restructuring in the branded products businesses, which achieved an operating profit of Ps.405,154 in 1999 compared to Ps.39,619 in 2000. As a result of the aforementioned events, operating margin decreased from 6.8% in 1999 to 1.1% in 2000. 1999 and 1998 compared. During 1999, net sales increased 0.9% to Ps.5,973,442 from Ps.5,923,063 in 1998 as a result of increased sales of branded food products during 1999 which compensated for lower prices in pork and poultry. Cost of sales increased 0.9% in 1999 to Ps.4,518,991 from Ps.4,478,700 in 1998, in line with the increase in net sales. As a result, gross margin remained essentially the same at 24.3% compared to 24.4% during the prior year. Operating expenses increased 15.2% in 1999 to Ps.1,049,297 from Ps.910,932 in 1998, reflecting the expenses of Nair, which were included for the full year in 1999 but only for one month in 1998, as well as higher distribution costs in our poultry and pork businesses due to increased volumes sold and sales made to a larger number of distributors during 1999. These factors led to a 24.0% decline in operating income from Ps.533,431 in 1998 to Ps.405,154 in 1999 and to a decline in operating margin from 9.0% in 1998 to 6.8% in 1999. In 1999, we sold our poultry business to Industrias Bachoco, S.A. de C.V. for $155 million. Real Estate The following table presents selected operating data for our real estate segment: [Enlarge/Download Table] Year ended December 31, ------------------------------------------ 1998 1999 2000 ----------- ----------- ----------- (In thousands, except percentages) Net sales Residential............................ Ps. 545,125 Ps. 665,162 Ps. 280,407 Tourism/resort......................... Ps. 74,705 Ps. 85,073 Ps. 420,185 Commercial............................. 275,540 126,217 295,076 ----------- ----------- ----------- Total................................ Ps. 895,370 Ps. 876,452 Ps. 995,668 ----------- ----------- ----------- Cost of sales(1).......................... 456,683 360,940 530,562 Gross margin.............................. 49.0% 58.8% 46.7% Operating expenses........................ Ps. 118,362 Ps. 206,679 Ps. 310,131 Operating income.......................... 320,325 308,833 154,975 Operating margin.......................... 35.8% 35.2% 15.6% Depreciation and amortization............. Ps. 29,180 Ps. 42,485 Ps. 66,278 Capital expenditures(2)................... 698,985 214,848 89,764 Investments in real estate projects(3).... 280,888 396,836 668,611 ---------- (1) Includes recognized cost of land, subcontracted construction costs, permit costs, architects' and engineering fees and related costs. These costs are recognized proportionately as revenues are received for the particular project. (2) Includes expenditures made during the relevant period related to the Santa Fe shopping mall, in which we hold a 50.1% interest, including acquisitions of land, construction costs, permits, and architects' and engineering fees. Does not include expenditures for other projects in our real estate sector which are being developed for sale. 48
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(3) Includes expenditures made during the relevant period for acquisitions of land, construction costs, permits, architects' and engineering fees and related items, except for expenditures related to the Santa Fe shopping mall. 2000 and 1999 compared. Net sales increased 13.6% from Ps.876,452 in 1999 to Ps.995,668 in 2000. The projects that contributed most to this increase were Bosques de Santa Fe, Punta Mita and Arcos Bosques Corporativo. Cost of sales increased 47.0% to Ps.530,562 in 2000 compared to Ps.360,940 in 1999. Costs increased at a higher rate than sales because there were more projects with lower margins in 2000, such as Arcos Bosques Corporativo and the operation of the Four Seasons Hotel in Punta Mita, resulting in a lower gross margin for the sector of 46.7% in 2000 compared to 58.8% in 1999. Operating expenses increased 50.1% from Ps.206,679 in 1999 to Ps.310,131 in 2000, which was due in large part to the operation of the Four Seasons Hotel in Punta Mita. As a percentage of sales, operating expenses represented 31.1% of sales in 2000 and 23.6% of sales during 1999. As a result of the foregoing, operating profit decreased 49.8%, from Ps.308,833 in 1999 to Ps.154,975 in 2000, and operating margin decreased to 15.6% in 2000 from 35.2% in 1999. 1999 and 1998 compared. The net sales of our real estate sector decreased 2.1% in 1999 to Ps.876,452 from Ps.895,370 in 1998. The decrease in net sales was mainly due to a lower sales volume in our Bosques de Santa Fe project in the 1999 period compared to the 1998 period when we began marketing this project, which were partially offset by sales in Punta Mita, which opened in September 1999. Cost of sales decreased 21% in 1999 to Ps.360,940 from Ps.456,683 in 1998. The decrease in cost of sales was significantly greater than the decrease in net sales because our 1999 sales mix included more properties with a relatively high profit margin. As a result, gross margin rose to 58.8% in 1999 from 49.0% in 1998. Operating expenses increased as a percentage of net sales in 1999 to 23.6% from 13.2% in 1998, and were Ps.206,679 in 1999 compared to Ps.118,362 in 1998 as a result of the commencement of operations of the Four Seasons Hotel in September, 1999, which we built and operate in partnership with Four Seasons Hotels Limited. As a result, operating income decreased 3.6% in 1999 to Ps.308,833 from Ps.320,325 in 1998, and operating margin decreased to 35.2% in 1999 from 35.8% in 1998. Comprehensive financial result Comprehensive financial result includes: (1) interest expense paid by us on financing, (2) interest earned by us on temporary investments, (3) the variations in our UDI-denominated debt which result from the inflation adjustment mechanism of these instruments, (4) foreign exchange gains or losses on our foreign currency-denominated monetary assets or liabilities, and (5) monetary earnings or losses due to the effects of inflation on our net monetary liability or asset position. To the extent that our monetary liabilities exceed our monetary assets during inflationary periods, we will generate a monetary position gain. The following table presents the components of our comprehensive financial result for each of the periods indicated: 49
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[Enlarge/Download Table] Year ended December 31, ------------------------------------------------------- 1998 1999 2000 --------------- --------------- --------------- (In thousands, except percentages) Interest expense................... Ps. (988,555) Ps. (1,247,668) Ps. (1,150,094) Interest income.................... 374,588 342,194 141,696 UDI variation...................... 0 (16,884) (108,022) Exchange, gain (loss), net......... (1,896,046) 393,227 (310,215) Gain on monetary position.......... 1,067,688 975,659 736,678 Comprehensive financial result..... Ps. (1,442,325) Ps. 446,528 Ps. (689,957) 2000 and 1999 compared. During 2000, the comprehensive financial result reflected a loss of Ps.689,957, compared to income of Ps.446,528 in 1999. This is attributable principally to: (1) the depreciation of the Peso against the Dollar during 2000, which resulted in an exchange loss of Ps.310,215 compared to an exchange gain of Ps.393,227 in 1999; (2) a 58.6% decrease in interest income during the 2000 to Ps.141,696 from Ps.342,194 in 1999 due to lower interest rates in 2000; (3) UDI variation expense of Ps.108,022 resulting from two issuances of UDI-denominated medium-term notes in 2000 and the inflation adjustment made to such notes and to the UDI-denominated medium-term notes issued in 1999 (UDIs are Peso-denominated, inflation-adjusted units); and (4) a 24.5% decline in monetary gains in 2000, from Ps.975,659 in 1999 to Ps.736,678 due to lower inflation during 2000. These factors more than offset a 7.8% decrease in interest paid in 2000 resulting from lower interest rates. 1999 and 1998 compared. In 1999, the comprehensive financial result showed a gain of Ps.446,528 compared to a loss of Ps.1,442,325 in 1998. This is attributable principally to the significant appreciation of the Peso against the Dollar during 1999, which resulted in a foreign exchange gain of Ps.393,227 compared to a foreign exchange loss of Ps.1,896,046 in 1998. This more than offset the following factors: (1) an increase of 26.2% in interest expense, from Ps.988,555 in 1998 to Ps.1,247,668 in 1999, resulting from increased consolidated debt in 1999; (2) an 8.6% decline in interest income in 1999 from Ps.374,588 in 1998 to Ps.342,194 due to lower interest rates paid on deposits in 1999; (3) UDI variation expense of Ps.16,884 resulting from the inflation adjustment made to our UDI-denominated medium term notes which were issued in 1999; and (4) an 8.6% decline in monetary gains in 1999 from Ps.1,067,688 in 1998 to Ps.975,659 due to lower inflation during 1999. Income taxes and employee profit sharing In Mexico, until 1998, the nominal corporate income tax rate was 34% of the taxable profits of a company for the fiscal year. The nominal corporate tax rate, however, may not be less than 1.8% of the average value of a company's assets, subject to some adjustments, whether or not the company had taxable income for the year. As a result of amendments to the Mexican income tax law which became effective on January 1, 1999, the nominal corporate income tax rate was increased to 35%. The nominal corporate tax rate, however, may not be less than 1.8% of the average value of a company's assets, subject to some adjustments, whether or not the company 50
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had taxable income for the year. Under the amended tax law, companies are permitted to defer a portion of their income tax liability on their net taxable income until dividends are paid from that income. For 1999, companies initially were required to pay income tax at a 32% rate, with the remaining 3% income tax liability payable on a proportional basis upon the distribution of dividends. For 2000 and subsequent years, the income tax liability due initially is 30% and the remaining 5% income tax may be deferred. With some exceptions, the amendments to the Mexican income tax laws also limit the extent to which we may reduce our consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries, to 60% of our equity interest in the relevant subsidiaries. We do not expect these changes to have a significant impact on our results of operations. In addition, aside from wages and agreed-upon fringe benefits, we and each of our subsidiaries are required by law to provide to our workers a share of our profits equal to 10% of taxable profit of the relevant company, calculated before any adjustments for inflation or amortization of fiscal losses of previous years. The combined statutory rates of corporate income tax and profit sharing were 44.0% for 1998 and 45.0% for 1999 and 2000. Bulletin D-4, "Accounting for Income and Asset Taxes and Employee Profit Sharing," became effective on January 1, 2000 for all Mexican companies. Prior to the effective date of this Bulletin, companies reporting under Mexican GAAP did not record the deferred tax effect of recurring temporary differences in the timing of the recognition of income and expenses for financial statement and income tax purposes. These differences, together with other non-recurring and permanent differences between income and expenses for accounting and tax purposes, resulted in an effective income tax rate that was lower than the statutory rate. New Bulletin D-4 requires that the comprehensive deferred effects (assets or liabilities) applicable to the cumulative temporary differences between assets and liabilities for financial statement and tax purposes be recorded. Deferred employee profit sharing will be calculated only for the temporary differences of the year whose reversal period can be determined. Our combined effective income tax rate for corporate income taxes and employee profit sharing was 25.8% in 1998, 26.4% in 1999 and 43.7% in 2000, as compared to the combined statutory rates of 44% in 1997 and 1998 and 45% in 1999 and 2000. The initial effect of Bulletin D-4 on Desc amounts to Ps.2,327,204 as of December 31, 1999. This effect was recognized as a long-term liability in 2000 and affected retained earnings. Our cash flows, however, are not affected by the application of Bulletin D-4. U.S. GAAP Reconciliation In 2000, we had net income under U.S. GAAP of Ps.495,344 compared to net income under Mexican GAAP of Ps.274,895. In 1999, we had net income under U.S. GAAP of Ps.1,732,027 compared to net income under Mexican GAAP of Ps.1,935,073. In 1998, we had net income under U.S. GAAP of Ps.1,405,990 compared to net income under Mexican GAAP of Ps.1,131,806. These differences are attributable mainly to the recognition of deferred taxes and employee profit sharing, net of their monetary gain and 51
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the effect of the minority interest. The other major reasons for these differences relate to the recognition of the benefits of tax consolidation, as well as the minority interest and inflation effect of the U.S. GAAP adjustments. For a further description of these and other adjustments under U.S. GAAP, see Notes 19 and 20 to the Financial Statements. Economic Conditions in Mexico Beginning in December 1994, Mexico experienced an economic crisis characterized by exchange rate instability and devaluation of the Peso, high inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemployment. The economic crisis resulted in part from a series of internal disruptions and political and economic events that adversely affected the Mexican economy and undermined the confidence of investors in Mexico. These adverse conditions in Mexico also resulted in an increase in the annual rate of inflation from 7.1% in 1994 to 52.0% in 1995, and a liquidity crisis affecting the ability of the Mexican government and the banking system to refinance or refund maturing debt issues. Mexican interest rates, which averaged 14.1% per annum for 28-day Cetes (Mexican treasury bills) during 1994, increased to an average of 48.4% during 1995. According to government estimates, Mexico's GDP fell by 6.2% in 1995. Mexico's gross international reserves fell sharply at the end of 1994, from $24.5 billion at December 31, 1993 to $6.1 billion at December 31, 1994, and were $15.7 billion at December 31, 1995, as reported by the Banco de Mexico. The Mexican economic crisis of late 1994 and 1995 had a profound impact on most Mexican businesses, including Desc. We experienced a significant decrease in demand in the domestic market for many of our products, particularly real estate and consumer products. However, the devaluation also caused imported products to become more costly and therefore less competitive in Mexico, which allowed domestic manufacturers to take advantage of an import substitution effect. Additionally, for those of our products for which there is an export market, such as automotive parts and chemicals, the devaluation enabled us to compete more effectively in the global marketplace. We cannot predict the effect that adverse economic conditions in Mexico, such as those beginning in December 1994, would have on our financial condition, results of operations or properties were such conditions to recur. Economic conditions in Mexico improved in 1996 and during the first half of 1997. However, beginning in the second half of 1997, economic crises in Asia, Russia, and Brazil caused a setback in the economic recovery of Mexico and other emerging markets. These crises resulted in very volatile global financial conditions, large outflows of capital from emerging market countries such as Mexico, and volatile exchange rates for emerging markets currencies such as the Peso. As a result, Mexico experienced higher interest rates, slower economic growth and higher inflation during the second half of 1997 and during all of 1998. Mexican interest rates, which had declined from an average of 31.2% per annum for the 28-day Cetes in 1996 to an average of 19.7% per annum in 1997, increased in 1998 to an average of 24.7% per annum. GDP growth 52
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declined from 6.76% in 1997, to 4.83% in 1998. Inflation, which had declined from 27.7% in 1996 to 15.7% in 1997 increased to 18.6% in 1998. During 1999 and 2000, economic conditions in Mexico improved. Mexican interest rates averaged 21.3% and 15.24% per annum in 1999 and 2000, respectively, for the 28-day Cetes and inflation decreased to 12.3% in 1999 and to 9.0% in 2000. GDP grew by 3.7% in 1999, and by 6.9% in 2000. During 1999, the Mexican currency also strengthened compared to the Dollar, from Ps.10.17 per Dollar in January 1999 to Ps.9.50 per Dollar in December 1999 and maintained its strength during 2000 ending at Ps.9.47 per Dollar in December 2000. Foreign investment also soared from approximately $10 billion in 1998 to $22 billion in 1999 to $11 billion in 2000. During the first quarter of 2000, Moody's upgraded Mexico to "investment grade" status. However, the current slowdown of the U.S. economy has adversely affected our business. Political Events in Mexico In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition PAN won the presidency, and he assumed office on December 1, 2000. His victory ended more than 70 years of presidential rule by PRI. Neither PRI nor PAN succeeded in securing a majority in the Mexican Congress or Senate. In April 1999, students at Mexico's National University, UNAM, staged a strike which lasted almost one year, demanding the end of certain reforms enacted by the Mexican government which the students believed threatened the future of free public education. Security forces ultimately secured the university facilities and ended the strike, and the university has resumed its normal activities. Since the strike, the Mexican government has responded to the initial demands of the strikers and agreed to create a University Congress where students and University administrators will be able to discuss the most relevant issues confronting the UNAM. Nonetheless, some radical student groups have continued to stage protests from time to time. In Chiapas, the social unrest has continued and from time to time there have been outbreaks of violence that have resulted in deaths in Chiapas and other southern regions of Mexico. The new administration has inherited the conflict and has started a new negotiation process to solve it. If the kind of political instability experienced at the UNAM or at Chiapas were to expand, the market price of securities of Mexican issuers, including our shares, ADSs and debt securities, could be adversely affected. Liquidity and Capital Resources Liquidity We have significant liquidity due to EBITDA, defined as earnings before interest expense, tax, depreciation and amortization. We generated cash flow of Ps.4,916,295 during 1998, Ps.4,474,232 during 1999, and Ps.3,447,093 during 2000. We used this cash flow mainly to finance capital expenditures and to service and repay debt. As of 53
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December 31, 2000, we had cash and marketable securities totaling Ps.325,264 on a non-consolidated basis, and Ps.1,540,002 on a consolidated basis. We believe that our working capital is sufficient for our company's and our subsidiaries' present requirements. Under Mexican GAAP, we present our consolidated statement of changes in financial position in accordance with Bulletin B-12, which identifies the generation and application of resources representing differences between beginning and ending financial statement balances in constant Pesos. The changes shown in the Financial Statements do not represent cash flow activities. See note 19 to the Financial Statements for more information about these changes. As of December 31, 2000, our consolidated Dollar-denominated liabilities were $1.2 billion and our net consolidated Dollar-denominated liabilities after deducting Dollar-denominated assets, which consist principally of cash, were $865 million. At the corporate level, Desc has no substantial operations of its own and, consequently, we depend on dividends and other payments from our subsidiaries and income tax refunds for virtually all of our cash flow. Dividends from subsidiaries. It is our general policy that each of our principal subsidiaries pay to Desc (and other stockholders of the subsidiary) dividends equal to at least 50% of the subsidiary's annual consolidated net income legally available for distribution. This percentage may be significantly lower in some cases, such as when the subsidiary proposes to make large capital expenditures or when its profits decline. As a general policy, Desc has paid approximately 35% of its legally available net income to stockholders, although it did not pay cash dividends in 1996 or 1999 as a result of restrictions under the terms of indebtedness that has since been repaid. During 2000, our subsidiaries paid dividends of approximately Ps.414,213, representing in total approximately 23% of the subsidiaries' 1999 net income. Approximately Ps.369,588 of these total dividends were paid to Desc and the balance were paid to minority interests. During 1999, our subsidiaries did not pay dividends. During 1998, our subsidiaries paid dividends of approximately Ps.1,982,747, representing in total approximately 62.5% of the subsidiaries' 1997 net income. Approximately Ps.1,688,757 of these total dividends were paid to Desc and the balance were paid to minority interests. Income tax refunds. In Mexico, each corporation is required to pay income tax for each year in an amount not less than 1.8% of the average value of its assets (subject to some adjustments), whether or not the corporation had taxable income for the year. Under Mexican income tax law, each year, each of our consolidated subsidiaries has been required to pay to Desc the amount of tax it would have paid to the Mexican government in respect of its annual taxable income and assets had the subsidiary filed a separate return. These payments were made pro rata based on our proportionate equity interest in the subsidiary making the payment. We were required to collect these tax payments and pay to the Mexican government the amount of tax due on behalf of Desc and its subsidiaries calculated on a consolidated basis. We generally made payments in respect 54
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of each year early in the following year, after completion of our year-end audit. Because we were entitled to apply this requirement on the basis of our consolidated taxable income, we generally were able to reduce our consolidated tax liability below the aggregate amount of tax payments we receive from our subsidiaries, depending on how many subsidiaries made payment based on the minimum tax and the extent of consolidated taxable income compared to consolidated taxable assets. Any amount by which these tax payments to Desc exceeded our consolidated tax liability for any year was retained by Desc and therefore provided a source of cash at the parent company level. We refer to these excess payments as "refunds." These refunds and the Mexican tax system are addressed in notes 3 and 15 to the Financial Statements. As a result of amendments to Mexican income tax law which became effective on January 1, 1999, each subsidiary now makes 40% of its income tax payments directly to the Mexican government. The amendments also limit the extent to which we may reduce our consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries, to 60% of our equity interest in the relevant subsidiaries thus reducing the amount of refunds available to us. We do not expect these changes to have a significant impact on our results of operations and financial condition. Uses of funds. At the Desc level, we utilize cash primarily to pay taxes, service debt and pay dividends. During 2000, we received Ps.369,588 in dividends from our subsidiaries, which we used to pay dividends to our stockholders totaling Ps.409,848. During 1999, our subsidiaries did not pay dividends. During 1998, we received Ps.1,688,757 in dividends from our subsidiaries, which we used to pay dividends to our stockholders totaling Ps.953,208 and to service debt. The dividend policies of the entity proposing to pay the dividend may change at the discretion of its stockholders. In addition, general limitations under Mexican corporate law apply to the amount of dividends payable by each of Desc and our direct and indirect subsidiaries. Financing activity Our principal subsidiaries generally do not rely on Desc or each other for financing, except when substantial capital expenditures are to be made and in other limited circumstances. When intercompany financing has been needed, Desc has generally provided it by means of capital contribution and not by intercompany loans. In the past, our subsidiaries have made several debt offerings in the capital markets with Desc's guaranty. As described below, presently there are outstanding notes issued by Dine which have been guaranteed by Desc. We anticipate that Desc alone will make future debt offerings in the capital markets. The proceeds of any future offerings of this kind, to the extent required by a subsidiary, would be provided to the subsidiary either by means of capital contribution or intercompany loan, as determined by Desc at the time. In April 1998, Girsa entered into a five-year, $30 million revolving credit facility with a group of banks. Interest on this loan is payable quarterly. At December 31, 2000, Girsa had used all $30 million available to it. Girsa used the proceeds from this loan to repay short-term debt and fund capital expenditures. 55
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In May 1998, Unik entered into a three-year, $75 million trade finance facility with a group of banks. This loan is guaranteed by Unik's subsidiaries Spicer, S.A. de C.V., Moresa, S.A. de C.V. and Hayes Wheels de Mexico, S.A. de C.V. Principal on the loan is payable at maturity and interest is payable semi-annually. At December 31, 2000, Unik and its subsidiaries had borrowed all $75 million available to them. In October 1999, Desc issued approximately Ps.850 million of UDI-denominated Medium Term Notes due 2006. These notes were our first issuance under a Ps.3 billion program structured by the Chase Manhattan Bank Mexico and authorized by the CNBV. UDIs are Unidades de Inversion or investment units, which are denominated in Pesos and adjusted periodically for inflation by Banco de Mexico, the Mexican Central Bank. These notes bear interest at a net rate of 9% and were rated "MAA" by Duffs and Phelps. We used the proceeds of this issuance to refinance short-term debt. In January 2000, Girsa entered into a ten-year, $105 million Loan Agreement with the International Finance Corporation. Girsa used the proceeds from this loan to fund the establishment of a joint venture in the synthetic rubber business, increase capacity at various facilities, implement quality, technology and process improvements in various businesses, and implement various cost reduction programs as well as maintenance and environmental investments. As of December 31, 2000, Girsa had borrowed $47 million under this facility and terminated the remaining commitment. In April 2000, Corfuerte entered into a five-year, $32 million Term Loan Agreement with a group of banks. Corfuerte used the proceeds from this loan to refinance short term debt. As of December 31, 2000, Corfuerte had borrowed all $32 million available to it under this facility. In November 2000, Desc entered into a three-year $150 million Credit Agreement with a group of banks. Principal on the loan is payable in November 2002 ($37.5 million), May 2003 ($37.5 million) and November 2003 ($75 million), and interest is payable on each principal payment date. We used the proceeds from this loan to refinance short-term debt of Desc. The credit facility contains various affirmative and negative covenants, including restrictions on the payment of dividends by Desc, on the purchase, redemption or acquisition of Desc's capital stock by Desc and any subsidiary, and on the ability to enter into agreements that restrict the payment of dividends by Desc's subsidiaries to Desc. As of December 31, 2000, we had borrowed $90 million under this facility and in the second quarter of 2001 we borrowed the additional $60 million available to us under this facility. In November 2000, Girsa entered into a four-year, $50 million revolving credit. Interest on this loan is payable monthly. Girsa used the proceeds from this loan to repay short-term debt and fund capital expenditures. On July 12, 2000, Desc issued approximately Ps.1 billion in UDI-denominated Medium Term Notes with a maturity period of seven years. These notes bear interest at a net rate of 8.20% and were rated "MAA" by Duffs and Phelps. This placement was done under the Ps.3 billion program authorized by the CNBV, from which Ps.850 million (or 324 million in UDIS) was placed during October 1999. 56
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As of December 31, 2000, our subsidiaries had outstanding short-term liabilities of $306 million, most of which was borrowed under unsecured revolving credit facilities provided by several Mexican and U.S. commercial banks. These facilities are predominantly Dollar-denominated and are payable within 30 to 364 days with interest rates which fluctuated during 2000 between 7.30% and 9.00% in Dollars and 17.00% and 20.50% in Pesos. As of December 31, 2000, our subsidiaries had approximately $1,012 million of available credit under these and other facilities, in addition to the $640 million outstanding on that date. Since none of these facilities is committed, borrowings under them require the lenders' consent. Item 6. Directors, Senior Management and Employees Directors Our board of directors is responsible for the management of our business. At the April 27, 2000 stockholders' meeting, our stockholders adopted amendments to our bylaws which among other things, reduced the size of our board of directors and eliminated the positions of alternate director. As a result of these amendments, our board of directors is to be composed of no less than 5 and no more than 15 directors, as determined by our stockholders at their annual meeting. The holders of the Series A shares have the right to elect one more than half of the board of directors. Stockholders or groups of stockholders holding shares, including Series C shares, of any one class which represent at least 10% of our total equity capitalization have a right to elect one director of the relevant series for each 10% held. The holders of the Series B shares have the right to elect the remaining members of the board of directors. Each director is elected to serve a one-year term and remains in office until the person elected to replace him takes office. At the April 26, 2001 meeting, our stockholders set the size of our board of directors at 12 members. Since the holders of Series C shares as a group represent more than 10% of our total equity capitalization, one Series C director was elected at our 2001 general stockholders' meeting. The following table lists the principal occupation, type of director and period of service on the board of each of our directors elected at our last general stockholders' meeting, which took place on April 26, 2001. Except as indicated below, none of the directors holds any offices or positions in Desc. [Download Table] Principal occupation First Name of Directors and positions with Desc elected ----------------- ----------------------- ------- Series A Directors: ------------------ Fernando Senderos Mestre(1)....... Chairman of the Board and Chief 1973 Executive Officer of Desc Eneko de Belausteguigoitia Arocena .......................... Entrepreneur 1973 Carlos Gomez y Gomez.............. Chairman of the Board of Grupo 1973 Financiero Santander Mexicano, S.A. de C.V. Carlos Gonzalez Zabalegui......... Chief Executive Officer of Controladora 1996 Comercial Mexicana, S.A. de C.V. 57
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[Download Table] Principal occupation First Name of Directors and positions with Desc elected ----------------- ----------------------- ------- Adolfo Patron Lujan............... Private investor and Consultant 1982 Luis Tellez Kuenzler.............. Executive Vice President of Desc 2001 Ernesto Vega Velasco.............. Secretary of the Board 1973 Series B Directors: Alberto Bailleres Gonzalez........ Chairman of the Board of Penoles, S.A. 1973 de C.V., and Chief Executive Officer of Grupo Bal Ruben Aguilar Monteverde.......... Private investor 1978 Federico Fernandez Senderos....... Chief Executive Officer of Grupo Eulen 1993 Mexico Valentin Diez Morodo.............. Vice President and Chief Sales Officer 1999 of Grupo Modelo, S.A. de C.V. Series C Director: Prudencio Lopez Martinez.......... Chairman of the Board of Sanvica, S.A. 1973 de C.V. ---------- (1) Fernando Senderos Mestre is the uncle of Federico Fernandez Senderos and the brother-in-law of Carlos Gomez y Gomez. Committees of the Board of Directors The amendments to our bylaws adopted by our stockholders at the April 27, 2000 meeting established 3 committees of our board of directors: an Evaluation and Compensation Committee, an Audit Committee, and a Finance and Planning Committee. Each of these committees is to be composed of no less than 3 and no more than 7 directors, as determined at the general stockholders' meeting, plus Desc's statutory auditor, who must attend meetings of the board and of each of its committees but may not vote at these meetings. See "--Statutory Auditor" below for more information about the Statutory Auditor's responsibilities. At the April 27, 2000 meeting, our stockholders set the size of the Evaluation and Compensation Committee and of the Audit Committee at 3 members each, and the size of the Finance and Planning Committee at 4 members. The duties of the Evaluation and Compensation Committee include recommending criteria to our Board for the selection and evaluation of the performance of our executive officers in accordance with general guidelines established by the Board, and analyzing the structure and amount of the compensation of our executive officers proposed by our CEO and making a recommendation to our Board. The current members of the Evaluation and Compensation Committee are Messrs. Adolfo Patron Lujan, Carlos Gonzalez Zabalegui, and Valentin Diez Morodo. The duties of the Audit Committee include recommending to our Board candidates to serve as our external auditors, the terms under which such candidates will serve and the scope of their audit; assisting our Board in its supervision of our external auditors' compliance with the terms of their engagement; acting as communication channels between our Board and our external auditors; ensuring the independence and objectivity of our external auditors; and reviewing our auditors' reports and letters and 58
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reporting the results of their review to the full Board. The current members of the Audit Committee are Messrs. Prudencio Lopez Martinez, Ruben Aguilar Monteverde, and Eneko de Belausteguigoitia Arocena. The duties of the Finance and Planning Committee include evaluating and, if applicable, recommending for approval to our Board the investment and financing policies proposed by our Chief Executive Officer; evaluating and recommending general guidelines for our strategic planning; opining as to the premises underlying our annual budget; overseeing the implementation of our budget and strategic plan; and identifying the financial risks to which our company is subject and evaluating our policies to manage those risks. The current members of the Finance and Planning Committee are Messrs. Fernando Senderos Mestre, Eneko de Belausteguigoitia Arocena, Carlos Gomez y Gomez, and Federico Fernandez Senderos. At the April 26, 2001 stockholders' meeting, our stockholders resolved to create an Executive Committee composed by Messrs. Fernando Senderos Mestre and Luis Tellez Kuenzler. The duties of the Executive Committee include supervising the performance of our subsidiaries; appointing their top tier officers and determining their compensation with the advise of the Evaluation and Compensation Committee, establishing the premises and guidelines for the growth and development of our company and its subsidiaries and deciding on their investments and financing, with the advise of the Finance and Planning Committee. The board of directors has six regular meetings scheduled per year and each of the committees has two regular meetings scheduled per year. Executive Officers The following table presents information concerning our executive officers: [Enlarge/Download Table] Years with Name Position Desc ---- -------- ---- Fernando Senderos Mestre...... Chairman of the Board and Chief Executive Officer 29 Luis Tellez Kuenzler.......... Executive Vice President 0 Emilio Mendoza Saeb........... Vice President (Automotive Parts) 33 Enrique Ochoa Vega............ Vice President (Chemicals and Branded Food Products) 10 Andres Banos Samblancat....... Vice President (Real Estate) 17 Arturo D'Acosta Ruiz.......... Chief Financial Officer 19 Jorge Almada Wright........... Corporate Director of Strategic Planning 2 Alberto Morett Lopez.......... Corporate Director of Administration and Human Resources 8 Pedro Piedras Ros............. Corporate Director of Control (Chemicals and Real Estate) 21 Agustin Rios Matence.......... Corporate Director of Control (Automotive Parts and Food) 24 Ramon F. Estrada Rivero....... General Counsel 11 59
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The following table presents information concerning the chief executive officers of our principal sectors: Years with Name Subsidiary (Business) Desc ---- --------------------- ---- Emilio Mendoza Saeb Unik (Automotive Parts) 33 Enrique Ochoa Vega Girsa (Chemicals and Branded Food Products) 10 Andres Banos Samblancat Dine (Real Estate) 17 Stautory Auditor In addition to electing our directors, our stockholders generally elect a statutory auditor at their annual ordinary meeting. Under Mexican law, the duties of the statutory auditor include, among other things, examining the operations, books, records and any other documents of Desc and presenting at the annual ordinary stockholders' meeting a report on the accuracy, sufficiency and reasonableness of the information presented by the board of directors at that meeting. Under our bylaws, the statutory auditor is also authorized to call ordinary or extraordinary general shareholders' meetings. Our statutory auditor is Jose Manuel Canal Hernando, and his alternate is Daniel del Barrio Burgos. Compensation of Directors and Officers For the year ended December 31, 2000, the aggregate compensation of all directors and officers of Desc, S.A. de C.V. as a group that was paid or accrued by us in that year for services in all capacities was approximately Ps.70,750. This group includes 11 directors, one statutory auditor, one alternate statutory auditor and 13 officers, 2 of whom were also directors. During the year ended December 31, 2000, we contributed approximately Ps.10,217 (in nominal Pesos) to a pension fund that covers the employees and the 15 executive officers of Desc, S.A. de C.V. Aside from this contribution, we did not set aside or accrue any other funds for pension, retirement or similar benefits for directors and executive officers as a group. Following the completion of each fiscal year, Desc in its sole discretion, awards cash bonuses in varying amounts to its executive employees. Most of these employees are entitled, if they so elected when the plan was adopted, to use their cash bonuses to purchase Desc shares from a trust to which we loaned funds in 1992 to enable it to purchase shares of our stock in the open market, at an amount equal to the trust's average cost basis in those shares. For 2000, the trust's average cost basis was Ps.8.00 per share (in nominal Pesos, not in thousands). In addition to the cash amount of his or her bonus, an employee purchasing shares from the trust may recognize income equal to the difference between the market price of the purchased shares at the time of purchase by the employee and the amount the employee paid to the trust for those shares. Share Ownership by Our Executive Officers and Directors Share ownership of Fernando Senderos Mestre and certain members of his immediate family and Eneko de Belausteguigoitia Arocena is set forth in "Major 60
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Shareholders" under Item 7. None of our other directors, alternate directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock. Employees; Labor Relations As of December 31, 2000, we employed approximately 22,320 people. Each of our subsidiaries has entered into short-term union, collective bargaining or similar agreements for each plant and/or facility it operates. These contracts generally have two-year terms and provide for an annual salary review as well as a review of other contract terms and conditions prior to renewal, which is a standard arrangement for collective bargaining agreements for most Mexican companies. We believe that our relations with our employees are satisfactory. Item 7. Major Shareholders and Related Party Transactions The following table presents information with respect to the ownership of Desc's Series A, B and C shares, as of April 26, 2001, by each stockholder known to us to own beneficially more than 5% of our outstanding Series A, B or C shares and by all of our officers and directors as a group: [Enlarge/Download Table] Number of Shares Owned ---------------------------------------------- Name Series A Series B Series C ---- -------- -------- -------- Fernando Senderos Mestre(1)(2) 321,986,985 1,770,000 4,968,600 Lucia Senderos de Gomez(1)(3) 0 134,812,955 9,318,680 Eneko de Belausteguigoitia Arocena 86,067,920(4) 8,804,631(5) 380,005 Officers and directors as a group (25 persons)(2) 428,503,295 13,814,631 6,395,737 Percentage Owned ---------------------------------------------- Name Series A Series B Series C ---- -------- -------- -------- Fernando Senderos Mestre(1)(2) 54.81% 0.35% 1.80% Lucia Senderos de Gomez(1)(3) 0.00 26.63 3.38 Eneko de Belausteguigoitia Arocena 14.65 1.74 0.14 Officers and directors as a group (25 persons)(2) 72.94 2.73 2.32 -------------------------------------------------------------------------------- (1) Lucia Senderos de Gomez and Fernando Senderos Mestre are siblings. Lucia Senderos de Gomez is the wife of Carlos Gomez y Gomez, a director of Desc. (2) Includes shares owned by SEN, S.A. de C.V., a corporation wholly-owned by Fernando Senderos Mestre. Does not include the 33,006,300 Series A shares, 2,761,940 Series B shares and 21,131,275 Series C shares owned by our pension funds, for which Fernando Senderos Mestre and other officers and directors serve as trustees or members of the investment committee, or shares owned by Lucia Senderos de Gomez. Does not include approximately 7,973,760 Series A shares, 687,000 Series B shares and 665,582 Series C shares currently owned by the trust referred to under "Item 6. Compensation of Directors and Officers", as to which Fernando Senderos Mestre has voting control. Does not include 26,391,360 Series A shares, 46,331,105 Series B shares and 38,806,305 Series C shares owned by Manuel Senderos Irigoyen, the father of Fernando Senderos. (3) Does not include 2,345,030 Series A shares, 564,000 Series B shares and 78,505 Series C shares owned by Carlos Gomez y Gomez, the husband of Lucia Senderos de Gomez. (4) Includes 257,765 shares owned by companies controlled by Eneko de Belausteguigoitia Arocena. (5) Includes 138,076 shares owned by companies controlled by Eneko de Belausteguigoitia Arocena. 61
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As a result of the shares owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre exercises voting control (see the table above and Item 6. "Directors, Senior Management and Employers --Compensation of Directors and Officers" for information about these additional shares), the Senderos family has the power to elect a majority of our board of directors, to control our general management and to determine the outcome of substantially all matters requiring stockholder approval. Item 8. Financial Information Consolidated Financial Statements See pages F-1 through F-47, which is incorporated herein by reference. Litigation We are involved in legal proceedings not described in this annual report that are incidental to the normal conduct of our business. We do not believe that liabilities relating to these proceedings will have a material adverse effect on our financial condition or results of operations. Dividend Policy For a discussion of our dividend policy, see Item. 10 "Additional Information--Dividends and Distributions" and "--Dividends and Paying Agent." Significant Changes No significant change has occurred since the date of the Financial Statements included in this Annual Report. Item 9. The Offer and Listing Trading Prices of our Shares and ADS All three series of our stock are listed on the Mexican Stock Exchange and our ADSs are listed in the New York Stock Exchange under the symbol "DES". As of April 26, 2001, approximately 85,570,520 of the Series C shares were held in the form of ADSs. It is not practicable for us to determine the number of Series C shares beneficially owned by U.S. persons. The following table sets forth for the periods indicated the high and low sales prices of the Series C shares on the Mexican Stock Exchange in nominal Pesos and the high and low sales prices of the ADSs on the New York Stock Exchange in Dollars. These prices are not representative of the prices for the Series A and Series B shares for these periods: 62
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[Download Table] Mexican Stock Exchange New York Stock Exchange Pesos Per Series C Share Dollars Per ADS ------------------------ ----------------------- Prior Five Years(1): High Low High Low ------------------- --------- --------- ------- ------- 1996 Ps. 9.00 Ps. 5.30 $ 23.13 $ 13.87 1997 16.62 8.54 43.25 21.75 1998 15.08 5.50 37.68 8.87 1999 13.60 6.80 29.12 14.06 2000 8.10 3.20 17.00 6.31 1999: First Quarter Ps. 11.86 Ps. 8.06 $ 27.12 $ 15.06 Second Quarter 13.60 10.10 29.12 21.00 Third Quarter 12.22 7.80 26.06 16.50 Fourth Quarter 7.90 6.80 18.62 14.06 2000: First Quarter Ps. 8.10 Ps. 5.90 $ 17.00 $ 12.50 Second Quarter 7.00 5.30 15.25 11.00 Third Quarter 6.62 4.99 14.37 10.25 Fourth Quarter 4.78 3.20 10.31 6.31 Most Recent Six Months: December 2000 Ps. 3.86 Ps. 3.20 $ 8.37 $ 6.31 January 2001 3.95 3.10 8.31 6.18 February 2001 4.40 3.40 9.09 7.25 March 2001 4.20 3.80 8.70 7.75 April 2001 4.00 3.40 8.15 7.00 May 2001 4.00 3.50 8.30 7.45 (1) We have adjusted the sales prices of the Series C shares for the periods presented to retroactively reflect the 5 for 1 stock split effected on September 8, 1998. As of June 28, 2001, the closing sales price of the Series C shares on the Mexican Stock Exchange was Ps.3.84 and the closing sales price of the ADSs on the New York Stock Exchange was $8.36. Dine's 8 3/4% Guaranteed Notes due 2007 were listed on the Luxembourg Stock Exchange on June 21, 1999. They are not listed on any other stock exchange. It is not practicable for us to determine the amount of Dine Notes beneficially owned by U.S. persons. Trading on the Mexican Stock Exchange The Mexican Stock Exchange was founded in 1894 and has operated continuously since 1907. The Mexican Stock Exchange is located in Mexico City and it is Mexico's only stock exchange. The Mexican Stock Exchange is organized as a corporation and its shares are owned by authorized brokerage firms. These firms exclusively are authorized to trade on the floor of the Mexican Stock Exchange. Electronic trading on the Mexican Stock Exchange takes place between the hours of 8:30 a.m. and 3:00 p.m., Mexico City time, on each weekday other than public 63
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holidays. Mexico's Daylight Savings Time begins approximately one month after Daylight Savings Time in the United States and ends approximately one month before. During those two periods of approximately one month each, electronic trading on the Mexican Stock Exchange takes place between the 7:30 a.m. and 3:00 p.m., Mexico City time, on each weekday other than public holidays. Since January 11, 1999, all trading of equity securities listed on the Mexican Stock Exchange has been made through the Electronic Negotiation System, an automated, computer-linked system commonly known as BMV SENTRA Capitales. The Mexican Stock Exchange publishes a daily official price list that includes information on each listed security. Trading may be suspended in the event of disclosure of material non-public information, if the Mexican Stock Exchange considers that the suspension is necessary for the public to be fully informed. The Mexican Stock Exchange may also suspend trading of a particular security as a result of significant price fluctuations during a given trading day (fluctuations exceeding a given price level by more than 15%) or as a result of unusual movements in the price of a security during a period of no more than five consecutive trading days. The Mexican Stock Exchange may also suspend trading generally as a result of unexpected events or force majeure, or if unusual market fluctuations arise. Settlement takes place two trading days after a share transaction is effected on the Mexican Stock Exchange. Deferred settlements, even if by mutual agreement, are not permitted without the approval of the CNBV. Most securities traded on the Mexican Stock Exchange, including our shares, are on deposit with S.D. Indeval, S.A. de C.V., Sociedad para el Deposito de Valores, a privately owned central securities depositary that acts as a clearing house, depositary, custodian, settlement, transfer and registration institution for Mexican Stock Exchange transactions, eliminating the need for physical delivery of securities. As of December 31, 2000, approximately 177 Mexican companies were listed on the Mexican Stock Exchange, excluding mutual funds. During the second half of 2000, the ten most actively traded equity issues represented approximately 63.7% of the total volume of the shares traded on the Mexican Stock Exchange, not including public offerings. Although there is substantial participation by the public in the trading of securities on the Mexican Stock Exchange, a major part of such activity reflects transactions of institutional investors. There is no formal over-the-counter market for securities in Mexico. The Mexican Stock Exchange is Latin America's third largest exchange in terms of market capitalization, but it remains relatively small and illiquid compared to major world stock markets and is subject to significant volatility. As of December 31, 2000, the total market value of all shares, excluding mutual funds, listed on the Mexican Stock Exchange was Ps.1,203 billion. 64
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Item 10. Additional Information Share Capital Our capital stock consists of 3 classes of common stock: Series A common stock, Series B common stock and Series C common stock. The holders of the Series A shares have the right to elect one more than half of the members of our board of directors and, subject to the right of stockholders or groups of stockholders holding shares of any one class which represent at least 10% of our total equity capitalization to designate one director of the relevant series for each 10% held, the holders of the Series B shares have the right to elect the remaining members of our board of directors. The holders of Series C shares and American Depositary Shares (each representing 20 Series C shares) have limited voting rights that entitle them to vote only upon the matters designated in the corporate charter. These matters are the extension of our duration, our dissolution, our transformation from one type of corporation into another, the change of our nationality, the change of our designated corporate purposes, our merger into another corporation, and the cancellation of the registration of our shares on the Mexican Stock Exchange. As of April 26, 2001, our outstanding capital stock consisted of 1,368,998,270 shares, comprised of 587,479,900 Series A shares, 506,176,760 Series B shares and 275,341,610 Series C shares. An additional 48,785,000 Series A shares, 60,088,140 Series B shares and 43,411,155 Series C shares had been repurchased by us and were held as treasury shares. Under our bylaws, the Series A shares and the Series B shares may be held only by Mexican investors. The Series C shares may be held by Mexican and non-Mexican investors, but under applicable law the Series C shares may not be held by foreign governments or official agencies of foreign governments. Bylaws Set forth below is a brief summary of certain principal provisions of our bylaws and certain provisions of Mexican law. This description does not purport to be complete and is qualified in its entirety by reference to our bylaws, which have been filed as an exhibit to this annual report, and the applicable provisions of Mexican law. For a description of the provisions of our bylaws relating to our board of directors, Executive Committee and statutory auditor, see Item 6. Organization and Register; Purposes Desc is a corporation (sociedad anonima de capital variable) organized under the laws of Mexico on August 28, 1973. Desc is registered with the Public Registry of Commerce of Mexico City under the number 8089. Pursuant to Article Three of our bylaws, Desc's general purpose includes promoting and encouraging industrial and tourist development, participating as a shareholder or partner in any type of Mexican company and acquiring all types of real estate and rendering all services necessary for the attainment of its purposes. 65
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Share Capital Our bylaws require that the Series A shares represent at all times at least 51% of the outstanding capital stock (not including the Series C shares) and that the Series B shares may not exceed 49% of such capital (not including the Series C shares). The Series C shares may in no event exceed 25% of our entire capital stock (including the Series C shares). Voting Rights Each Series A share and Series B share entitles the holder to one vote at any general meeting of our stockholders. The holders of the Series A shares have the right to elect one more than half of the board of directors. Stockholders or groups of stockholders holding shares, including the Series C shares, of any one class which represent at least 10% of our total equity capitalization have a right to elect one director of the relevant series for each 10% held. The holders of the Series B shares have the right to elect the remaining members of the board of directors. Except as described above, the holders of the Series C shares are entitled to vote only upon certain matters designated in the corporate charter, namely: o the extension of the term of duration of Desc; o the dissolution of Desc; o the transformation of Desc from one type of corporation into another; o the change of Desc's designated corporate purposes; o the change of nationality of Desc; o the merger of Desc into another corporation; and o cancellation of the registration of any series of our shares on the Mexican Stock Exchange. Under Mexican law, the holders of shares of any series are also entitled to vote as a class at a special meeting on any action that would prejudice the rights of holders of such series, and a holder of such series would be entitled to judicial relief against any such action taken without such a vote. The determination whether an action requires a class vote on these grounds would initially be made by our board of directors or other party calling for shareholder action. Any determination that an action does not require a vote at a special meeting would be subject to judicial challenge by an affected stockholder, and the need for a vote at a special meeting would ultimately be determined by a court. There are no other procedures for determining whether a proposed shareholder action requires a class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination. 66
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Stockholders' Meetings Under Mexican law and our bylaws, we may hold three types of stockholders' meetings: ordinary, extraordinary and special. Ordinary stockholders' meetings are those called to discuss any issue specified in Article 181 of the Ley General de Sociedades Mercantiles (the "Mexican Companies Law") and other issues not reserved for extraordinary stockholders' meetings. An ordinary stockholders' meeting must be held at least annually during the four months following the end of each fiscal year to consider certain matters specified in Article 181, including, among other things, the approval of the report prepared by the board of directors on Desc's financial statements for the preceding fiscal year, the appointment of members of our board of directors and statutory auditors and the determination of compensation for members of our board of directors and statutory auditors. Extraordinary stockholders' meetings are those called to consider the matters specified in Article 182 of the Mexican Companies Law, including: o extension of the company's duration or voluntary dissolution; o an increase or decrease in the company's minimum fixed capital; o change in corporate purpose or nationality; o any transformation, merger or spin-off involving the company; o any stock redemption or issuance of preferred stock or bonds; o the cancellation of the listing of the company's shares with the National Registry of Securities and Intermediaries; o amendments to the company's bylaws; and o other matters for which applicable Mexican law or the bylaws specifically require an extraordinary meeting. Special stockholders' meetings are those called and held by stockholders of the same series or class to consider any matter particularly affecting the relevant series or class of shares. Under Mexican law, holders of 20% of our outstanding capital stock may have any stockholder action set aside by filing a complaint with a Mexican court of competent jurisdiction within 15 days after the close of the meeting at which the action was taken, which shows that the challenged action violates Mexican law or our bylaws. Relief under these provisions is only available to holders (1) who were entitled to vote on the challenged stockholder action and (2) whose shares were not represented when the action was taken or, if represented, voted against such action. Stockholders' meetings are required to be held in our corporate domicile, which is Mexico City. Calls for stockholders' meetings must be made by our board of directors, 67
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the statutory auditors or any Mexican court of competent jurisdiction. The board of directors or the statutory auditors may be required to call a meeting of stockholders by the holders of 10% of our outstanding capital stock. Notice of meetings must be published in the Diario Oficial de la Federacion or in a newspaper of major circulation in Mexico City at least 15 days prior to the meeting. Unless the approval of financial statements is to be discussed at the meeting, such notice period may be reduced to 5 days if the board of directors deems such reduction appropriate based on the urgency of the matters to be discussed at the meeting. Each call must set forth the place, date and time of the meeting and the matters to be addressed. Calls must be signed by whomever makes them. In order to attend and vote at a stockholders' meeting, a stockholder must request and obtain an admission card by depositing its share certificates (or evidence of deposit thereof in a Mexican bank) with the Secretary of Desc at least one day prior to the meeting. Quorum A quorum on a first call for an ordinary stockholders' meeting is least 50% of the outstanding shares entitled to vote thereat. In order for a resolution of the ordinary stockholders' meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote of the majority of the shares represented and entitled to vote at such meeting is required. The quorum on a first call for an extraordinary stockholders' meeting is at least 75% of the outstanding shares entitled to vote at such meeting. An extraordinary stockholders' meeting may be validly held pursuant to a second call with a quorum of at least 50% of the outstanding shares entitled to vote at such meeting. In order for a resolution of the extraordinary general meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote of 50% of the outstanding shares entitled to vote at such meeting is required. Withdrawal Rights The outstanding variable portion of our capital stock may be fully or partially withdrawn by the stockholders. The minimum fixed portion of our capital stock specified in our charter cannot be withdrawn. A holder of shares representing our variable capital stock that wishes to effect a total or partial withdrawal of its shares must notify us in an authenticated written notice to that effect. If notice of withdrawal is received prior to the last quarter of the fiscal year, the withdrawal becomes effective at the end of the fiscal year in which the notice is given. Otherwise, the withdrawal becomes effective at the end of the following fiscal year. The redemption of the stockholders' shares would be made at the lower of: (i) 95% of the average share price quoted on the Mexican Stock Exchange during the 30 business days prior to the date on which the withdrawal becomes effective or (ii) the book value per share in accordance with our most recent financial statements approved at 68
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the annual ordinary stockholders' meeting, by reference to the date on which the withdrawal becomes effective. Since our inception, no stockholder has ever exercised its right to withdraw. Dividends and Distributions At our annual ordinary general stockholders' meeting, our board of directors must submit to the holders of the Series A shares and the Series B shares our financial statements for the preceding fiscal year. Five percent of our net earnings must be allocated to a legal reserve fund until such fund reaches an amount equal to 20% of Desc's capital stock. Our legal reserve fund currently satisfies this requirement. Additional amounts may be allocated to extraordinary, special or additional reserve funds as the stockholders may from time to time determine. The remaining balance, if any, of net earnings may be distributed as dividends or allocated for the redemption of shares. Any redemption must be approved in advance at an extraordinary stockholders' meeting. Dividends are paid to the registered holder of the relevant share or the duly authorized representative of such holder upon delivery of the applicable coupon. With respect to share certificates deposited with Indeval, payment of dividends is made through Indeval in accordance with customary payment procedures. Partially paid shares participate in any distribution to the extent that such shares have been paid at the time of the distribution. Our ability to pay dividends is subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits reflected in its year-end financial statements (approved by its stockholders), only if such payment is approved by its stockholders, and then only after the creation of a required legal reserve and the set off or satisfaction of losses, if any, incurred in previous fiscal years. See Item 4. "Risk Factors Relating to Our Operations--Dependence on dividends from subsidiaries" and "Risks Relating to Our Controlling Stockholder and Capital Structure--Certain members of the Senderos family effectively control our management and their interests may differ from those of other securityholders". Liquidation Rights Upon a dissolution of Desc, one or more liquidators must be appointed by an extraordinary stockholders' meeting to wind up its affairs. All fully paid and outstanding shares of capital stock, regardless of class, will be entitled to participate equally in any distribution upon liquidation. Partially paid shares participate in a liquidation distribution in the same manner as they would in a dividend distribution. Changes in Share Capital An increase of capital stock may be effected through the issuance of new shares for payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items of stockholders' equity. No increase of capital stock may be effected until all previously issued shares have been fully paid. A reduction of capital stock may be effected to absorb losses, to redeem shares or to release stockholders from payments not made. A reduction of capital stock to absorb losses may be effected by reducing the value of all outstanding shares. A reduction of capital stock to redeem shares may be 69
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effected by reimbursing holders of shares pro rata or through a drawing before a public broker. Stockholders may also approve the redemption of fully paid shares with retained earnings, which would be effected by a repurchase of shares on the Mexican Stock Exchange (in the case of shares listed thereon). Our capital stock may be increased or decreased only by resolution of an extraordinary general stockholders' meeting and, if such increase or decrease affects the fixed portion of our capital, an amendment to our bylaws. Any holders of the Series A shares or the Series B shares would be entitled to vote on an increase or decrease in capital stock, including one affecting the Series C shares. No stockholder resolution is required for decreases in capital stock based on the exercise of a stockholder's right to withdraw variable shares or Desc's purchase of its shares or for increases based on a resale by Desc of shares it previously purchased. Preemptive Rights In the event of a capital increase through the issuance of new shares for payment in cash or in kind, a holder of existing shares generally has a preferential right to subscribe for a sufficient number of new shares to maintain the holder's proportionate holdings of shares; however, such right is unavailable to holders of the Series C shares in respect of capital increases represented by either the Series A shares or the Series B shares or both the Series A shares and the Series B shares. Except in limited circumstances, preemptive rights must be exercised within the period and under the conditions established for such purpose by the stockholders' meeting approving the increase and under our bylaws, and in no case may such period be less than 15 business days following the publication of notice of the capital increase in the Diario Oficial de la Federacion, provided that if all stockholders are present or represented at such meeting such publication shall not be required. Otherwise, such rights will lapse. Under Mexican law, preemptive rights may not be waived in advance by a stockholder and cannot be represented by an instrument that is negotiable separately from the corresponding share. Holders of ADSs may exercise preemptive rights only through the Depositary. Registration and Transfer of the Shares All of Desc's series of shares are evidenced by share certificates in registered form, and registered dividend coupons may be attached to the certificates. Share certificates held by stockholders may have dividend coupons attached. If Desc and Indeval agree, share certificates deposited with Indeval will have no dividend coupons attached. Dividend coupons may only be presented for payment by the registered holder of the related share or its duly appointed agent. Stockholders of Desc may either hold their shares directly, in the form of physical certificates, or indirectly through institutions that have accounts with Indeval. Accounts may be maintained at Indeval by brokers, banks, other financial institutions or other entities approved by the CNBV ("Indeval Participants"). Desc maintains a share registry, and only those persons listed in such 70
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registry and those holding certificates issued by Indeval and any relevant Indeval Participant indicating ownership will be recognized as stockholders by Desc. Other Provisions Liabilities of the members of the board of directors Under Mexican law, an action for civil liabilities against members of our board of directors may be initiated by a stockholders' resolution. The director against whom such action is brought will cease to be a member of the board immediately upon the stockholders' adoption of a resolution demanding responsibility for such civil liabilities. Additionally, stockholders representing not less than 15% of our outstanding shares may directly take such action against members of our board of directors, if (1) such stockholders have not voted against taking such action at the relevant stockholders' meeting and (2) the claim in question covers damage alleged to have been caused to Desc and not merely to the individual plaintiffs. Any recovery of damages with respect to the action will be for our benefit and not for the stockholders bringing such action. Purchase by Desc of its shares According to Mexican law, we may repurchase any series of our shares on the Mexican Stock Exchange at any time at the then prevailing market price. Any such repurchase must be done by charging our shareholders' equity account, while we hold the repurchased shares, or by reducing our outstanding capital stock, if such shares are to be held as treasury stock. No approval by our shareholders is required for such reduction, but our shareholders must approve, for each year, the maximum amount that may be used to repurchase shares which may not exceed the amount of net earnings (including retained earnings). During the period we own such shares, they may not be represented at any shareholders' meeting. In no event may a share repurchase result in a percentage of the Series C shares in excess of that permitted by our bylaws or applicable law. Repurchased shares may be resold at any time. Repurchases in the event of delisting In the event that the registration of our shares in the Securities Section of the National Registry for Securities and Intermediaries is canceled, whether upon our request or pursuant to a resolution adopted by the CNBV, our bylaws and CNBV regulations require that our controlling shareholders make a public offer to purchase the shares owned by minority holders. The purchase price to be paid by the controlling shareholders will be equal to the higher of (i) the average quotation price of the shares for the 30 trading days prior to the date of the offer or (ii) the book value of the shares, as reflected in the last quarterly report filed with the CNBV and the Mexican Stock Exchange prior to the date of the offer. If after that repurchase offer our controlling shareholders fail to acquire 100% of our capital stock, the cancellation of the registration of our shares will not become effective until our controlling shareholders have created a trust with the funds required to purchase the remaining shares at the same offering price, with the trust remaining in effect for at least 2 years. 71
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Appraisal rights Whenever a stockholders' meeting approves a change of corporate purpose, change of nationality, a restructuring from one type of corporate form to another or a spin-off (escision), any stockholder who has voted against such change or restructuring has the right to withdraw from Desc and receive an amount broadly equal to the book value of Desc's shares (in accordance with Desc's latest balance sheet approved by an ordinary general meeting), provided the dissenting stockholder exercises its right to withdraw during the 15-day period following the meeting at which such change or restructuring was approved. Stockholder's conflicts of interest Pursuant to Article 196 of the Mexican General Law of Commercial Companies, any stockholder that has a direct or indirect conflict of interest with respect to a transaction must abstain from voting with respect to such transaction at the relevant stockholders' meeting. A stockholder that votes on a transaction in which its interest conflicts with that of Desc may be liable for damages if the relevant transaction would not have been approved without such stockholder's vote. Director's conflicts of interest Pursuant to Article 156 of the Mexican General Law of Commercial Companies, any director that has a direct or indirect conflict of interest with respect to a transaction that is presented to the board of directors must disclose such conflict to the board of directors and abstain from voting with respect to such transaction at the relevant board meeting. A director who votes on a transaction in which his interest conflicts with that of Desc may be liable for damages if the relevant transaction would not have been approved without such director's vote. Rights of stockholders The protections afforded to minority shareholders under Mexican law are different from those in the United States and many other jurisdictions. The substantive law concerning fiduciary duties of directors has not been the subject of extensive judicial interpretation in Mexico, unlike many states in the United States where duties of care and loyalty elaborated by judicial decisions help to shape the rights of minority shareholders. Mexican civil procedure does not contemplate class actions or shareholder derivative actions, which permit shareholders in U.S. courts to bring actions on behalf of other shareholders or to enforce rights of the corporation itself. Shareholders cannot challenge corporate action taken at a shareholders' meeting unless they meet certain procedural requirements, as described above under "Stockholders' Meetings." As a result of these factors, in practice it may be more difficult for our minority shareholders to enforce rights against us or our directors or controlling shareholders than it would be for shareholders of a U.S. company. 72
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Enforceability of civil liabilities Desc is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and their assets are located in Mexico. As a result, it may be difficult for investors to effect service of process within the United States on such persons. It may also be difficult to enforce against them, either inside or outside the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts judgments obtained against them in courts in jurisdictions outside the United States, in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. Exclusive jurisdiction Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws shall be brought only in the courts of Mexico City, Federal District. Duration Our existence under the bylaws is 99 years from the date of registration with the Public Registry of Commerce. Material Contracts For a description of our material contracts please refer to Item. 4 "Information on our Company" and Item 5. "Operating and Financial Review." Exchange Controls Restrictions on Foreign Investment. Foreign investment in the capital stock of Mexican companies is regulated by the 1993 Ley de Inversion Extranjera (the "Foreign Investment Law") and the 1998 regulations promulgated under the Foreign Investment Law (the "Foreign Investment Regulations"). The Foreign Investment Law defines foreign investment as (i) the participation of foreign investors in the capital stock of Mexican corporations, or investments made in the capital stock of Mexican corporations by a Mexican corporation in which foreign capital has a majority participation, and (ii) the participation of foreign investors in those activities that are regulated by the Foreign Investment Law. Foreign investors are defined as individuals or entities that are not Mexican nationals. The Comision Nacional de Inversiones Extranjeras (the "Foreign Investment Commission") and the Registro Nacional de Inversiones Extranjeras (the "National Registry of Foreign Investments") of the Ministry of Economy are responsible for the administration of the Foreign Investment Law and the Foreign Investment Regulations. In order to comply with foreign investment restrictions, Mexican companies typically 73
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limit particular classes of their stock to ownership by Mexican individuals and Mexican corporations in which foreign investment has a minority participation. As a general rule, the Foreign Investment Law allows foreign investment in up to 100% of the capital stock of Mexican companies except for those engaged in restricted industries. With respect to restricted industries, the Foreign Investment Law not only limits or forbids share ownership but also requires that Mexican stockholders retain the power to determine the administrative control and the management of those corporations. Restricted industries currently include retail trade in gasoline and distribution of liquid petroleum gas, radio broadcasting, credit unions, development banks, land transportation of passengers, tourists and freight in Mexico other than messenger and package delivery services, and the rendering of specified professional and technical services. Desc and its subsidiaries currently do not engage in any restricted industry. However, our bylaws restrict our Series A and Series B shares to Mexican ownership. A holder that directly acquires Series A or B shares in violation of the restrictions on foreign investment contained in our bylaws will not have any of the rights of a stockholder with respect to those shares, the acquisition will be null and void, and the corresponding shares will be cancelled. Due to the limited voting rights of our C shares, they are not taken into account under the Foreign Investment Law or our bylaws in determining compliance with restrictions on foreign ownership. Accordingly, unlike the Series A and B shares, the C shares are not restricted to Mexican ownership. Under applicable law, however, the Series C shares may not be held by foreign governments or official agencies of foreign governments. Neither applicable Mexican law nor Dine's bylaws (estatutos sociales) impose any limitation on the right of non-Mexican investors to hold Dine's 8 3/4% Guaranteed Notes due 2007. Taxation Tax Treaty between the United States and Mexico The United States and Mexico have signed and ratified a Convention for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income and Protocols thereto. We refer to this Convention as the "Tax Treaty". The Tax Treaty is currently in effect and we summarize below the provisions of the Tax Treaty that may affect holders of ADSs, Series C shares and Dine Notes who are residents of the United States (as defined in the Tax Treaty). Mexico has also executed treaties to avoid double taxation with other countries as well as agreements providing for the exchange of information with respect to tax matters, some of which presently are in force. The following summary does not take into account the effect of any such treaties. Readers should consult their tax advisors as to their entitlement to the benefits afforded by the Tax Treaty or such other treaties. 74
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Mexican Federal Income Tax Considerations for Holders of ADSs and Series C Shares The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and administrative rules issued by the Ministry of Finance and Public Credit and the Tax Treaty of the purchase, ownership and disposition of ADSs or Series C shares by a holder that is not a resident of Mexico, as in effect as of the date hereof. We caution that these laws and regulations are subject to change or differing interpretations, which changes or differing interpretations could apply retroactively. This summary does not address the tax laws of any state or municipality in Mexico. Readers are cautioned that this is not a complete analysis or listing of all potential tax effects that may be relevant to a decision to purchase, hold or dispose of ADSs or Series C shares. For purposes of Mexican taxation, an individual is a resident of Mexico if he has established his home in Mexico, unless he has resided in another country for more than 183 days, whether consecutive or not, during a calendar year and can demonstrate that he has become a resident of that other country for tax purposes. Individuals of Mexican birth are deemed to be Mexican residents for tax purposes, unless proof is submitted to the contrary. A legal entity established under Mexican law or having its principal offices or management in Mexico is deemed a resident of Mexico. A person having a permanent establishment or a fixed base in Mexico will be regarded as a resident of Mexico and will be required to pay taxes in Mexico in accordance with applicable law in respect of all Mexican-source income. Taxation of dividends Dividends paid either in cash or in any other form to Mexican individuals and to all non-Mexican shareholders, whether individuals or entities, with respect to the ADSs or the Series C shares represented by ADSs, are subject to a 5% Mexican withholding tax on the product that results from multiplying the amount of the dividend paid and 1.5385. The Tax Treaty limits the rate of withholding tax on dividends to be received by U.S. residents to 5% of the gross amount of the dividend if the beneficial owner is a company that owns at least 10% of the voting stock of Desc or 10% of the gross amount of the dividend for all other U.S. residents. The Tax Treaty is not expected to have a material effect on the Mexican tax consequences to U.S. holders of the ADSs or Series C shares so long as the rate of withholding tax in effect under Mexican Income Tax Law and regulations is less than the rate imposed by the Tax Treaty. We will not be subject to any tax in connection with a dividend payment if the amount maintained in our previously taxed reinvested net earnings account (cuenta de utilidad fiscal neta reinvertida or "CUFINRE") or previously taxed net earnings account (cuenta de utilidad fiscal neta or "CUFIN") exceeds the dividend payment to be made. However, if the dividend payment is in an amount greater than our CUFINRE and CUFIN balance (which may occur in a year when net profits exceed the balance in such accounts), then we will be required to pay a 35% income tax on an amount equal to the product of (i) the portion of the amount which exceeds such balance times (ii) 1.5385. 75
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Taxation of capital gains Gains on the sale or other disposition of ADSs by holders who are not residents of Mexico will not be subject to Mexican tax. Deposits of Series C shares in exchange for ADSs and withdrawals of Series C shares in exchange for ADSs will not give rise to Mexican taxes. Gains on the sale of Series C shares by holders who are not residents of Mexico will not be subject to any Mexican tax if the transaction is carried out either through the Mexican Stock Exchange or through a recognized exchange. A recognized exchange is an exchange or quotation system that has operated for at least five years and has been duly authorized to operate under the laws of a country where taxes on interest from a foreign source are imposed at a rate of at least 15%. Gains on the sale or other disposition of Series C shares made in other circumstances may be subject to Mexican taxes. The Tax Treaty exempts United States residents from Mexican capital gains taxes on dispositions of stock (whether or not those dispositions are carried out through the Mexican Stock Exchange or a recognized exchange), provided that (i) during the 12-month period before the disposition, the U.S. resident did not hold, directly or indirectly, an equity interest of 25% or more in the Mexican company, (ii) less than 50% of the assets of the Mexican company consist of immovable property situated in Mexico or (iii) the gain is not attributable to a permanent establishment or fixed base in Mexico of the U.S. resident. Other Mexican taxes There are no Mexican inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs or Series C shares, although gratuitous transfers of Series C shares may in some circumstances cause a Mexican federal tax to be imposed on the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of ADSs or Series C shares. Mexican Federal Income Tax Considerations for Holders of Dine Notes The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and administrative rules issued by the Ministry of Finance and Public Credit and the Tax Treaty of the purchase, ownership and disposition by a Foreign Holder of Dine's 8 3/4% Guaranteed Notes due 2007, which are fully and unconditionally guaranteed by Desc (the "Notes"). A "Foreign Holder" is a holder who (1) is not a resident of Mexico for tax purposes and (2) will not hold Notes or a beneficial interest in Notes in connection with the conduct of a trade or business through a permanent establishment or a fixed base in Mexico. This summary does not address the tax laws of any state or municipality in Mexico. Readers are cautioned that this is not a complete analysis or listing of all potential tax effects that may be relevant to a decision to purchase, hold or dispose of Notes. The statements of Mexican federal income tax laws that we make below are based on the federal laws of Mexico, the regulations and administrative rules issued by the 76
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Ministry of Finance and Public Credit, as in effect as of the date hereof. We caution that these laws and regulations and the Tax Treaty are subject to change or differing interpretations, which changes or differing interpretations could apply retroactively. Taxation of payments of interest and principal Under the Mexican Income Tax Law, payments of interest made by Dine or by Desc to a Foreign Holder in respect of the Notes will be subject to Mexican withholding taxes assessed at a rate of 10% if, as is the case, the Notes have been registered with the Special Section of the National Registry for Securities and Intermediaries (the "Special Section"). In addition, under the general rules issued by the Mexican Ministry of Finance and Public Credit (the "Reduced Rate Regulation"), payments of interest made by Dine or by Desc to Foreign Holders in respect of Notes will be subject to withholding taxes imposed at a rate of 4.9% (the "Reduced Rate") until March 16, 2002 (or thereafter if as has been the case in the past, the effectiveness of a rule equivalent to the Reduced Rate Regulation is extended), regardless of the place of residence or tax regime applicable to the Foreign Holder recipient of the interest, if: o the Notes, as is the case, are registered in the Special Section; o Dine, as is the case, has timely filed with the Ministry of Finance and Public Credit information relating to the registration of the Notes in the Special Section and to the issuance of the Notes; and o Dine timely files each quarter of the calendar year with the Ministry of Finance and Public Credit information representing that no "party related" to Dine, directly or indirectly, is the effective beneficiary of 5% or more of the aggregate amount of the interest payment, and Dine maintains records evidencing compliance with this requirement. Under the Reduced Rate Regulation any of the following would be a "party related" to Dine: (1) shareholders of Dine that own, directly or indirectly, individually or collectively with related persons (within the meaning of the Reduced Rate Regulation) more than 10% of Dine's voting stock or (2) corporations if more than 20% of their stock is owned directly or indirectly, individually or collectively by related persons of Dine. Apart from the Reduced Rate Regulation, other special rates of Mexican withholding income tax may apply. In particular, under the Tax Treaty, the Mexican withholding tax is reduced to 4.9% (the "Treaty Rate") for some holders that are residents of the United States within the meaning of the Tax Treaty provided they satisfy the circumstances contemplated in the Tax Treaty. However, during 2001, the Tax Treaty is not expected, generally, to have any material effect on the Mexican tax consequences to holders of Notes because, as described above, with respect to a United States holder, Dine will be entitled to withhold taxes in connection with interest payments under the Notes at the Reduced Rate so long as the Reduced Rate Regulation 77
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requirements described above are met. From March 2002 and beyond, holders of the Notes should consult their tax advisors as to the possible application of the Treaty Rate. Interest paid on Notes held by a non-Mexican pension or retirement fund will be exempt from Mexican withholding tax if the fund (1) has been duly incorporated as a fund pursuant to the laws of its country of origin, (2) is the effective beneficiary of the interest paid, (3) is registered with the Ministry of Finance and Public Credit for that purpose, and (4) is exempt from income taxation in its country of origin and the relevant interest income is exempt from taxes in that country. Dine and Desc, as guarantor of the Notes, have agreed, subject to the exceptions and limitations contained in the indenture under which the Notes were issued, to pay additional amounts in respect of the Mexican withholding taxes mentioned above to the holders of the Notes. Under the Mexican Income Tax Law, a Foreign Holder will not be subject to any Mexican income taxes in respect of payments of principal made by Dine or by Desc in connection with the Notes. Taxation of capital gains Under the Income Tax Law it is not clear if a tax will apply to gains resulting from a Foreign Holder's sale or other disposition of Notes. We believe that if such tax were to apply, it would be deemed paid when the withholding tax on interest payments on the Notes is paid pursuant to the Income Tax Law or the Reduced Rate Regulation. However, there can be no assurance that the Mexican authorities would agree with our interpretation. Transfer and other taxes There are no Mexican stamp, registration, or similar taxes payable by a Foreign Holder in connection with the purchase ownership or disposition of the Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift, inheritance or similar tax with respect to the Notes, although gratuitous transfers of the Notes may in some circumstances cause a Mexican income tax to be imposed on the recipient. United States Federal Income Tax Considerations - ADSs or Series C Shares General Subject to the limitations described below, the following discussion describes the material United States federal income tax consequences to a U.S. Holder (as defined below) that is a beneficial owner of the ADSs or Series C shares (the "Shares") and that holds them as capital assets. For purposes of this summary, a "U.S. Holder" is a beneficial owner of Shares who or that is for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal tax purposes) created or organized in the United States or under the laws of the United States or of any state or the District of Columbia, (iii) an estate, the income of which is includible in gross income for United States federal 78
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income tax purposes regardless of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. This summary is for general information purposes only. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person's decision to purchase Shares. As this is a general summary, prospective owners of Shares are advised to consult their own tax advisers with respect to the U.S. federal, state and local tax consequences, as well as to non-U.S. tax consequences, of the acquisition, ownership and disposition of Shares applicable to their particular tax situations. This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), current and proposed U.S. Treasury regulations promulgated thereunder, and administrative and judicial decisions, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of United States federal income taxation that may be relevant to any particular holder based on such holder's individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the United States federal income tax consequences to U.S. Holders that are subject to special treatment, including: o broker-dealers, including dealers in securities or currencies; o insurance companies; o taxpayers that have elected mark-to-market accounting; o tax-exempt organizations; o financial institutions or "financial services entities"; o taxpayers who hold Shares as part of a straddle, "hedge" or "conversion transaction" with other investments; o holders owning directly, indirectly or by attribution at least 10% of our voting power; o taxpayers whose functional currency is not the U.S. dollar; and o taxpayers who acquire Shares as compensation. This discussion does not address any aspect of United States federal gift or estate tax, or state, local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who hold Shares through a partnership or other pass-through entity. Certain material aspects of United States federal income tax relevant to a beneficial owner other than a U.S. Holder (a "Non-U.S. Holder") also are discussed below. Each prospective investor is advised to consult such person's own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of Shares. 79
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Taxation of Dividends Paid on Shares In the event that we do pay a dividend, and subject to the discussion of the passive foreign investment company, or "PFIC," rules below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on Shares, including any Mexican taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder's basis in the Shares and, to the extent in excess of such basis, will be treated as a gain from the sale or exchange of the Shares. Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the date the distribution is received. U.S. Holders will have the option of claiming the amount of any Mexican income taxes withheld at source either as a deduction from gross income or as a dollar-for-dollar credit against their United States federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of any Mexican income taxes withheld, but such individuals may still claim a credit against their United States federal income tax liability. The amount of foreign income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. The total amount of allowable foreign tax credits in any year cannot exceed the pre-credit U.S. tax liability for the year attributable to foreign source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to Mexican income tax withheld from dividends received on the Shares: o if such U.S. Holder has not held the Shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date; or o to the extent such U.S. Holder is under an obligation to make related payments on substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Shares are not counted toward meeting the 16-day holding period required by the statute. In addition, distributions of current or accumulated earnings and profits will be foreign source passive income for United States foreign tax credit purposes and will not qualify for the dividends received deduction otherwise available to corporations. Taxation of the Disposition of Shares Subject to the discussion of the PFIC rules below, upon the sale, exchange or other disposition of Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder's basis in the Shares, which is usually the U.S. dollar cost of such shares, and the amount realized on the disposition. Capital gain from the sale, exchange or other disposition of the Shares held more than one year is 80
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long-term capital gain. Gain or loss recognized by a U.S. Holder on a sale, exchange or other disposition of Shares generally will be treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of Shares is subject to limitations. Passive Foreign Investment Company Considerations We will be a passive foreign investment company, or PFIC, for United States federal income tax purposes, if 75% or more of our gross income in a taxable year, including the pro-rata share of the gross income of any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value, is passive income. Alternatively, we will be considered to be a PFIC if 50% or more of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including the pro-rata share of the assets of any company in which we are considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income. If we are a PFIC, a U.S. Holder may be subject to adverse U.S. federal income tax consequences upon receipt of distributions by us or upon realizing a gain on the disposition of our Shares, including taxation of such amounts as ordinary income and the imposition of an interest charge on the resulting tax liability as if such ordinary income accrued over the U.S. Holder's holding period for the PFIC shares. We believe that we were not a PFIC for 2000 and believe we will not be a PFIC for 2001. However, there can be no assurances that we will not become a PFIC. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules. Tax Consequences for Non-U.S. Holders of Shares Except as described in "U.S. Information Reporting and Back-up Withholding" below, a Non-U.S. Holder who is a beneficial owner of Shares will not be subject to United States federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, Shares, unless: o such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; o the Non-U.S. Holder is an individual who holds the Shares as capital assets and is present in the United States for 183 days or more in the taxable year of the disposition and does not qualify for an exemption; or o the Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to U.S. expatriates. 81
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U.S. Information Reporting and Backup Withholding U.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on Shares. In addition, U.S. Holders are subject to U.S. backup withholding at a rate of up to 31% on dividends paid in the United States on Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders are subject to information reporting and backup withholding at a rate of up to 31% on proceeds paid from the sale, exchange, redemption or other disposition of Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. Non-U.S. Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on, or proceeds upon the sale, exchange, redemption or other disposition of, Shares, provided that such Non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. The amount of any backup withholding will be allowed as a credit against such U.S. Holder's or Non-U.S. Holder's United States federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the U.S. Internal Revenue Service. United States Federal Income Tax Considerations - Dine Notes The following discussion is based upon the provisions of the Code, the applicable U.S. Treasury regulations promulgated or proposed thereunder, judicial authority and current administrative rulings and practice. Legislative, judicial or administrative changes or interpretations may be forthcoming that may be retroactive and that could alter or modify the continued validity of the statements and conclusions set forth below. Except with respect to the discussions set forth below under "- Non-U.S. Holders" and "- Information Reporting and Backup Withholding," this discussion is limited to the U.S. federal income tax considerations applicable to a beneficial owner of a Note who or which is (i) a citizen or resident of the United States, (ii) a corporation organized under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust (for purposes of this section relating to the Notes, a "U.S. Holder"). Certain aspects of U.S. federal income taxation relevant to a beneficial owner of a Note other than a U.S. Holder (for purposes of this section relating to the Notes, a "Non-U.S. Holder") are also discussed below. This discussion does not address all aspects of U.S. federal income taxation that might be relevant to particular holders in light of their personal investment circumstances or status, nor does it discuss the consequences to investors subject to special treatment under the U.S. federal income tax laws, including: o broker-dealers, including dealers in securities or currencies; o insurance companies; 82
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o taxpayers that have elected mark-to-market accounting; o tax-exempt organizations; o financial institutions or "financial services entities"; o taxpayers who hold Shares as part of a straddle, "hedge" or "conversion transaction" with other investments; and o taxpayers whose functional currency is not the U.S. dollar. The discussion does not address any special rules that may apply if the Holder receives principal in installment payments of if a Note is called before the maturity date. This discussion does not address any aspect of United States federal gift or estate tax, or state, local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who hold Shares through a partnership or other pass-through entity. Holders are urged to consult their own tax advisors regarding the U.S. federal, state, local and other tax considerations of the acquisition, ownership and disposition of the Notes. Except as otherwise indicated below, this discussion is generally limited to the tax consequences to beneficial owners of the Notes that are initial holders of the Notes that hold the Notes as capital assets (within the meaning of Section 121 of the Code) and that purchased the Notes at the "issue price." For this purpose, the "issue price" of a Note is the first price at which a substantial amount of the Notes were sold to the public for money (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). Stated Interest on Notes Stated interest on a Note will be taxable to a U.S. Holder as ordinary income either at the time it accrues or is received in accordance with the U.S. Holder's method of accounting. Stated interest paid on a Note will be includible in income by a U.S. Holder in an amount equal to the U.S. dollar value of the interest, regardless of whether a payment is in fact converted to dollars at that time. The U.S. dollar value of interest accrued or received, adjusted for any exchange gain or loss with respect to the amount accrued, generally will be a U.S. Holder's tax basis in the Mexican pesos received as interest on a Note. Additional Amounts A U.S. Holder will treat the gross amount of any Additional Amounts (the amount of interest provided in the Notes to prevent any net reduction for withholding taxes determined using the withholding tax rate applicable to the U.S. Holder) as ordinary interest income at the time such amount is received or accrued in accordance with such U.S. Holder's method of accounting for tax purposes. Consequently, the amount a U.S. Holder will include in gross income with respect to a Note could exceed the amount of cash received by the U.S. Holder. 83
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Withholding Taxes Any foreign withholding taxes paid at the rate applicable to a U.S. Holder will be treated as foreign taxes eligible for credit against such Holder's U.S. federal income tax liability, at the election of the U.S. Holder, subject to generally applicable limitations and conditions (including that the U.S. Holder claim any applicable treaty benefits). Alternatively, such taxes are eligible for deduction in computing such U.S. Holder's taxable income. Stated interest and Additional Amounts will constitute foreign source income for foreign tax credit purposes. Such income will generally constitute "high withholding tax interest" for U.S. foreign tax credit purposes, unless the rate applicable to the U.S. Holder is below 5%, in which case such income generally will constitute "passive income". The calculation of foreign tax credits involves the application of complex rules that depend on a U.S. Holder's particular circumstances. Accordingly, investors are urged to consult their tax advisors regarding their ability to claim a credit for any foreign withholding taxes paid with respect to the Notes. Sale, Exchange or Redemption Unless a non-recognition provision applies, the sale, exchange, redemption (including pursuant to an offer by us) or other disposition of a Note will be a taxable event for U.S. federal income tax purposes. In that event, a U.S. Holder will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of any property received upon that sale, exchange, redemption or other taxable disposition (other than amounts attributable to accrued interest) and (ii) the U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's tax basis in a Note generally will equal the cost of the Note to the U.S. Holder, which is the U.S. dollar value of the Mexican peso purchase price translated at the spot rate for the date of purchase (or, in some cases, the settlement date). The conversion of dollars into Mexican pesos and the immediate use of those Mexican pesos to purchase a Note generally will not result in a taxable gain or loss for a U.S. Holder. A U.S. Holder will have a tax basis in any Mexican pesos received on the sale, exchange or retirement of a Note equal to the U.S. dollar value of the Mexican pesos on the date of receipt. Gain or loss recognized by a U.S. Holder of a Note should be capital gain or loss and will be long-term capital gain or loss if the Note has been held by the U.S. Holder for more than one year at the time of sale, exchange, redemption or other disposition. Upon the sale, exchange, retirement or repayment of a Note, a U.S. Holder will recognize exchange gain or loss to the extent that the rate of exchange on the date of retirement or disposition differs from the rate of exchange on the date the Note was acquired, or deemed acquired. Exchange gain or loss is recognized, however, only to the extent of total gain or loss on the transaction. For purposes of determining the total gain or loss on the transaction, a U.S. Holder's tax basis in the Note will generally equal the U.S. dollar cost of the Note. Exchange gain or loss recognized by a U.S. Holder will generally be treated as ordinary income or loss. Any gain realized by a U.S. Holder on the sale, exchange or redemption of a Note generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Any loss realized upon such a sale, exchange, redemption or other disposition of a Note 84
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generally will be allocated against U.S. source income for U.S. foreign tax credit purposes. Non-U.S. Holders Subject to the discussion below under "-Information Reporting and Back-up Withholding," a Non-U.S. Holder of a Note generally will not be subject to U.S. federal income or withholding tax on payments, including stated interest and Additional Amounts in respect of a Note, and gain realized on the sale, exchange, redemption or other disposition of a Note unless (i) that income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States (or in the case of a treaty resident, attributable to a permanent establishment (or a fixed base) in the United States) or (ii) in the case of a gain, the Non-U.S. Holder of a Note is a nonresident alien individual who holds a Note as a capital asset and is present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption or other disposition and certain other conditions are satisfied. Information Reporting and Back-up Withholding Payments of interest and principal on a Note and the proceeds from the sale of a Note paid to a U.S. Holder (other than a corporation or other exempt recipient) will be reported to the U.S. Internal Revenue Service. A U.S. Holder may be subject to U.S. back-up withholding at the rate of up to 31% with respect to interest paid on a Note unless such U.S. Holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from back-up withholding and otherwise complies with the applicable requirements of the back-up withholding rules. Interest on a Note paid outside the United States to a Non-U.S. holder through a U.S. person or a U.S. related person (as defined below) is subject to information reporting and possible back-up withholding unless certain documentation and other requirements are satisfied. The payment of principal on a Note and the process from the disposition of a Note by a Non-U.S. Holder to or through the U.S. office of any broker, U.S. or foreign, or the non-U.S. office of a U.S. person or a U.S. related person, will be subject to information reporting and possible back-up withholding unless (i) the owner certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption and (ii) the broker does not have actual knowledge that the holder is a U.S. Holder or that the conditions of any other exemption are not, in fact, satisfied. A "U.S. related person" is a person with certain enumerated U.S. relationships. Any amount withheld under the back-up withholding rules will be creditable against the Holder's U.S. federal income tax liability, subject to satisfaction of certain procedural requirements. Holders of Notes should consult their tax advisors to determine whether they qualify for exemption from U.S. withholding and the procedure for obtaining an exemption, if applicable. 85
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Dividends and Paying Agent All three series of shares are entitled to the same dividend and distribution rights, and therefore any dividends must be declared and paid in equal amounts with respect to all outstanding shares. We did not pay cash dividends in 1996, paid a stock dividend in 1996, paid both cash and stock dividends in 1997, made two cash dividend payments in 1998, did not pay dividends in 1999 and paid cash dividends in 2000. The table below presents the cash and stock dividends paid on each share, as well as the number of shares entitled to these dividends during the periods indicated. Dividend per share amounts have not been adjusted for inflation, and reflect share amounts outstanding immediately prior to the distribution of the dividend. Peso amounts have been translated into Dollars at the Noon Buying Rate on the first date that the dividend was available for payment: Number of shares entitled Dividends Dividends Period to dividends per share(1) per share ------ ------------ ------------ --------- 1996(2) 273,091,084 Ps. 0.00 $ 0.00 1997(3) 301,244,072 0.55 0.07 1998(4) 304,256,513 1.20 0.14 1998(5) 1,492,814,425 0.25 0.02 1999 1,492,363,425 0.00 0.00 2000 1,444,774,155 0.27 0.00 (1) Dividends reflected in the table are in nominal Pesos. If the amounts for 1997 and 1998 had been restated in constant Pesos of December 31, 2000, the dividends per share would have been Ps.0.87 for 1997 and Ps.0.63 for 1998 (after giving retroactive effect to the 5 for 1 stock split). (2) In the second quarter of 1996, we declared a stock dividend to holders of Series A, B and C shares. The stock dividend was issued on May 13, 1996 to stockholders of record on May 9, 1996 and consisted of one Series C share for each 48 previously outstanding Series A, B or C shares. After giving effect to the stock dividend, we had 278,780,482 outstanding shares. (3) In the second quarter of 1997, we declared a stock dividend to holders of Series A, B and C shares. The dividend was issued on May 9, 1997 to stockholders of record on April 25, 1997 and consisted of one Series C share for each 100 previously outstanding Series A, B or C shares. After giving effect to the stock dividend, we had 304,256,513 outstanding shares. (4) Paid in May 1998. (5) Paid in December 1998, after the 5 for 1 split of all our shares was effected on September 8, 1998. In accordance with Mexican Law and our bylaws, at least 5% of our net income, as reflected in the financial statements approved by our stockholders, must be allocated to a legal reserve until this reserve equals 20% of our paid-in capital. We increased this reserve in April 1998 to reflect the increase in paid-in-capital caused by the stock dividend declared in 1997. After this allocation, the remainder of our net profits is available for distributions as dividends subject to stockholders' approval and the terms of any applicable law or indebtedness that restricts dividends. The declaration, amount and payment of dividends are determined by majority vote of the holders of the Series A shares and the Series B shares, generally, but not necessarily, on the recommendation of our board of directors, and will depend on our results of operations, financial condition, cash requirements, future prospects and other 86
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factors deemed relevant by the board of directors and the holders of the Series A and the Series B shares. As a general policy, approximately 35% of the legally available net income of Desc has been paid annually to our stockholders. However in 1996 and 1999, we were not permitted to pay cash dividends under the terms of indebtedness that has since been repaid. The indenture that we executed in October 1997 with respect to Dine's 8 3/4% Guaranteed Notes due 2007 limits our ability to pay dividends or make other distributions. Under the Dine indenture, we are not permitted to pay dividends or make other distributions if at the time of the dividend payment or distribution, a Default or an Event of Default under the indenture has occurred and is continuing, or if the payment or distribution exceeds, in the aggregate since July 1, 1997, the sum of: (1) the Consolidated Adjusted Majority Net Income of Desc, which may be positive or negative, earned during the period beginning on January 1, 1997 and ending on the last day of the most recent fiscal quarter of Desc ended on or prior to the date of the proposed dividend payment or distribution, multiplied, if positive, by 50% or, if negative, by 100%; plus (2) if the amount determined as specified in clause (1) is positive and if the Dine notes are Investment Grade at the time the dividend payment or distribution is proposed to be made, an additional 25% of the Consolidated Adjusted Majority Net Income of Desc, if positive, for each full fiscal quarter, if any, that falls entirely within the period specified in clause (1) above and in which the Dine notes are Investment Grade during the entire quarter; plus (3) the aggregate net cash proceeds received by Desc on or after January 1, 1997 as capital contributions or from the issuance or sale of (x) shares of non-redeemable capital stock of Desc, including upon the exercise of options, warrants or rights, or (y) warrants, options or rights to purchase shares of non-redeemable capital stock of Desc; plus (4) the aggregate net cash proceeds received by Desc on or after January 1, 1997 from the issuance or sale of debt securities or redeemable capital stock of Desc that have been converted into or exchanged for non-redeemable capital stock of Desc, to the extent those securities were originally sold for cash, together with the aggregate net cash proceeds, if any, received by Desc at the time of the conversion or exchange; plus (5) $50 million. Any amount described in the clauses above and denominated in Pesos will be adjusted to reflect constant Pesos as of the date on which the relevant dividend payment or distribution is proposed to be made. We may make dividend payments or distributions 87
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of up to $30 million in the aggregate per fiscal year without regard to the restrictions described in this paragraph so long as there is no Default or Event of Default under the Dine indenture that is continuing. The Dine indenture also requires that we maintain a specified consolidated fixed charge coverage ratio, which may indirectly have the effect of restricting dividends or other distributions. The Dine indenture terminates in October 2007, upon payment and cancellation of the Dine notes. The $150 million credit agreement that we executed with a syndicate of lenders in November 2000 also limits our ability to pay dividends or make other distributions. Under the credit agreement, we are permitted to pay dividends or make other distributions if the aggregate amount of dividends, including capital reductions, and other distributions received by Desc (1) during the first annual period of the credit agreement exceeds $40 million, or (2) during any annual period thereafter until the maturity date of the credit agreement exceeds $70 million, so long as no event of default under the credit agreement has occurred and is continuing, Desc is in pro forma compliance with the interest rate coverage ratio, leverage capitalization ratio and the leverage EBITDA ratio requirements established by the credit agreement, and the dividend payments during each such annual period, if any, do not exceed the amount of dividends, including capital reductions, and other distributions received by Desc. The credit agreement also requires that we maintain a fixed interest coverage ratio, which may indirectly have the effect of restricting dividends or other distributions. The principal amounts under the credit agreement are payable as follows: $37.5 million in November 2002, $37.5 million in May 2003 and $75 million in November 2003, with interest to be repaid at the end of the relevant interest period. We cannot assure you that we will be able to pay dividends in the future or that any future dividends will be comparable to historical dividends. Owners of ADSs are entitled to receive any dividends payable in respect of the Series C shares underlying the ADSs. The Depositary generally will convert cash dividends received by it in respect of Series C shares evidenced by ADSs from Pesos into Dollars and, after deduction or upon payment of expenses of the Depositary, pays these dividends to the holders of ADSs in Dollars. Documents on Display We file reports, including annual reports on Form F-20, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also read and copy any materials we file with the SEC at the regional offices of the SEC located Seven World Trade Center, 13th Floor, New York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. As a foreign private issuer, we are not required to make filings with the SEC by electronic means, although we may do so. Any filings we make electronically 88
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will be available to the public over the internet at the SEC's website at http://www.sec.gov. Item 11. Quantitative and Qualitative Disclosures About Market Risk Our business activities require that we hold or issue financial instruments, principally debt obligations, that expose us to market risk caused by movements in currency exchange rates and interest rates. To hedge these risks, we sometimes utilize derivative instruments. All financial instruments held by us are for purposes other than trading. Interest Rate Risk. Our exposure to market risk associated with changes in interest rates relates primarily to debt obligations. Our policy is to manage our interest rate risk through a combination of fixed and floating rate debt issues. With respect to floating rate debt, we sometimes use interest rate swap contracts to reduce our interest rate exposure. Most of our debt is denominated in Dollars. The table below provides information as of December 31, 2000 about our financial instruments that are sensitive to changes in interest rates. For these debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair value of long-term debt is based on the quoted market prices for the same or similar issues, as well as on the present value of future cash flows. The rates used to discount the future cash flows of debt instruments are the London inter-bank offered rate or "LIBOR" and the Mexican CETES rates that match the remaining life of the instrument. [Enlarge/Download Table] Expected Maturity Date 2001 2002 2003 2004 2005 Thereafter ---- ---- ---- ---- ---- ---------- (Pesos in Millions) Fixed Rate Debt(1) Dollar-denominated Ps. 19 Ps. 19 Ps. 19 Ps. 19 Ps. 19 Ps. 1,312 Weighted average interest rate 9.88% 9.88% 9.88% 9.88% 9.88% 8.76% Peso-denominated Ps. 7.9 Ps. 1,980 Weighted average interest rate 7.44% 8.62% Floating Rate Debt(2) Dollar - denominated Ps. 3,320 Ps. 1,699 Ps. 1,836 Ps. 771 Ps. 749 Weighted average interest rate(3) 8.15% 8.61% 8.14% 8.49% 10.32% Peso-denominated Ps. 392 Ps. 8 Ps. 42 Weighted average interest rate(4) 19.23% 21.31% 19.13% Interest RateDerivatives(6) Variable to fixed swaps Ps. 155 Ps. 122 Ps. 42 Average pay rate 7.0% 7.1% 7.3% Average receive rate 6.8% 6.0% 6.3% 2000 2000 1999 1999 ---- ---- ---- ---- Total Fair Value Total(5) Fair Value(5) ----- ---------- -------- ------------- Fixed Rate Debt(1) Dollar-denominated Ps. 1,408.9 Ps. 1,530.0 Ps. 6,657 Ps. 6,694 Weighted average interest rate Peso-denominated Ps. 1,987.8 Ps. 1,183.1 Weighted average interest rate Floating Rate Debt(2) Dollar - denominated Ps. 8,373.2 Ps. 8,697.7 Ps. 2,577 Ps. 2,642 Weighted average interest rate(3) Peso-denominated Ps. 441.6 Ps. 438.4 Ps. 1,031 Ps. 1,034 Weighted average interest rate(4) Interest RateDerivatives(6) Variable to fixed swaps Ps. 319.5 Ps. 300.6 Ps. 695 Ps. (1) Average pay rate Average receive rate (1) Fixed interest rates are weighted averages as contracted by Desc. (2) Floating interest rates are based on market rates as of December 31, 2000 plus the weighted average spread for Desc and its subsidiaries. (3) Market rates for Dollar-dominated debt are based on the LIBOR curve. (4) Market rates for Peso-Denominated debt are based on the CETES and assume a flat yield curve because there is no long-term yield curve in Mexican pesos. (5) For comparison purposes, amounts are based on 1999 figures plus the 2000 inflation factor. (6) Fair value refers to accrued net interest expenses/income as of December 31, 2000. 89
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A hypothetical, instantaneous and unfavorable change of 100 basis points in the average interest rate applicable to floating rate liabilities held at December 31, 2000 would increase our interest expense in 2001 by approximately Ps. 132.02 or 1.44%, over a 12-month period of 2001, assuming no additional debt is incurred during such period. Foreign Exchange Risk. Our exposure to market risk associated with changes in foreign currency exchange rates relates primarily to our debt obligations which are denominated in Dollars, as shown in the interest risk table above. We currently utilize forwards and options contracts to hedge against unfavorable movements of the Peso against the Dollar. [Enlarge/Download Table] 2001 2002 Total Fair Value ---- ---- ----- ---------- (Pesos in millions, except for weighted averages) Foreign Exchange Derivatives Net-Forward Contracts Ps. 189.45 Ps. 346.78 Ps. 536.22 Ps. (50.43) (Peso/Dollar) Weighted Average Fixed Exchange 9.47 9.91 Rate (Peso/Dollar) A hypothetical, instantaneous and unfavorable 10% devaluation in the value of the Peso relative to the Dollar ocurring on December 31, 2000 would have resulted in an increase in our net consolidated integral cost of financing expense of approximately Ps. 49.91 Equity Risk From time to time we buy back our own shares as part of a share repurchase program. Purchases may be made directly on the Mexican Stock Exchange or through over-the-counter derivative contracts. As of December 31, 2000, our equity derivatives position was as follows: [Enlarge/Download Table] 2001 Total Fair Value ---- ----- ---------- (Pesos in millions, except for weighted averages) Equity Derivatives Short put option contracts on ADRs 71,090(1) 71,090 Ps. 18.54 Weighted average strike price $ 33.41(2) ---------- (1) Number of units. (2) Strike price in Usd Item 12. Description of Securities Other than Equity Securities Not Applicable. 90
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PART II Item 13. Defaults, Dividend Arrearages and Delinquencies Not Applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not Applicable. Item 15. [RESERVED] Item 16. [RESERVED] 91
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PART III Item 17. Financial Statements Not Applicable. Item 18. Financial Statements Page Report of Arthur Andersen, independent public accountants......... F-1 Consolidated balance sheets as of December 31, 1999 and 2000...... F-2 Consolidated statements of income for the years ended December 31, 1998, 1999 and 2000............................................. F-3 Consolidated statements of stockholders' equity for the years ended December 31, 1998, 1999 and 2000.......................... F-4 Consolidated statements of changes in financial position for the years ended December 31, 1998, 1999 and 2000.................... F-5 Notes to consolidated financial statements........................ F-9-F-40 Reports of independent public accountants other than Arthur Andersen................................................. F-41-F-47 Item 19. Exhibits 1.1. English translation of Registrant's bylaws, as amended on April 26, 2001. 2.1. Indenture, dated as of October 17, 1997, among Dine, S.A. de C.V., as Issuer, Desc, S.A. de C.V., as Guarantor, and Bankers Trust Company, as Trustee, relating to Dine's 8 3/4% Guaranteed Notes due 2007 (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-9150 of Desc, S.A. de C.V.). The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, copies of any instruments that define the rights of holders of long-term debt of the registrant that are not filed as exhibits to this annual report. 92
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SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Desc, S.A. de C.V. By:/s/ Arturo D'Acosta Ruiz --------------------------- Name: Arturo D'Acosta Ruiz Title: Chief Financial Officer Dated: August 24, 2001 93
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Translation of a report originally issued in Spanish To the Shareholders of Desc, S.A. de C.V.: We have audited the accompanying consolidated balance sheets of DESC, S.A. DE C.V. AND SUBSIDIARIES (all incorporated in Mexico and collectively referred to as the "Company") as of December 31, 1999 and 2000, and the related consolidated statements of income, shareholders' equity and changes in financial position for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Girsa, S.A. de C.V. and subsidiaries, Agroken, S.A. de C.V., Aquanova, S.A. de C.V., Grupo Corfuerte, S.A. de C.V. and Authentic Acquisition Corporation, Inc., were audited by other auditors whose reports thereon have been furnished to us and our opinion, insofar as it relates to the amounts included for those entities is based solely on the reports of the other auditors. Those financial statements reflect total assets of 43% and 42% in 1999 and 2000, respectively, and total revenues of 55%, 53% and 49% in 1998, 1999 and 2000, respectively, of the related consolidated totals. We conducted our audits in accordance with generally accepted auditing standards in Mexico and in the United States of America. Those standards require that the audit be planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they are prepared in conformity with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. As mentioned in Note 4 to the accompanying financial statements, beginning in January 2000, the Company adopted the provisions of Bulletin D-4, "Accounting for Income and Asset Taxes and Employee Profit Sharing". The effect from this adoption was to recognize an initial long-term liability for deferred income taxes in the amount of Ps. 1,644,919 (in thousands of Mexican Pesos) affecting shareholder's equity as "Cumulative effect from deferred income taxes" and Ps. 682,285 (in thousands of Mexican pesos) of the minority interest. The provision for income taxes for the year increased by Ps. 99,658 (in thousands of Mexican pesos). As a result of the adoption of Bulletin D-4 mentioned above, the Company changed its method for recording the effect from tax consolidation. Until 1999, it was recorded in the year in which the corresponding annual consolidated tax return was filed. Beginning in 2000, this benefit is recorded in the results of the year in which the benefit is generated. The effect from this change increased the benefit from tax consolidation by Ps. 124,795 (in thousands of Mexican pesos), which is recorded as "Extraordinary item". F-1
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Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico but do not conform with generally accepted accounting principles in the United States of America. Notes 19 and 20 describe the main differences and present a reconciliation of the net consolidated majority income and the majority shareholders' equity to the accounting principles generally accepted in the United States of America in conformity with the guidelines of the Securities and Exchange Commission of the United States of America. These guidelines allow the omission of the requirement to quantify, in the reconciliation, the differences attributable to the adjustments recorded locally to comprehensively recognize the effects of inflation. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Desc, S.A. de C.V. and Subsidiaries as of December 31, 1999 and 2000, and the results of their operations, the changes in their shareholders' equity and the changes in their financial position for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in Mexico. s/ Arthur Andersen March 27, 2001 F-2
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DESC, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 2000 EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS (Ps.) AND THOUSANDS OF U.S. DOLLARS ($) [Enlarge/Download Table] 1999 2000 2000 ------------- ------------- ----------- ASSETS CURRENT: Cash and cash equivalents ............................................ Ps. 1,828,434 Ps. 1,540,002 $ 159,585 Notes and accounts receivable, net ................................... 4,783,122 4,467,403 462,943 Inventories .......................................................... 3,349,977 3,672,989 380,621 Prepaid expenses ..................................................... 84,699 96,470 9,997 Real estate assets available for sale ................................ -- 1,207,235 125,102 ------------- ------------- ----------- Total current assets .............................................. 10,046,232 10,984,099 1,138,248 LAND HELD FOR DEVELOPMENT AND REAL ESTATE PROJECTS ................................................. 3,765,789 3,737,802 387,337 PROPERTY, PLANT AND EQUIPMENT ........................................... 15,537,372 14,147,921 1,466,106 GOODWILL ................................................................ 1,631,823 1,460,004 151,296 OTHER ASSETS ............................................................ 1,329,750 1,462,108 151,514 EMPLOYEE SEVERANCE BENEFIT INTANGIBLE ASSET ............................. -- 320,216 33,183 ------------- ------------- ----------- Total assets ................................................... Ps.32,310,966 Ps.32,112,150 $3,327,684 ============= ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT: Bank loans and current portion of long-term debt ..................... Ps. 4,082,850 Ps. 3,738,874 $ 387,448 Notes and accounts payable to suppliers .............................. 2,064,647 2,162,334 224,076 Other payables and accrued liabilities ............................... 1,183,425 1,304,950 135,228 Income taxes and employee profit sharing ............................. 308,913 184,491 19,118 ------------- ------------- ----------- Total current liabilities ..................................... 7,639,835 7,390,649 765,870 LONG-TERM DEBT .......................................................... 7,024,513 8,472,697 878,000 DEFERRED INCOME TAXES ................................................... -- 2,072,901 214,808 EMPLOYEE SEVERANCE BENEFITS ............................................. -- 320,216 33,183 OTHER LONG-TERM LIABILITIES ............................................. 135,321 114,412 11,856 ------------- ------------- ----------- Total liabilities .............................................. 14,799,669 18,370,875 1,903,717 SHAREHOLDERS' EQUITY: Capital stock ........................................................ 10,062,431 10,060,941 1,042,584 Paid-in surplus ...................................................... 1,169,800 1,169,800 121,223 Retained earnings .................................................... 20,424,907 18,859,571 1,954,361 Reserve for repurchase of shares ..................................... 175,460 907,079 93,998 Cumulative effect of deferred income taxes ........................... -- (1,644,919) (170,458) Cumulative effect of restatement ..................................... (19,294,885) (20,340,715) (2,107,846) ------------- ------------- ----------- 12,537,713 9,011,757 933,862 Minority interest .................................................... 4,973,584 4,729,518 490,105 ------------- ------------- ----------- Total shareholders' equity ..................................... 17,511,297 13,741,275 1,423,967 ------------- ------------- ----------- Total liabilities and shareholders' equity ..................... Ps.32,310,966 Ps.32,112,150 $ 3,327,684 ============= ============= =========== The accompanying notes are an integral part of these balance sheets. F-3
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DESC, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS (Ps.) AND THOUSANDS OF U.S. DOLLARS ($), EXCEPT PER SHARE INFORMATION [Enlarge/Download Table] 1998 1999 2000 2000 ---- ---- ---- ---- NET SALES ................................................. Ps.26,176,034 Ps.25,329,850 Ps.23,439,306 $ 2,428,944 COST OF SALES ............................................. 18,859,146 18,255,984 17,444,972 1,807,769 ------------- ------------- ------------- ----------- Gross profit ....................................... 7,316,888 7,073,866 5,994,334 621,175 OPERATING EXPENSES: Administrative ......................................... 1,805,706 1,947,712 2,167,677 224,631 Selling ................................................ 1,735,474 1,791,020 1,563,342 162,004 ------------- ------------- ------------- ----------- 3,541,180 3,738,732 3,731,019 386,635 ------------- ------------- ------------- ----------- Operating income ................................... 3,775,708 3,335,134 2,263,315 234,540 COMPREHENSIVE FINANCIAL RESULT: Interest income ........................................ 374,588 342,194 141,696 14,684 Interest expense ....................................... (988,555) (1,247,668) (1,150,094) (119,181) UDIS variation ......................................... -- (16,884) (108,022) (11,194) Exchange gain (loss), net .............................. (1,896,046) 393,227 (310,215) (32,147) Gain on monetary position .............................. 1,067,688 975,659 736,678 76,340 ------------- ------------- ------------- ----------- (1,442,325) 446,528 (689,957) (71,498) ------------- ------------- ------------- ----------- EQUITY IN ASSOCIATED COMPANIES AND UNCONSOLIDATED SUBSIDIARIES ............................ (132,380) 46,483 (10,302) (1,067) IMPAIRMENT OF FIXED ASSETS ................................ (37,739) (220,736) (152,026) (15,753) OTHER INCOME (EXPENSES): Reorganization of food sector .......................... -- -- (245,080) (25,397) Depreciation of idle plant ............................. (68,558) (78,316) (57,249) (5,932) Nonrecurring freight and shipments ..................... -- -- (47,364) (4,908) Amortization of goodwill ............................... (50,468) (37,074) (32,902) (3,410) Gain on sale of shares ................................. -- -- 54,588 5,657 Indemnity payments ..................................... (33,058) (75,352) (65,546) (6,792) Income from the technology fund ........................ 54,061 62,610 35,076 3,635 Contingencies .......................................... (7,090) (36,597) -- -- Other, net ............................................. 7,458 (76,513) (69,625) (7,216) ------------- ------------- ------------- ----------- (97,655) (241,242) (428,102) (44,363) Income before provisions, extraordinary item and profit on the sale of shares ..... 2,065,609 3,366,167 982,928 101,859 PROVISIONS FOR: Current income taxes ................................... 449,212 778,397 454,241 47,072 Deferred income taxes .................................. -- -- 99,658 10,328 Employee profit sharing ................................ 153,260 150,840 124,090 12,858 Asset taxes ............................................ 86,335 68,132 -- -- Tax consolidation benefit .............................. (156,804) (107,526) (123,973) (12,847) ------------- ------------- ------------- ----------- 532,003 889,843 554,016 57,411 Income before extraordinary item and profit on the sale of subsidiaries ................... 1,533,606 2,476,324 428,912 44,448 EXTRAORDINARY ITEM ........................................ -- -- 191,465 19,840 ------------- ------------- ------------- ----------- 1,533,606 2,476,324 620,377 64,288 PROFIT ON THE SALE OF SUBSIDIARIES ........................ 119,517 153,746 -- -- ------------- ------------- ------------- ----------- Net consolidated income for the year ......... Ps. 1,653,123 Ps. 2,630,070 Ps. 620,377 $ 64,288 ============= ============= ============= =========== ALLOCATION OF NET CONSOLIDATED INCOME: Majority interest ...................................... Ps. 1,131,806 Ps. 1,935,073 Ps. 274,895 $ 28,486 F-4
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[Enlarge/Download Table] Minority interest ........................................... 521,317 694,997 345,482 35,802 ------------- ------------- ----------- ---------- Ps. 1,653,123 Ps. 2,630,070 Ps. 620,377 $ 64,288 ============= ============= =========== ========== Income per share before extraordinary item and profit on the sale of subsidiaries ............. Ps. 1.01 Ps. 1.66 Ps. 0.30 $ 0.03 ------------- ------------- ----------- ---------- Extraordinary item per share ...................... Ps. -- Ps. -- Ps. 0.13 $ 0.01 ------------- ------------- ----------- ---------- Profit on the sale of shares per share ............ Ps. 0.08 Ps. 0.10 Ps. -- $ -- ------------- ------------- ----------- ---------- Majority net income per share ..................... Ps. 0.75 Ps. 1.30 Ps. 0.19 $ 0.02 ============= ============= =========== ========== Weighted average shares outstanding (000's) ....... 1,506,981 1,489,733 1,418,126 1,418,126 ============= ============= =========== ========== The accompanying notes are an integral part of these statements. F-5
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DESC, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS (Ps.) AND THOUSANDS OF U.S. DOLLARS ($) [Enlarge/Download Table] Capital stock Number of ------------------------------ Shares Historical Restatement ------------- ------------ ---------------- BALANCES AS OF DECEMBER 31, 1997 ................. 1,515,492,565 Ps. 19,701 Ps. 10,045,206 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... (23,129,140) (300) (1,980) Dividends paid in cash ..................... -- -- -- Net variation in minority interest ......... -- -- -- ------------- ------------ ---------------- Balances before comprehensive income ....... 1,492,363,425 19,401 10,043,226 Comprehensive income- Net consolidated income for the year . -- -- -- Result from holding nonmonetary assets -- -- -- ------------- ------------ ---------------- BALANCES AS OF DECEMBER 31, 1998 ................. 1,492,363,425 19,401 10,043,226 Repurchase of shares ....................... (13,629,000) (177) (19) ------------- ------------ ---------------- Balances before comprehensive income ....... 1,478,734,425 19,224 10,043,207 Comprehensive income- Net consolidated income for the year . -- -- -- Result from holding nonmonetary assets -- -- -- ------------- ------------ ---------------- BALANCES AS OF DECEMBER 31, 1999 ................. 1,478,734,425 19,224 10,043,207 Cumulative effect of deferred income taxes . -- -- -- ------------- ------------ ---------------- BALANCES AS OF JANUARY 1, 2000 ................... 1,478,734,425 19,224 10,043,207 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... (109,736,155) (1,427) (63) Dividends paid in cash ..................... -- -- -- ------------- ------------ ---------------- Balances before comprehensive loss ......... 1,368,998,270 17,797 10,043,144 Comprehensive loss- Net consolidated income for the year . -- -- -- Result from holding nonmonetary assets -- -- -- ------------- ------------ ---------------- BALANCES AS OF DECEMBER 31, 2000 ................. 1,368,998,270 Ps. 17,797 Ps. 10,043,144 ============= ============ ================ BALANCES AS OF DECEMBER 31, 1999 ................. 1,478,734,425 $ 1,992 $ 1,040,747 Cumulative effect of deferred income taxes . -- -- -- ------------- ------------ ---------------- BALANCES AS OF JANUARY 1, 2000 ................... 1,478,734,425 1,992 1,040,747 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... (109,736,155) (148) (7) Dividends paid in cash ..................... -- -- -- ------------- ------------ ---------------- Balances before comprehensive loss ......... 1,368,998,270 1,844 1,040,740 Comprehensive loss- Net consolidated income for the year . -- -- -- Result from holding nonmonetary assets -- -- -- ------------- ------------ ---------------- BALANCES AS OF DECEMBER 31, 2000 ................. 1,368,998,270 $ 1,844 $ 1,040,740 ============= ============ ================ Cumulative Reserve for Effect of Paid-in Retained Repurchase Deferred Surplus Earnings of Shares Income Taxes --------------- ---------------- ------------- ------------- BALANCES AS OF DECEMBER 31, 1997 ................. Ps. 1,177,498 Ps. 18,599,534 Ps. 320,372 Ps. -- Increase in reserve for repurchase of shares -- (200,000) 200,000 -- Repurchase of shares ....................... (7,698) (76,319) (234,524) -- Dividends paid in cash ..................... -- (953,207) -- -- Net variation in minority interest ......... -- -- -- -- --------------- ---------------- ------------- ------------- Balances before comprehensive income ....... 1,169,800 17,370,008 285,848 -- Comprehensive income- Net consolidated income for the year . -- 1,131,806 -- -- Result from holding nonmonetary assets -- -- -- -- --------------- ---------------- ------------- ------------- BALANCES AS OF DECEMBER 31, 1998 ................. 1,169,800 18,501,814 285,848 -- Repurchase of shares ....................... -- (11,980) (110,388) -- --------------- ---------------- ------------- ------------- Balances before comprehensive income ....... 1,169,800 18,489,834 175,460 -- Comprehensive income- Net consolidated income for the year . -- 1,935,073 -- -- Result from holding nonmonetary assets -- -- -- -- --------------- ---------------- ------------- ------------- BALANCES AS OF DECEMBER 31, 1999 ................. 1,169,800 20,424,907 175,460 -- Cumulative effect of deferred income taxes . -- -- -- (1,644,919) --------------- ---------------- ------------- ------------- BALANCES AS OF JANUARY 1, 2000 ................... 1,169,800 20,424,907 175,460 (1,644,919) Increase in reserve for repurchase of shares -- (1,400,000) 1,400,000 -- Repurchase of shares ....................... -- (30,383) (668,381) -- Dividends paid in cash ..................... -- (409,848) -- -- --------------- ---------------- ------------- ------------- Balances before comprehensive loss ......... 1,169,800 18,584,676 907,079 (1,644,919) Comprehensive loss- Net consolidated income for the year . -- 274,895 -- -- Result from holding nonmonetary assets -- -- -- -- --------------- ---------------- ------------- ------------- BALANCES AS OF DECEMBER 31, 2000 ................. Ps. 1,169,800 Ps. 18,859,571 Ps. 907,079 Ps.(1,644,919) =============== ================ ============= ============= BALANCES AS OF DECEMBER 31, 1999 ................. $ 121,223 $ 2,116,572 $ 18,182 $ -- Cumulative effect of deferred income taxes . -- -- -- (170,458) --------------- ---------------- ------------- ------------ BALANCES AS OF JANUARY 1, 2000 ................... 121,223 2,116,572 18,182 (170,458) Increase in reserve for repurchase of shares -- (145,078) 145,078 -- Repurchase of shares ....................... -- (3,148) (69,262) -- Dividends paid in cash ..................... -- (42,471) -- -- --------------- ---------------- ------------- ------------ Balances before comprehensive loss ......... 121,223 1,925,875 93,998 (170,458) Comprehensive loss- Net consolidated income for the year . -- 28,486 -- -- Result from holding nonmonetary assets -- -- -- -- --------------- ---------------- ------------- ------------ BALANCES AS OF DECEMBER 31, 2000 ................. $ 121,223 $ 1,954,361 $ 93,998 $ (170,458) =============== ================ ============= ============ Cumulative Total Effect of Minority Shareholders Restatement Interest Equity --------------- -------------- -------------- BALANCES AS OF DECEMBER 31, 1997 ................. Ps. (17,075,283) Ps. 2,960,339 Ps. 16,047,367 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... -- -- (320,821) Dividends paid in cash ..................... -- (293,990) (1,247,197) Net variation in minority interest ......... -- 1,089,472 1,089,472 --------------- --------------- ---------------- Balances before comprehensive income ....... (17,075,283) 3,755,821 15,568,821 Comprehensive income- Net consolidated income for the year . -- 521,317 1,653,123 Result from holding nonmonetary assets (159,227) 12,062 (147,165) --------------- --------------- ---------------- BALANCES AS OF DECEMBER 31, 1998 ................. (17,234,510) 4,289,200 17,074,779 Repurchase of shares ....................... -- -- (122,564) --------------- --------------- ---------------- Balances before comprehensive income ....... (17,234,510) 4,289,200 16,952,215 Comprehensive income- Net consolidated income for the year . -- 694,997 2,630,070 Result from holding nonmonetary assets (2,060,375) (10,613) (2,070,988) --------------- --------------- ---------------- BALANCES AS OF DECEMBER 31, 1999 ................. (19,294,885) 4,973,584 17,511,297 Cumulative effect of deferred income taxes . -- (682,285) (2,327,204) --------------- --------------- ---------------- BALANCES AS OF JANUARY 1, 2000 ................... (19,294,885) 4,291,299 15,184,093 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... -- -- (700,254) Dividends paid in cash ..................... -- (44,662) (454,510) --------------- --------------- ---------------- Balances before comprehensive loss ......... (19,294,885) 4,246,637 14,029,329 Comprehensive loss- Net consolidated income for the year . -- 345,482 620,377 Result from holding nonmonetary assets (1,045,830) 137,399 (908,431) --------------- --------------- ---------------- BALANCES AS OF DECEMBER 31, 2000 ................. Ps. (20,340,715) Ps. 14,729,518 Ps. 13,741,275 =============== =============== ================ BALANCES AS OF DECEMBER 31, 1999 ................. $ (1,999,470) $ 515,396 $ 1,814,642 Cumulative effect of deferred income taxes . -- (70,703) (241,161) BALANCES AS OF JANUARY 1, 2000 ................... (1,999,470) 444,693 1,573,481 Increase in reserve for repurchase of shares -- -- -- Repurchase of shares ....................... -- -- (72,565) Dividends paid in cash ..................... -- (4,628) (47,099) Balances before comprehensive loss ......... (1,999,470) 440,065 1,453,817 Comprehensive loss- Net consolidated income for the year . -- 35,802 64,288 Result from holding nonmonetary assets (108,376) 14,238 (94,138) ------------ --------------- ---------------- BALANCES AS OF DECEMBER 31, 2000 ................. $ (2,107,846) $ 490,105 $ 1,423,967 ============ =============== ================ The accompanying notes are an integral part of these statements. F-6
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DESC, S.A. DE C.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS (Ps.) AND THOUSANDS OF U.S. DOLLARS ($) [Enlarge/Download Table] 1998 1999 2000 2000 ------------- ------------ ------------ --------- OPERATIONS: Net consolidated income for the year Ps.1,653,123 Ps.2,630,070 Ps. 620,377 $ 64,288 Add (deduct)-Items which do not require (generate) resources- Depreciation and amortization 1,140,587 1,139,098 1,183,778 122,671 Depreciation of idle plant 68,558 78,316 57,249 5,932 Impairment of fixed assets 37,739 220,736 152,026 15,753 Capitalized comprehensive financial cost (134,896) (68,480) (47,919) (4,966) Equity in associated companies and unconsolidated subsidiaries 132,380 (46,483) 10,302 1,068 Amortization of goodwill 50,468 37,074 60,010 6,220 Deferred income taxes -- -- 99,658 10,328 ------------- ------------ ------------ --------- 2,947,959 3,990,331 2,135,481 221,294 Changes in operating assets and liabilities- Notes and accounts receivable (166,565) (328,441) 315,719 32,717 Inventories (64,181) (123,485) (508,896) (52,736) Prepaid expenses 609 (23,427) (11,770) (1,220) Real estate assets available for sale (364,923) 364,923 (1,207,235) (125,102) Notes and accounts payable to suppliers, other payables and accrued liabilities 43,474 (180,921) 219,212 22,716 Income taxes and employee profit sharing 122,703 112,712 (124,422) (12,894) ------------- ------------ ------------ --------- (428,883) (178,639) (1,317,392) (136,519) ------------- ------------ ------------ --------- Net resources generated by operations 2,519,076 3,811,692 818,089 84,775 ------------- ------------ ------------ --------- INVESTMENTS: Land acquisition (105,176) -- (51,648) (5,352) Cost of land sold 269,930 224,942 330,627 34,262 Investment in real estate projects (439,776) (396,836) (616,963) (63,934) Cost of real estate projects sold 157,572 90,816 171,565 17,778 Investment in shares (81,838) (250,369) 67,745 7,020 Sale of shares of Campi -- 1,023,074 -- -- Cash and cash equivalents of Campi -- (64,213) -- -- Purchase of shares of Authentic Specialty Foods ("ASF") (1,807,547) -- -- -- Sale of shares of ASF and Corfuerte 529,948 -- -- -- Cash and cash equivalents of ASF 99,954 -- -- -- Purchase of shares of Nair Industrias (309,625) -- -- -- Cash and cash equivalents of Nair Industrias 32,618 -- -- -- Purchase of shares of Canada de Santa Fe (144,134) -- -- -- Acquisition of property, plant and equipment (1,954,525) (2,823,055) (1,842,228) (190,904) Net book value of retirements 195,708 106,291 115,083 11,926 Real estate assets available for sale -- -- 1,207,235 125,102 Investment in real estate held for rent (280,888) -- -- -- Deferred income taxes -- -- (9,041) (937) Other assets 23,360 82,409 (153,128) (15,868) ------------- ------------ ------------ --------- Net resources applied to investing activities (3,814,419) (2,006,941) (780,753) (80,907) ------------- ------------ ------------ --------- FINANCING: Variation in short-term bank loans and current portion of long-term debt 570,049 (1,123,443) (343,976) (35,645) Proceeds from long-term debt 2,310,442 2,601,778 2,288,845 237,186 Payments of principal of long-term debt (1,573,716) (1,725,541) (1,418,260) (146,970) Effect of the variation on long-term debt, in constant pesos 1,096,814 (910,220) 577,599 59,855 Other long-term liabilities -- 69,145 (20,909) (2,167) Deferred income taxes -- -- 2,072,901 214,808 Dividends paid (953,207) -- (409,848) (42,471) Dividends paid to minority shareholders of subsidiaries (293,990) -- (44,662) (4,628) Repurchase of shares (320,821) (122,564) (700,254) (72,565) Cumulative effect of deferred income taxes -- -- (2,327,204) (241,161) Net resources generated by (applied to) financing activities 835,571 (1,210,845) (325,768) (33,758) ------------- ------------ ------------ --------- Net increase (decrease) in cash and cash equivalents (459,772) 317,029 (288,432) (29,890) Balance at beginning of year 1,694,300 1,234,528 1,828,434 189,475 ------------- ------------ ------------ --------- Balance at end of year Ps. 1,234,528 Ps.1,828,434 Ps.1,540,002 $ 159,585 ============= ============ ============ ========= F-7
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[Enlarge/Download Table] SUPPLEMENTAL CASH FLOW DISCLOSURES: Income and asset taxes paid Ps. 682,923 Ps. 475,531 Ps. 725,249 $ 75,155 ============= ============ ============ ========= Employee profit sharing paid Ps. 93,422 Ps. 98,655 Ps. 128,536 $ 13,320 ============= ============ ============ ========= Interest paid Ps. 1,055,340 Ps. 870,019 Ps.1,064,070 $ 110,266 ============= ============ ============ ========= The accompanying notes are an integral part of these consolidated statements. F-8
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) 1) PRINCIPAL ACTIVITIES AND SIGNIFICANT EVENTS: The Company is the controlling shareholder of a group of companies that engage mainly in the manufacture and sale of autoparts, chemicals and food. It is also engaged in the acquisition, sale, development and leasing of real estate. Significant events- Reorganization of the food sector- Due to the low profitability generated by the food segment in recent years, the Company decided to restructure the businesses making up this segment. As part of this reorganization, the majority of the management of this segment was changed. As a result of this situation the companies of the trademark segment (Grupo Corfuerte, S.A. de C.V. and Authentic Acquisition Corporation, Inc.) were grouped with the consumer products business under the management structure of GIRSA, S.A. de C.V. The pork breeding and fattening business (Agroken, S.A. de C.V.) and the shrimp aquaculture business (Aquanova, S.A. de C.V.) now report directly to the Company's management. A restructuring charge of Ps.245,080 was charged to results in 2000, which is included in "Other expenses" in the accompanying consolidated statement of income. Shareholding restructuring of Velcon, S.A. de C.V.- On November 29, 2000, there was a shareholding restructuring of Velcon, S.A. de C.V. (Velcon), a subsidiary of Unik, S.A. de C.V. (UNIK) that is engaged in the manufacturing and sale of constant speed shafts, whereby Spicer, S.A. de C.V. (Spicer), another subsidiary, sold all of its shares in Velcon, representing 36.18% of the capital stock. UNIK acquired 26.22% and GKN Automotive International GMBH (GKN) acquired 9.96%, resulting in shareholding interests of 51.05% and 48.95%, respectively. As a result of this restructuring, UNIK increased its total shareholding interest in Velcon by 7.71% at a cost of Ps.108,687. In this transaction, Ps.63,551 goodwill was recognized for these additional shares related to the participation of Dana Corporation, Inc. (DANA) in Spicer, which will be amortized over four years, the term over which it is estimated that the investment will be recovered. Sale of shares of Grupo Campi, S.A. de C.V.- On December 21, 1999, the Company sold its shares of Grupo Campi, S.A. de C.V. (Campi), a subsidiary engaged in the production and sale of poultry, as well as the production and sale of balanced food for animals, to Industrias Bachoco, S.A. de C.V. This transaction generated a gain, net of income taxes, of Ps.153,746. F-9
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) 2) BASIS OF PRESENTATION: These consolidated financial statements are presented on the basis of accounting principles generally accepted in Mexico ("Mexican GAAP"), which may not conform with the accounting principles generally accepted in the United States of America ("US GAAP") as explained in Note 19. A reconciliation between Mexican GAAP and US GAAP is presented in Note 20. The amounts in U.S. dollars shown in the accompanying financial statements were calculated based on the figures in constant Mexican pesos as of December 31, 2000, translated at the exchange rate in effect as of such date of Ps.9.65 per U.S. dollar. The interim monthly statements of income produced by the Company for internal reporting purposes are presented in nominal Mexican pesos translated at the average exchange rates of each of the months reported and, therefore, differ from the accompanying financial statements. Certain amounts in the consolidated financial statements at December 31, 1998 and 1999 have been reclassified in order to conform them to the presentation of the consolidated financial statements at December 31, 2000. 3) SUMMARY OF FINANCIAL DATA BY BUSINESS SEGMENT: The presentation below sets forth certain financial information regarding Desc's industry segments: autoparts, chemicals, food and real estate. Intersegment transactions have been eliminated. Total assets by industry are those assets that are used in the operations in each industry segment. Corporate assets are principally cash and long-term investments. [Enlarge/Download Table] Net Operating Consolidated Total Total Capital 1998 Net Sales Income Income Assets Liabilities Expenditures ---- ------------- ------------ ------------ ------------- ------------- ------------- Autoparts (UNIK).... Ps.10,876,582 Ps.1,657,099 Ps. 830,487 Ps.11,342,258 Ps.5,136,185 Ps.1,015,542 Chemicals (GIRSA)... 8,456,287 1,302,128 340,692 8,361,759 5,301,754 498,449 Food................ 5,923,063 533,431 272,418 7,150,229 3,575,984 2,407,653 Real estate (DINE).. 895,370 320,325 (1,897) 6,580,134 2,227,156 979,873 Corporate (DESC).... 24,732 (37,275) 211,423 264,989 383,512 89,421 ------------- ------------ ------------ ------------- ------------- ------------- Ps.26,176,034 Ps.3,775,708 Ps.1,653,123 Ps.33,699,369 Ps.16,624,591 Ps.4,990,938 ============= ============ ============ ============= ============= ============= Depreciation Provision And Interest Interest for 1998 Amortization Expenses Income Income Taxes ---- ------------ ----------- ---------- ---------- Ps. 603,960 Ps. 229,616 Ps. 77,640 Ps. 215,088 Autoparts (UNIK).... 324,322 253,467 81,142 172,342 Chemicals (GIRSA)... 220,692 221,857 60,609 55,727 Food................ 29,180 215,542 32,006 2,334 Real estate (DINE).. 30,991 68,073 123,191 3,721 ------------ ----------- ---------- ---------- Corporate (DESC).... Ps.1,209,145 Ps. 988,555 Ps.374,588 Ps.449,212 ============ =========== ========== ========== [Enlarge/Download Table] Net Operating Consolidated Total Capital 1999 Net Sales Income Income Total Assets Liabilities Expenditures ---- --------- ------ ------ ------------ ----------- ------------ Autoparts (UNIK).... Ps.10,854,485 Ps.1,732,028 Ps.1,265,864 Ps.10,984,884 Ps. 4,170,323 Ps. 868,664 Chemicals (GIRSA)... 7,595,856 934,974 728,483 8,282,794 4,650,961 1,186,956 Food................ 5,973,442 405,154 199,615 5,618,917 1,601,222 771,972 Depreciation And Interest Interest Provision for 1999 Amortization Expenses Income Income Taxes ---- ------------ -------- ------ ------------ Autoparts (UNIK).... Ps. 630,439 Ps. 216,921 Ps. 89,581 Ps. 383,790 Chemicals (GIRSA)... 320,873 272,015 52,195 272,704 Food................ 197,842 350,691 43,913 74,639 F-10
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) [Enlarge/Download Table] Real estate (DINE).. 876,452 308,833 313,732 6,496,545 1,757,992 611,684 Corporate (DESC).... 29,615 (45,855) 122,376 927,826 2,619,171 30,984 ------------- ------------ ------------ ------------- ------------- ------------ Ps.25,329,850 Ps.3,335,134 Ps.2,630,070 Ps.32,310,966 Ps.14,799,669 Ps.3,470,260 ============= ============ ============ ============= ============= ============ Real estate (DINE).. 42,485 210,360 41,204 46,734 Corporate (DESC).... 25,775 197,681 115,301 530 ------------ ------------ ---------- ------------ Ps.1,217,414 Ps.1,247,668 Ps.342,194 Ps. 778,397 ============ ============ ========== ============ [Enlarge/Download Table] Net Operating Consolidated Total Capital 2000 Net Sales Income Income Total Assets Liabilities Expenditures ---- --------- ------ ------ ------------ ----------- ------------ Autorparts (UNIK)... Ps.10,935,622 Ps.1,599,725 Ps. 486,457 Ps.11,519,177 Ps. 6,049,075 Ps.1,097,298 Chemicals (GIRSA)... 7,914,807 521,385 220,382 8,311,012 5,755,776 336,001 Food................ 3,575,823 39,619 (243,915) 5,079,056 1,445,636 317,315 Real estate (DINE).. 995,668 154,975 42,592 6,425,650 1,696,376 758,375 Corporate (DESC).... 17,386 (52,389) 114,861 777,255 3,424,010 1,850 ------------- ------------ ------------ ------------- ------------- --------- Ps.23,439,306 Ps.2,263,315 Ps. 620,377 Ps.32,112,150 Ps.18,370,875 2,510,839 ============= ============ ============ ============= ============= ========= Depreciation Provision And Interest Interest for 2000 Amortization Expenses Income Income Taxes ---- ------------ -------- ------ ------------ Autorparts (UNIK)... Ps. 605,493 Ps. 225,188 Ps. 71,491 Ps. 355,652 Chemicals (GIRSA)... 325,895 375,979 21,679 111,167 Food................ 211,085 181,853 15,541 (9,370) Real estate (DINE).. 66,278 141,350 6,686 (3,208) Corporate (DESC).... 32,276 225,724 26,299 -- ------------ ------------ ---------- ----------- Ps.1,241,027 Ps.1,150,094 Ps.141,696 Ps. 454,241 ============ ============ ========== =========== 4) SIGNIFICANT ACCOUNTING POLICIES: The accounting policies followed by the Company are in accordance with accounting principles generally accepted in Mexico, which require management to make certain estimates and use certain assumptions to determine the valuation of some of the balances included in the financial statements and to make the disclosures required to be included therein. Although the actual results may differ from those estimates, management believes that the estimates and assumptions used were appropriate in the circumstances. The significant accounting policies followed by the companies are as follows: Changes in accounting policies- Adoption of new Bulletin D-4- Beginning in January 2000, the Company adopted the new procedures for the recognition of deferred income taxes as prescribed by recently revised Bulletin D-4, "Accounting for Income and Asset Taxes and Employee Profit Sharing". The effect from this adoption was to recognize an initial long-term liability for deferred income taxes in the amount of Ps.1,644,919 affecting shareholder's equity under the account "Cumulative effect of deferred income taxes" and the minority interest by Ps.682,285. The provision for income taxes for the year increased by Ps.99,658. The provision for employee profit sharing of the subsidiaries was not affected because the Company does not have any items that generated a future liability or benefit. The adoption of this bulletin did not have any effect on the cash flows of the Company. F-11
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Recognition of the tax consolidation benefit- As a result of the adoption of Bulletin D-4 mentioned above, the Company changed its method for recognizing the tax consolidation benefit. Through 1999, the benefit was recognized in the year in which the corresponding annual consolidated tax return was filed. Beginning in 2000, this benefit is recognized in the results of the year in which the benefit is generated. The effect from this change in accounting policy increased the benefit from tax consolidation by Ps.124,795, which is recorded as an "extraordinary item" in the accompanying consolidated statement of operations. Recognition of the effects of inflation- The Company and its subsidiaries follow the accounting policies established in Bulletin B-10 and its amendments and, accordingly, the financial statements have been restated in terms of the purchasing power of the Mexican peso as of December 31, 2000. Basis of consolidation- The consolidated financial statements include those subsidiaries in which the Company owns capital stock and has administrative control. All significant intercompany transactions and balances have been eliminated. The Company's principal subsidiaries are: 1999 2000 -------- --------- Unik, S.A. de C.V. ("Unik")........................ 99.9% 99.9% Girsa, S.A. de C.V. ("Girsa")...................... 99.9% 99.9% Dine, S.A. de C.V. ("Dine") 99.9% 99.9% Agroken, S.A. de C.V............................... 99.9% 99.9% Aquanova, S.A. de C.V.............................. 99.9% 99.9% Grupo Corfuerte, S.A. de C.V....................... 77.2% 77.2% Authentic Acquisition Corporation, Inc............. 81.3% 81.3% The local currency financial statements of foreign subsidiaries whose operations are not an integral part of the Mexican companies are restated using the inflation index of the corresponding country and subsequently translated into Mexican pesos at the exchange rate at yearend. The local currency financial statements of foreign subsidiaries whose operations are an integral part of the Mexican companies are translated at the exchange rate at yearend or as of the transaction date, based on whether the items are monetary or nonmonetary, and are restated using factors derived from the National Consumer Price Index (NCPI). The participation in net income and changes in equity or consolidation of those subsidiaries that were acquired or sold has been included in the financial statements since or up to the date on F-12
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) which the transactions took place and were restated in terms of the purchasing power of the Mexican peso as of December 31, 2000. Cash equivalents- Investments in marketable securities consist mainly of acceptances, bank promissory notes, and paper issued by the Mexican and United States governments, at market (cost plus accrued interest). Cash equivalents also include technology and training funds since the Company plans to utilize these funds during 2001. Inventories and cost of sales- Inventories are originally recorded at their acquisition or manufacturing cost and restated to their specific net replacement cost without exceeding their net realizable value. Substantially all subsidiaries compute cost of sales using the replacement cost at the time of sale. Real estate assets available for sale- Following the Company's strategy, DINE has begun a process of liquidation and the sale of certain real estate projects. Among those for sale are Centro Comercial Santa Fe and the Four Seasons Hotel in Punta Mita. Therefore, this real estate was recorded at its estimated realizable value as of December 31, 2000. The Four Seasons Hotel in Punta Mita was sold at the end of February 2001 for $52 million. Land held for development and real estate projects- Undeveloped land represents land reserves which, together with developed land and ongoing and completed projects, are considered inventories, since they are held for sale. They include acquisition, development and construction costs and are restated in U.S. dollars based on the NCPI of the United States and the market exchange rate for the purpose of showing values in accordance with the current situation of the real estate market. Had the NCPI been used to restate land held for development, developed land and real estate projects, their net value at December 31, 1999 and 2000 would have increased by Ps.854,358 and Ps.888,428, respectively, and the cost of land sold for the years ended December 31, 1998, 1999 and 2000 would have increased by Ps.41,773, Ps.8,758 and Ps.60,649, respectively. During 1998, the Company capitalized the integral cost of financing on debt used to finance real estate projects in progress in addition to their construction and development costs. The amount capitalized was Ps.77,606 and is restated at yearend using the NCPI. During 1999 and 2000 DINE did not any incur integral cost of financing subject to capitalization. Investment in shares- The investment in shares is recorded under the equity method except for the participation in Grupo Financiero Santander Mexicano, S.A. de C.V. (SANTANDER), which was recorded at F-13
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) market value as of December 31, 1999. During June 2000 the Company sold its shares in SANTANDER, which resulted in a gain of Ps.54,588, which is recorded in the results for the year under the caption "Other expenses". Property, plant and equipment- Property, plant and equipment are originally recorded at their cost of acquisition and/or construction and restated following the accounting policies established in Bulletin B-10 and its amendments, using the following methods. The methods used to restate the fixed assets were the NCPI for assets of domestic origin and the specific indexation for assets of foreign origin, which were restated by applying to their cost in foreign currency the slippage of the Mexican peso plus the inflation of their country of origin, not exceeding their net realizable value. Had the restatement of all property, plant and equipment been calculated using the NCPI, the net value of fixed assets as of December, 31, 1999 and 2000 would have increased by Ps.1,413,977 and Ps.1,762,295, respectively, and depreciation charged to income for 1998, 1999 and 2000 would have increased by Ps.89,241, Ps.118,337 and Ps.226,450, respectively. The companies follow the practice of capitalizing the comprehensive financial result on debt used to finance construction in progress and the installation of equipment, up until the equipment is ready for production. During 1998, 1999 and 2000 the comprehensive financing result capitalized was Ps.134,896, Ps.68,480 and Ps.47,919, respectively. Depreciation of property, plant and equipment is calculated using the straight-line method applied to month-end balances based on the utilization of the assets and the estimated remaining useful lives. Impairment of fixed assets- The amounts shown in the accompanying consolidated statements of income correspond basically to the reduction in value of property and equipment of some productive facilities in the food and autoparts businesses, in order to reflect their current realizable value. Goodwill- The goodwill resulting from acquisitions made in excess of book value is amortized over periods ranging from 5 to 20 years, the terms over which the benefits from the investment will be realized. Income taxes and employee profit sharing- Beginning January 1, 2000, the Company and its subsidiaries recognize by means of the liability method the future effects of income taxes related to the cumulative temporary differences between book and taxable income. For employee profit sharing purposes they recognize only F-14
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) those items that will materialize in the short term. Up to 1999 deferred taxes were recognized on the significant nonrecurring temporary differences whose turnaround period could be determined and which were not expected to be replaced by items of a similar nature and amount. Based on the authorization granted by the Ministry of Finance, the Company prepares its income and asset tax returns on a consolidated basis, including all subsidiaries which comply with the characteristics established for controlled companies. Employee severance benefits- Under Mexican labor law, the subsidiaries with employees are liable for separation payments to employees terminating under certain circumstances. The related indemnity payments are charged to results in the period in which they are made. The liabilities for seniority premiums, pensions and retirement payments are recorded through annual contributions to irrevocable trust funds, calculated using actuarial calculations based on the projected-unit credit method, using real interest rates. The liability being accrued at present value will cover the obligation from benefits projected to the estimated retirement date of the Company's employees. The subsidiaries have established irrevocable trust funds to cover the accrued employee benefits. The contributions made in 1998, 1999 and 2000, based on actuarial computations, were Ps.26,834, Ps.39,927 and Ps.83,897, respectively. The Company follows the funding recommendations of its actuaries. At December 31, 2000 the balances of these funds amount to Ps.569,171. The asset of the trusts consist of stock traded in the Mexican Stock Market (32.64%), the majority of which is represented by the Company's common shares and certain fixed-rate investments (67.36%). The number and series of common shares of the Company held by the trusts at December 31, 2000 was as follows: Series A..................... 33,006,300 Series B..................... 2,761,940 Series C..................... 21,131,235 ---------- 56,899,475 ========== The market value of the shares of the Company held at December 31, 2000 was Ps.222,404. During 2000 the trusts purchased 18,749,235 shares and sold 21,000,389 shares of the Company's stock. F-15
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Shareholders' equity restatement- Capital stock and retained earnings are restated by applying the NCPI to the original contributions of capital and the earnings obtained. The restatement represents the amount necessary to maintain shareholders' equity in terms of the purchasing power of the amounts originally invested or retained. The cumulative effect of restatement represents the gain or loss from holding nonmonetary assets, which is the amount by which nonmonetary assets change in value as compared to the NCPI. Revenues and expense restatement- Revenues and expenses associated with monetary items are restated from the month in which they arise through yearend, based on factors derived from the NCPI. Cost of sales and depreciation expense are restated through yearend as a function of the restatement of the nonmonetary asset that is being consumed or sold. Comprehensive financial result- This represents the net effect of interest earned and incurred, exchange gains and losses and the gain or loss from monetary position, which is the result of maintaining monetary assets and liabilities whose real purchasing power is modified by the effects of inflation. Foreign currency transactions are recorded at the exchange rate effective at the time the transactions are carried out and foreign currency denominated assets and liabilities are adjusted to the exchange rate effective at yearend. Earnings per share- The Company determined its earnings per share based on the majority interest in the income before extraordinary item and profit on the sale of subsidiaries, extraordinary item, profit on the sale of subsidiaries and the net income utilizing the weighted-average number of shares outstanding during the years. Comprehensive income (loss)- Comprehensive income (loss) is comprised of the net income for the period plus any gains or losses that according to specific regulations are presented directly in shareholders' equity, such as the gain or loss from holding nonmonetary assets. 5) NEW ACCOUNTING PRINCIPLE: In 2001 the new Mexican Bulletin C-2, "Financial Instruments", became effective. Bulletin C-2 requires the recognition of certain derivatives on the balance sheet as either assets or liabilities and the measurement of such instruments and the related hedged item at their fair value. Bulletin F-16
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) C-2 also requires that all gains and losses on derivative hedging instruments be recorded in current earnings, regardless of the nature of the instrument. Although the Company does not presently have any significant derivative instruments or engage in any significant hedging activities, there can be no assurance that the Company will not do so in the future. 6) CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of the following: 1999 2000 ------------- ------------- Cash.................................... Ps. 137,292 Ps. 307,195 Investments with maturities of less than 3 months.............. 1,414,265 1,058,717 Technology and training funds........... 276,877 174,090 ------------- ------------- Ps. 1,828,434 Ps.1,540,002 ============= ============= 7) NOTES AND ACCOUNTS RECEIVABLE: Notes and accounts receivable include: 1999 2000 ------------- ------------- Trade................................... Ps. 3,897,410 Ps. 3,725,816 Less- Allowance for doubtful accounts... 82,115 99,152 ------------- ------------- 3,815,295 3,626,664 Other accounts receivable............... 967,827 840,739 ------------- ------------- Ps. 4,783,122 Ps. 4,467,403 ============= ============= 8) INVENTORIES: Inventories consist of the following: 1999 2000 ------------- ------------- Finished goods and work-in-process....... Ps. 1,692,190 Ps. 1,991,653 Raw materials, supplies and other........ 1,660,942 1,724,052 ------------- ------------- 3,353,132 3,715,705 Less- Allowance for slow-moving items.... 37,220 62,790 ------------- ------------- 3,315,912 3,652,915 Advances to suppliers.................... 34,065 20,074 ------------- ------------- Ps. 3,349,977 Ps. 3,672,989 ============= ============= 9) TECHNOLOGY FUNDS: The companies of UNIK have a trust fund with Banco Santander Mexicano, S.A. as trustee to earmark funds for research and development of technology for the companies. The contributions during 1999 and 2000 amounted to Ps.136,378 and Ps.83,605, respectively, and withdrawals from the trust amounted to Ps.160,196 and Ps.134,923, respectively, mainly as a result of the acquisition of technology for machinery and equipment. At December 31, 1999 and 2000, the fund amounted to Ps.211,419 and Ps.77,045, respectively. F-17
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) In 2000, the technology fund was classified as cash and cash equivalents since the Company plans to use these funds during 2001. 10) LAND HELD FOR DEVELOPMENT AND REAL ESTATE PROJECTS ARE AS FOLLOWS: 1999 2000 ------------ ------------ Land held for development............ Ps.1,745,840 Ps.1,746,907 Real estate projects-in-progress..... 1,668,771 1,739,219 Real estate for sale................. 82,806 32,917 Developed land....................... 222,357 132,187 Advances to contractors.............. 33,243 75,733 Other................................ 12,772 10,839 ------------ ------------ Ps.3,765,789 Ps.3,737,802 ============ ============ 11) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment include: 1999 2000 ------------- ------------- Buildings and installations......... Ps.6,646,038 Ps.6,157,640 Machinery and equipment............. 14,297,900 15,321,198 Transportation equipment............ 293,618 263,190 Furniture and office equipment...... 336,058 599,952 Real estate for rent................ 712,319 66,195 Other............................... 921,347 293,871 ------------- ------------- 23,207,280 22,702,046 Less- Accumulated depreciation...... 10,250,582 10,545,829 ------------- ------------- 12,956,698 12,156,217 Projects-in-progress................ 1,319,588 758,347 Land................................ 1,261,086 1,233,357 ------------- ------------- Ps.15,537,372 Ps.14,147,921 ============= ============= The annual depreciation rates are as follows: Buildings and installations...... 2.00% to 31.46% Machinery and equipment.......... 3.77% to 31.73% Transportation equipment......... 9.00% to 25.00% Furniture and office equipment... 3.00% to 30.00% Real estate for rent............. 2.5% Other............................ 4.56% to 33.00% 12) TRANSACTIONS AND BALANCES IN FOREIGN CURRENCY: The Company and its subsidiaries valued their foreign currency denominated assets and liabilities, represented mainly by U.S. dollars, at the exchange rates effective at December 31, F-18
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) 1999 and 2000 of 9.55 and 9.65 Mexican pesos per U.S. dollar, respectively, as the Company expects to use foreign currency denominated assets to settle foreign currency denominated liabilities. As of December 31, 1999 and 2000, the foreign currency position was as follows: 1999 2000 ---------- ---------- Assets ............................ $ 362,852 $ 338,510 Current liabilities- Non-interest bearing ............ 148,881 181,066 Interest bearing ................ 382,618 345,761 ---------- ---------- 531,499 526,827 Long-term liabilities ............. 584,281 677,086 ---------- ---------- 1,115,780 1,203,913 ---------- ---------- Net liability position in foreign currency ..................... $ 752,928 $ 865,403 ========== ========== During the years ended December 31, 1998, 1999 and 2000, the Company and its subsidiaries had the following transactions in foreign currency, which were translated into Mexican pesos at the exchange rate in effect at the date of each transaction: [Download Table] 1998 1999 2000 --------- ----------- ----------- Direct export sales ................. $ 596,850 $ 559,816 $ 634,258 Indirect export sales under agreement 140,326 254,941 305,692 Sales of foreign subsidiaries ....... 85,159 118,333 97,713 --------- ----------- ----------- 822,335 933,090 1,037,663 Less- Purchases of inventories .......... (512,850) (491,221) (639,905) Purchases and expenses of foreign subsidiaries ..................... (70,939) (84,251) (86,421) --------- ----------- ----------- (583,789) (575,472) (726,326) --------- ----------- ----------- 238,546 357,618 311,337 --------- ----------- ----------- Interest earned ..................... 580 1,804 6,210 Less- Interest expense .............. (58,780) (37,034) (69,609) --------- ----------- ----------- (58,200) (35,230) (63,399) --------- ----------- ----------- Technical support ................... (4,839) (11,199) (9,894) --------- ----------- ----------- Net ............................... $ 175,507 $ 311,189 $ 238,044 ========= =========== =========== As of March 27, 2001, the date of issuance of these financial statements, the unaudited foreign exchange position was similar to that at yearend, and the exchange rate was 9.51 Mexican pesos per U.S. dollar. 13) BANK LOANS AND LONG-TERM DEBT: F-19
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Banks loans and long-term debt are as follows: [Enlarge/Download Table] 1999 2000 ------------------------------------------------------------------------------------- Maturity Interest Rate Amount Maturity Interest Rate Amount -------- ------------- ------ -------- ------------- ------ Syndicated loan- DESC $90 million 2001 Variable Ps.1,248,674 2003 LIBOR+1.375 Ps. 868,500 Medium-term promissory notes- DESC 680,569 million UDIS 2006 9.00% 942,567 2006 to 2007 9% and 8.20% 1,979,882 CORFUERTE $24,500 -- -- -- 2005 LIBOR+2.70 236,425 DINE $11.00 million LIBOR + 2006 3.875 124,867 2006 LIBOR+3.875 106,150 AQUANOVA $11.08 million LIBOR + 2002 1.75 181,231 2002 LIBOR+1.75 106,953 International Finance Corporation- GIRSA $128.86 million 2000 to 2006 Variable 1,522,121 2000 to 2006 Variable 1,258,929 GIRSA $105 million -- -- -- 2008 Variable 1,016,400 Loans- GIRSA $50 million 2000 Variable 676,365 2004 Variable 482,500 GIRSA $30 million 2003 LIBOR + 1 312,168 2003 LIBOR+1 289,500 GIRSA $15 million 2002 Variable 156,084 2003 LIBOR+1.60 144,750 GIRSA $4 million -- -- -- 2003 Variable 38,600 CORFUERTE $25 million 2002 to 2003 Eurodollar+1 260,162 2002 to 2003 Eurodollar+1 241,250 Secured bonds- DINE $135 million 2007 8.75% 1,404,758 2007 8.75% 1,302,750 Secured syndicated loans- UNIK $75 million 2001 LIBOR + 1 780,422 -- -- -- UNIK $16.66 million 2002 6.50% 252,010 2002 6.50% 160,788 UNIK $20.42 million 2003 7.34% 287,067 2003 7.34% 197,014 UNIK $11.9 million -- -- -- 2004 LIBOR + 1 114,835 Other loans payable in- Mexican pesos 2000 to 2003 Variable 101,883 2002 to 2008 Variable 57,352 Foreign currency 2000 to 2007 Variable 1,202,967 2002 to 2007 Variable 542,926 ------------ ------------ 9,453,346 9,145,504 Less- Current portion (2,428,833) (672,807) ------------ ------------ Ps.7,024,513 Ps.8,472,697 ============ ============ Long-term debt maturities are as follows: 2002....................................... Ps. 2,411,667 2003....................................... 1,167,191 2004....................................... 808,649 F-20
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) 2005....................................... 212,834 2006....................................... 1,557,207 2007 and thereafter........................ 2,315,149 -------------- Ps. 8,472,697 ============== The current portion of long-term debt and short-term bank loans are as follows: 1999 2000 -------------- ------------- Current portion of long-term debt ....... Ps. 2,428,833 Ps. 672,807 Other loans payable in- Mexican pesos ......................... 78,998 311,960 Foreign currency ...................... 1,575,019 2,754,107 -------------- ------------- Ps. 4,082,850 Ps. 3,738,874 ============== ============= Syndicated loan- On January 14, 2000, the Company fully prepaid the syndicated loan obtained on January 14, 1999 for $120 million with an original maturity date of January 14, 2001. The resources were obtained from the sale of Grupo Campi. On November 1, 2000, the Company signed a syndicated loan contract for $150 million, for a three-year term, bearing interest annually at LIBOR plus 1.375. At December 31, 2000 a total of $90 million has been drawn. The proceeds from the loan were used to pay short-term debt. The financing establishes certain restrictions for the Company, which have all been complied with, of which, the most important are: - Limitations regarding dividend payments. - Interest coverage ratio more than 2.75. - Debt to equity ratio not higher than .50. - Debt to EBITDA ratio not higher than 3.5. Medium-term promissory notes- In October 1999 and July 2000, the Company issued medium-term promissory notes equivalent to 324,000,000 and 356,568,600 Units of Investment (UDIS), respectively. The value of the UDI as of December 31, 2000 was 2.909158 Mexican pesos per UDI so the value of the promissory notes was Ps.942,567 and Ps.1,037,315, respectively. The notes bear interest quarterly at 9% and 8.20% and mature in 2006 and 2007, respectively. There are no restrictions on the notes. The resources generated were used to pay short-term debt. In April 2000, Grupo Corfuerte, S.A. de C.V. obtained two long-term promissory notes in the total amount of $32 million. This loan establishes, among other conditions, that the Company comply with certain financial ratios, which the Company has complied with. The notes accrue interest at a variable rate equal to LIBOR plus 2.7%, with quarterly payments from June 30, 2000 through March 31, 2005. F-21
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) In 1998 DINE obtained a bank loan with Banca Promex, S.A. for $11 million, with interest equal to LIBOR plus 3.875 and the loan is paid semiannually beginning on April 28, 2000. This loan is guaranteed with the Hotel Four Seasons of Punta Mita land and construction. This loan was fully paid in February 2001. On July 23, 1997, Aquanova and its subsidiaries obtained a long-term loan in U.S. dollars to finance their working capital and investment in shrimp production projects. The interest rate is equal to LIBOR plus 1.75 and the loan is paid quarterly from October 29, 1999 through July 29, 2002. The balance as of December 31, 2000 is $11.08 million. International Finance Corporation- The loan contract with International Finance Corporation (IFC), whereby granted to GIRSA a financing for $155 million, is comprised as follows: - Loan A, for $30 million - Loan B, for $40 million - Loan C, for $10 million - Loan D is a revolving loan through the issuance of commercial paper represented by a maximum unpaid amount of $75 million At December 31, 1999 and 2000, a total of $146.28 million and $128.86 million, respectively, has been drawn. Repayment of loans A, B and C will be made through equal semi-annual installments, beginning on August 15, 1999, over five, four and seven-year terms, respectively. Loan D will be repaid in full no later than August 14, 2002 in accordance with the amended agreement dated June 4, 1999. Interest on the loans will be paid semiannually at the following rates: Loan Interest Rate --------------- A and C......... LIBOR + 2.125 B............... LIBOR + 2.0 Additionally, loan C requires the payment of additional annual interest calculated at 1% of the consolidated operating margin (operating income less consolidated financial expense of GIRSA) with a maximum limit set. Interest on loan D is determined in accordance with the discount rate of the issuance of commercial paper plus the commission on the unused line of credit equivalent to 1.125%, until June 4, 1999 and 2.625% from June 4, 1999 to maturity date, in accordance with the amended agreement as of such date. F-22
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) There are certain covenants for Girsa and its subsidiaries, which in all cases have been complied with, of which the most significant are: - Limitation as to the existence of liens. - Limitations on disposals of property, plant and equipment. - Current ratio of at least 1:1. - Debt to equity ratio (total liabilities divided by total liabilities plus equity) not higher than 0.60:1. - Consolidated short-term debt may not exceed 20% of net sales of GIRSA and its subsidiaries of the previous year. As well, on January 21, 2000, GIRSA executed another loan contract with IFC, through which IFC granted financing of $105 million, made up as follows: - Loan A for $45 million - Loan B for $60 million The A and B loans are going to be paid in equal semiannual payments over six years beginning on March 15, 2003. The interest on the loans is paid semiannually at the following rates: Loan Interest Rate ---------------- ---------------------- A............... LIBOR + 3.75 B............... U.S. Bond rate + 4.50 (fixed) The financing establishes restrictions for GIRSA and its subsidiaries with which they are in compliance. The most important of the restrictions are as follows: - Limitations as to the existence of liens. - Limitations on disposal of property, plant and equipment. - Liquidity index higher than 1.1. - Debt to equity ratio lower than 0.60. - Consolidated short-term debt must not exceed 20% of the net consolidated sales of the preceding year. Loan contracts- During 1997, GIRSA entered into a loan agreement to finance long-term (three years) transactions whereby it received financing in the amounts of $35 million are based on committed and revolving credit. These lines matured during 2000 and a committed and revolving credit of $50 million was negotiated to finance long-term operations (four years as a maximum). As of December 31, 2000 the entire amount of the revolving line of credit has been drawn. F-23
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) During 1998, GIRSA signed into credit contracts for long-term operations (5 years) in which it received financing of $30 million, with payment due on the maturity dates and quarterly payments of interest at LIBOR plus 1.0. The financing establishes restrictions for GIRSA and its subsidiaries, which in all cases have been met, the most important of which are similar to those of the IFC loan. As well, during 1997, GIRSA executed loan contracts for long-term operations for $30 million which will be repaid at the maturity dates. These lines matured during 2000 and the Company paid $15 million and renegotiated $15 million at LIBOR plus 1.60 for an additional three years. In 1999, GIRSA executed a loan contract for long-term operations (3.5 years) through which a line of credit up to $50 million was granted. The funds must be drawn within a maximum of 18 months from the date of the contract (July 12, 1999) and payment is due 24 months from the date of the draw. As of December 31, 2000, $4 million has been drawn. In March 1998, Grupo Corfuerte contracted an unsecured loan for $25 million. The interest rate is equal to the Eurodollar plus 1, and it matures in March 2003. This loan establishes the restriction that the shareholders' equity of Alimentos del Fuerte, S.A. de C.V. must be higher than $5,000. The resources were used to pay short-term debt. Secured bonds- On October 9, 1997, DINE placed long-term guaranteed bonds on the international markets due October 9, 2007. Some of the obligations and restrictions of the bonds are as follows: - Specific restrictions on new liens on fixed assets. - Limitations on the acquisition of new debt when the adjusted interest coverage ratio is less than 2.25. At year end, the ratio was 3.12. - Limitations regarding dividend payments, shares distributions, repurchase of shares and/or any other form of capital redurctions in cash. Such payments may be only when: 1. No event of default under the established obligations of the issue has occurred. 2. Payments do not exceed the cumulative amount of consolidated majority income of DINE (not considering the effects of inflation). The cumulative amount shall be computed from January 1, 1999 through the date on which any payment is made. Such amount shall be multiplied by 0.5, and $50 million will be added. The result shall represent the Company's dividend payment capacity. In case the cumulative amount is negative, an aggregate payment of $30 million may be made over the term of the issue. As of December 31, 2000 the book value of the long-term bonds issued by DINE is $135 million and their fair value is $121.5 million. F-24
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Secured syndicated loans- On May 19, 1998 UNIK signed a guaranteed syndicated loan in the amount of $75 million, payable in one installment in 2001, bearing interest at LIBOR plus 1.0 in the first year and Libor plus 1 1/8 in the next two years. This loan is guaranteed by the subsidiaries of UNIK (Spicer, S.A. de C.V., Moresa, S.A. de C.V. and Hayes Wheels de Mexico, S.A. de C.V.). As part of its debt restructuring, Spicer entered into syndicated loan agreements amounting to $100 million, secured by its export sales. As of December 31, 2000, outstanding amounts were $20.42 million and $16.66 million. These loans are linked to a long-term export contract with Dana Corporation (minority stockholder of Spicer), whereby Dana agrees to purchase sufficient amounts to generate the resources necessary to pay the loan installments. These loans are payable in semi-annual installments that began on June 6 and September 11, 1996, respectively, over a seven-year period, bearing interest at LIBOR plus 0.50. In addition, Spicer entered into two swaps for the same amounts and terms of these loans, to secure fixed interest rates, after taxes, of 6.50% and 7.34%, respectively. In December 1998, Forjas y Maquinas, S.A. de C.V., subsidiary company of UNIK, obtained a loan from Comerica Bank, N.A., for $12 million payable semiannually with maturity in 2004. The interest rate is LIBOR plus 1. F-25
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) 14) EMPLOYEE BENEFITS: The employee benefit obligation relates to the pension plan, which will cover the pension and seniority premiums due upon retirement of the Company's employees. The amount resulting from the actuarial calculations prepared by external actuaries is being funded using the projected unit credit method. Below is a breakdown of this obligation as of December 31, 1999 and 2000: [Download Table] 1999 2000 ---------- ------------ Projected benefit obligation (PBO)................. Ps.855,064 Ps.1,055,058 Plan assets at fair value:......................... 837,916 569,171 ---------- ------------ Funded status.................................... (17,148) (485,887) Unrecognized transition obligation............... (315,274) (288,688) Unrecognized variances in assumptions............ 454,472 903,187 ---------- ------------ Net projected benefit obligation under Mexican GAAP 122,050 128,612 Fund withdrawals................................. 49,661 40,529 ---------- ------------ Net projected benefit obligation under U.S. GAAP... Ps.171,711 Ps. 169,141 ========== ============ As of December 31, 1999, the amount accrued exceeds the obligation for present services (ABO) (equivalent to the PBO without projecting the salaries to the date of retirement) by Ps.161,087. As of December 31, 2000 the ABO exceeds the plan assets by Ps.320,216 which is recorded as an employee severance benefit intangible asset and as an additional liability in the consolidated balance sheets. The cost of employee benefits is as follows: [Download Table] 1998 1999 2000 ---------- ---------- ---------- Service cost............................ Ps. 48,577 Ps. 49,364 Ps. 62,567 Amortization of transition liability.... (24,005) (16,117) (4,663) Amortization of variances in assumptions 41 5,794 26,282 Financial cost.......................... 34,856 38,443 52,894 ---------- ---------- ---------- 59,469 77,484 137,080 Less- Actual return on plan assets...... (71,191) (60,066) (50,569) ---------- ---------- ---------- Net result for the period under Mexican GAAP.......................... (11,722) 17,418 86,511 Amortization of fund withdrawals........ (8,404) (5,747) (5,248) ---------- ---------- ---------- Net result for the period under U.S. GAAP............................. Ps.(20,126) Ps. 11,671 Ps. 81,263 ========== ========== ========== Interest rates utilized in the actuarial calculations for 1998, 1999 and 2000 were as follows: Investment return rate....... 7% F-26
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Interest rate................ 5% Salary increase rate......... 1.5% The changes in the projected benefit obligation are as follows: 1999 2000 ---------- ------------ Beginning balance................................ Ps.760,647 Ps.855,064 Service cost................................... 49,364 62,567 Financial cost................................. 38,443 52,894 Actuarial gain................................. 6,610 84,533 ---------- ------------ Ending balance................................... Ps.855,064 Ps.1,055,058 ========== ============ The changes in the net projected liability were as follows: 1999 2000 ---------- ---------- Beginning balance................................ Ps.101,551 Ps.122,050 Provision for the year......................... (17,418) (86,511) Actuarial gain................................. 5,821 50,517 Contributions to the fund...................... 39,927 83,897 Payments for the reduction of personnel........ (7,831) (41,341) ---------- ---------- Ending balance................................... Ps.122,050 Ps.128,612 ========== ========== The changes in the fund were as follows: 1999 2000 ---------- ---------- Beginning balance................................ Ps.866,978 Ps.837,916 Contributions.................................. 39,927 83,897 Variation in fund assets....................... (61,158) (311,301) Payments for the reduction of personnel........ (7,831) (41,341) ---------- ---------- Ending balance................................... Ps.837,916 Ps.569,171 ========== ========== The amortization periods are as follows: Remaining Years --------------- Transition liability...................... 19 to 20 Variances in assumptions.................. 17 to 27 15) SHAREHOLDERS' EQUITY: During a General Ordinary Shareholders' Meeting held on April 27, 2000, the shareholders approved an increase in the reserve for the repurchase of its shares in the amount of Ps.1,400,000. F-27
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) During 1999 and 2000, the Company repurchased 13,629,000 and 109,736,155 of its outstanding shares at a nominal value of Ps.122,564 and Ps. 700,254, respectively. As of December 31, 2000 the capital stock is represented by: Shares Amount ------------- ----------- Fixed portion- Nominative Series "A" shares (without withdrawal rights and which must represent at least 51% of the shares with voting rights)............. 587,479,900 Ps. 7,637 Variable portion- Nominative Series "B" shares (with withdrawal rights and which may not represent more than 49% of the shares with voting rights)......... 506,176,760 6,580 Series "C" shares (with voting restrictions)... 275,341,610 3,580 ------------- ----------- 1,368,998,270 Ps. 17,797 ============= =========== Series "A" and "B" shares may only be acquired by Mexican citizens or Mexican entities with an exclusion clause for foreign investors. Series "C" shares may be freely subscribed. Dividends paid to individuals or foreign residents will be subject to income tax withholding at an effective rate ranging from 7.5% to 7.7%, depending on the year in which the earnings were generated. In addition, if earnings for which no corporate tax has been paid are distributed, the tax must be paid upon distribution of the dividends. Consequently, the Company must keep a record of earnings subject to each tax rate. 16) TAX ENVIRONMENT: The companies are subject to income and asset taxes. Income taxes are calculated in terms of Mexican pesos when the transactions occurred and not in terms of Mexican pesos as of the end of the periods. Beginning in 1999, the income tax rate increased from 34% to 35%, with the obligation to pay this tax each year at a rate of 30%, with the remainder payable upon distribution of earnings. Some subsidiaries in the agribusiness sector have authorizations to pay income and asset taxes under a simplified regimen. Other subsidiaries have a 50% reduction in their taxable income due to their activities. Asset taxes are computed at an annual rate of 1.8% on the average of the majority of restated assets (except investments) less certain liabilities, and the tax is paid only to the extent that it exceeds the income taxes of the period. Any required payment of asset taxes may be credited against the excess of income taxes over asset taxes of the preceding three and following 10 years. F-28
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Employee profit sharing has been determined based at a rate of 10% on the individual results of each operating company, rather than on a consolidated basis. Deferred income taxes- The tax effects of the temporary differences that generated deferred tax liabilities (assets), under Bulletin D-4, are as follows: 2000 ---------------------------- January 1st December 31 ------------ ------------- Property, plant and equipment.................... Ps.2,397,778 Ps.2,273,409 Inventories...................................... 658,901 743,796 Land held for development and real estate projects......................................... 402,833 474,129 Real estate assets available for sale............ -- 80,366 Investment in SANTANDER.......................... (364,085) (378,348) Reserves and provisions.......................... (260,002) (353,043) Other assets..................................... 45,571 20,818 Tax loss carryforwards........................... (760,692) (928,493) Recoverable asset tax............................ (243,682) (327,876) Reserve for tax loss carryforward and recoverable asset tax............................ 139,634 169,769 Other............................................ 310,948 298,374 ------------ ------------ Ps.2,327,204 Ps.2,072,901 ============ ============ Income taxes are calculated on taxable income, which differs from book income principally as follows: [Download Table] 1998 1999 2000 ---------- ------------ ---------- Tax expense at statutory rate................. Ps.702,307 Ps.1,178,158 Ps.344,025 Permanent differences- Gain on monetary position .................. (407,140) (245,556) (249,001) Inflationary component ..................... 234,165 253,229 241,252 Non-deductible items ....................... 86,603 93,559 122,802 Non-taxable income ......................... (107,850) (78,809) (48,351) Income (loss) related to subsidiaries subject to the simplified tax system ...... (27,766) 1,144 1,663 Tax effect from sale of shares ............. -- (99,089) -- Other ...................................... 148,404 (55,017) 141,509 -------- -------- -------- (73,584) (130,539) 209,874 -------- -------- -------- Temporary differences- Depreciation ............................... (113,216) 23,720 Cost of sales versus purchases, labor and overhead .............................. (32,914) (164,799) Reserves ................................... 8,437 65,006 Tax loss carryforwards ..................... (5,663) (146,656) Other ...................................... (36,155) (46,493) -------- -------- (179,511) (269,222) F-29
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Total income tax provision......... Ps.449,212 Ps.778,397 Ps. 553,899 ========== ========== =========== The tax loss carryforwards shown above do not include the benefit from tax consolidation related to the use of the tax loss carryforwards, which is presented as a separate item in the accompanying consolidated statement of income. 17) EXTRAORDINARY ITEM: The extraordinary item is comprised as follows: Gain on the shareholding restructuring of Velcon Ps.103,886 Reorganization expenses in Moresa, S.A. de C.V. (37,216) Effect of change in recognition of tax 124,795 consolidation benefit ---------- Ps.191,465 ========== 18) FINANCIAL INSTRUMENTS: The fair value of interest rate swaps and cash-settled options is estimated based on quoted market prices to terminate the related contracts at the reporting date. As of December 31, 1999 and 2000 the fair value of the interest rate swaps was estimated to be a gain (loss) of $100 and $(233), respectively. SPICER does not anticipate canceling these contracts and expects them to expire as originally contracted (see Note 13). UNIK and its subsidiaries entered into option contracts for risk coverage with Pemex Gas and Petroquimica Basica to protect themselves against the price volatility of natural gas for the period from September 2000 to February 2001. Those companies entered into a contract to hedge against the rise in the market price of gas exceeding the maximum price that had been selected through the payment of a premium. The maximum price was 8 dollars per "MMBTU" (one million energy units) and the minimum price was 2.85 dollars per "MMBTU". In the event the referred price exceeds the maximum price, a discount will be applied to the invoice; if it is below the minimum price, the invoice will be issued in the amount of the corresponding minimum price. At December 31, 2000, the market value of the premium for the price of gas shows an estimated gain of $37.3. 19) DIFFERENCES BETWEEN MEXICAN AND US GAAP: The consolidated financial statements of the Company are presented on the basis of accounting principles generally accepted in Mexico ("Mexican GAAP") which do not conform with accounting principles generally accepted in the United States ("U.S. GAAP"). Note 20 presents a reconciliation of majority net income and shareholders' equity to U.S. GAAP. However, this reconciliation to U.S. GAAP does not include the reversal of the restatement of the financial statements to comprehensively recognize the effects of inflation, as required under Mexican GAAP Bulletin B-10, "Recognition of the Effects of Inflation in the Financial Information," as amended. The application of Bulletin B-10 represents a comprehensive measure F-30
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) of the effects of price level changes in the inflationary Mexican economy and, as such, is considered a more meaningful presentation than historical cost-based financial reporting for both Mexican and U.S. accounting purposes. The principal differences between Mexican GAAP and U.S. GAAP are described below together with an explanation, where appropriate, of the method used in the determination of the adjustments that affect net income and shareholders' equity. Restatement of prior year financial statements: As explained in Note 4, in accordance with Mexican GAAP, the financial information for foreign subsidiaries of prior years was restated using the inflation rate of the country in which the foreign subsidiary is located, then translated at the year-end exchange rate of the Mexican peso. This procedure results in the presentation of prior year amounts in the purchasing power of the respective currencies as of the end of the latest year presented. Under U.S. GAAP, the financial information for foreign subsidiaries of prior years must be restated in constant units of the reporting currency, the Mexican peso, which requires the restatement of such prior year amounts using the inflation rate of Mexico. Accordingly, a reconciling item for the difference in methodologies of restating prior year balances is included in the GAAP reconciliation of net majority income and consolidated majority shareholders' equity. Additionally, all other U.S. GAAP adjustments affected by the use of the B-15 methodology have been determined based on the U.S. GAAP methodology described above. Cash flow information- Under Mexican GAAP, the Company presents consolidated statements of changes in financial position. Bulletin B-12 specifies the appropriate presentation of the statement of changes in financial position when the financial statements have been restated in constant Mexican pesos in accordance with the third amendment to Bulletin B-10. Bulletin B-12 identifies the generation and application of resources representing differences between beginning and ending financial statement balances in constant Mexican pesos. The bulletin also requires that monetary and foreign exchange gains and losses be treated as non-cash items in the determination of resources provided by operations. The changes included in this statement constitute cash flow activity stated in constant Mexican pesos (including monetary and unrealized foreign exchange gains and losses on liabilities, which are considered cash gains and losses in the constant Mexican peso financial statements). In accordance with Mexican GAAP, the reduction in current and long-term debt due to restatement in constant Mexican pesos and unrealized exchange gains and losses on liabilities are presented in the statement of changes in financial position as a resource used in financing activities F-31
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) and the gain on monetary position is presented as a component of operating activities. U.S. GAAP Statement of Financial Accounting Standards (SFAS) No. 95, "Statement of Cash Flows", does not provide guidance with respect to inflation-adjusted financial statements and requires presentation of a statement of cash flows. The following presents a reconciliation of the resources generated by (applied to) operating, investing and financing activities under Mexican GAAP to the resources generated by (applied to) such activities under U.S. GAAP: The following presents a reconciliation of the resources generated by (applied to) operating, investing and financing activities under Mexican GAAP to the resources generated by (applied to) such activities under U.S. GAAP: [Enlarge/Download Table] 1998 1999 2000 ------------- ------------- ----------- Net Resources generated by operations under Mexican GAAP..... Ps. 2,519,076 Ps. 3,811,692 Ps. 818,089 Inflationary effects......................................... (1,067,688) (975,659) (736,678) Exchange loss................................................ 2,113,265 (402,392) (99,496) Net book value of retirements................................ 195,708 106,291 115,083 ------------- ------------- ----------- Net Resources generated by operations under U.S. GAAP..... Ps. 3,760,361 Ps. 2,539,932 Ps. 96,998 ============= ============= =========== Net Resources applied to investing activities under Mexican GAAP.............................................. Ps.(3,814,419) Ps.(2,006,941) Ps.(780,753) Net book value of retirements................................ (195,708) (106,291) (115,083) Restatement of investment.................................... 296,233 120,274 30,804 ------------- ------------- ----------- Net Resources applied to investing activities under US GAAP.................................................... Ps.(3,713,894) Ps.(1,992,958) Ps.(865,032) ============= ============= =========== Net Resources generated by (applied to) financing activities under Mexican GAAP............................. Ps. 835,571 Ps.(1,210,845) Ps.(325,768) Inflationary effects......................................... 771,455 855,385 705,874 Exchange loss................................................ (2,113,265) 402,392 99,496 ------------- ------------- ----------- Net Resources generated by (applied to) financing activities under U.S. GAAP.............................. Ps. (506,239) Ps. 46,932 Ps. 479,602 ============= ============= =========== Deferred income taxes and employee profit sharing- The Company adopted SFAS No. 109, "Accounting for Income Taxes" for U.S. GAAP reconciliation purposes. The objective of this pronouncement is to recognize the deferred assets and liabilities that arise from all temporary differences between the book and tax basis of the assets and liabilities for future tax purposes. The principal temporary differences that generated the deferred tax liability, in accordance with U.S. GAAP, were the deduction of purchases for tax purposes versus cost of sales for financial statements purposes, differences in the depreciation indexes used for book and tax purposes and the recognition of tax loss carryforwards as deferred taxes. Beginning on January 1, 2000, the new Bulletin D-4, "Accounting for Income and Asset Taxes and Employee Profit F-32
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Sharing", went into effect and one of the most important differences with respect to U.S. GAAP has been significantly reduced. The tax effects of temporary differences that generated deferred tax liabilities (assets) under SFAS No. 109 are as follows: [Download Table] 1999 2000 ------------ ------------ Fixed assets......................................s Ps.2,688,564 Ps.2,673,482 Inventories........................................ 711,907 743,796 Land held for development and real estate projects. 861,591 765,105 Fixed assets for sale.............................. -- 112,151 Reserves........................................... (53,486) (353,043) Investment in SANTANDER............................ (339,871) (378,348) Tax loss carryforwards............................. (760,662) (928,493) Recoverable asset taxes............................ (242,783) (327,876) Other.............................................. 493,065 446,454 Valuation allowance................................ 479,525 169,769 ------------ ------------ Ps.3,837,850 Ps.2,922,997 ============ ============ Employee profit sharing is subject to the future consequences of temporary differences in the same manner as income taxes. The deferred effects not recorded under Mexican GAAP are included in the reconciliation of Mexican to U.S. GAAP. Additionally, for US GAAP purposes, employee profit sharing must be classified as an operating expense. The tax effects of temporary differences that generated deferred employee profit sharing liabilities (assets) under SFAS No. 109 are as follows: 1999 2000 ---------- ---------- Fixed assets....................... Ps.684,655 Ps.657,965 Inventories........................ 220,876 199,746 Reserves........................... (12,723) (7,892) Unrealized exchange losses......... (35,953) (8,774) Other.............................. 53,860 49,721 ---------- ---------- Ps.910,715 Ps.890,766 ========== ========== Cost of pension plans and other employee benefits- Under Mexican GAAP, the requirement to record liabilities for employee benefits using actuarial computations is substantially the same as under SFAS No. 87, "Employers' Accounting for Pensions". The Company's independent actuaries have prepared a study of pension costs under U.S. GAAP (see Note 14). F-33
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) The Company has no postretirement health care insurance or other benefit plans, other than the pension plans referred to in Note 14. Therefore, SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions", would have no effect on the Company's financial position. During 1992, the Company withdrew Ps.228,266 from plan assets covering pension and seniority premiums for employees of certain subsidiaries, as the plans were overfunded. The amount of the withdrawal was recorded as income under Mexican GAAP, however, for purposes of SFAS No. 87, the amount must be amortized over the average remaining working life of the employees, which is approximately 17 years. Minority interest- Under Bulletin B-8 of Mexican GAAP, minority interest in subsidiaries must be included as a component of shareholders' equity. Consequently, unlike U.S. GAAP, minority interest in the income of subsidiaries is not presented as an expense in the consolidated statement of income. Under U.S. GAAP, minority interest in subsidiaries is shown below liabilities in the consolidated balance sheet and is not included in consolidated shareholders' equity. Technology and training funds- The technology and training funds are recorded under cash and cash equivalents since the Company plans to utilize these funds during 200. Under U.S. GAAP those funds must be classified as "Other assets". Cost of sales and inventory valuation- Certain of the Company's subsidiaries use the direct cost method to calculate cost of sales and inventory, whereby certain overhead costs are charged to expense when they are incurred rather than being allocated to inventory. U.S. GAAP requires that indirect manufacturing costs be considered as part of inventory cost. Land held for development and real estate projects- Undeveloped and developed land of the real estate business and the real estate projects are considered as inventories, since they are held for sale. They were restated in U.S. dollars using the inflation rate of the US. Under U.S. GAAP, these assets and the corresponding cost of land sold during the year would be restated using the NCPI. Property, plant and equipment- Since 1997, the Company restated its fixed assets of foreign origin based on the internal inflation rate of the country of origin and the period end exchange rate. Under U.S. GAAP, these fixed assets would be restated using the NCPI. F-34
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Goodwill- Up to 1997 the goodwill resulting from acquisitions made in excess of book value of the acquired subsidiaries in the food segment was partially restated using the NCPI. Under U.S. GAAP this goodwill should be restated using the NCPI from the date of acquisition through the date of the financial statements. Plant closings and abandonment of assets-- Under Mexican GAAP, certain costs of plant closings were deferred and amortized over a three-year period. In addition, certain assets not in use and expected to be disposed were depreciated over their normal useful lives. Under US GAAP, the costs associated with the sale or closing of a plant, and any estimated impairment in value of the assets or loss on sale must be recorded as an expense as soon as it can be estimated. Therefore, in the reconciliation of net income and shareholders' equity, these costs and writedowns are adjusted and are reflected in results in the year in which they can be estimated. Payments received for the right to enter into lease agreements- In Mexico, it is common practice for lessors to collect an "up-front" payment from lessees upon the initial signing of a lease agreement. The Company, under Mexican GAAP, has recognized these payments as income in the period in which they were received. The Company has no future obligation with regard to these payments and they are not refundable to the lessee. Under U.S. GAAP, the amounts received as "up-front" payments must be amortized to income over the terms of the lease agreements, which average three years. Goodwill of POLIFOS- During 1994 and 1995, the Company purchased the shares of a new subsidiary at a cost below book value. The negative goodwill recorded on the purchases was amortized to income during 1995 and 1996. Under U.S. GAAP purchase accounting, after considering the deferred tax liability not recorded under Mexican GAAP for the subsidiary, positive goodwill resulted. This goodwill is being amortized to expense over three years for U.S. GAAP purposes. Goodwill of Canada de Santa Fe- During 1999, DINE acquired 10% of the shares of Canada de Santa Fe, S.A. de C.V. As a result of this acquisition, goodwill of Ps.79,394 was generated, which will be amortized in proportiona to the sales of the "Bosques de Santa Fe" project, not to exceed a period of seven years. Under U.S. GAAP purchase accounting, goodwill of Ps.82,410 resulted, which will be amortized over the same term. F-35
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) Negative goodwill- In September 1997, AGROBIOS acquired 94.3% of the shares of ("CORFUERTE"), a company engaged in the manufacturing and distribution of processed food. The book value (substantially equivalent to the fair value of the net assets acquired as a result of inflation accounting) exceeded the cost of the shares by Ps.9,276, which is being amortized to income over five years using the straight-line method. Under U.S. GAAP purchase accounting, after considering the deferred tax asset not recorded under Mexican GAAP for the subsidiary, the excess of the book value over the cost of the shares was Ps.351,556, which was offset against the fair value of the fixed assets acquired and will be recognized in income as a reduction of the related depreciation. Goodwill of VELCON- In 2000, UNIK increased its share ownership in VELCON (see Note 1), its subsidiary, at a cost above the book value of DANA's interest in SPICER. The goodwill resulting from this acquisition will be amortized over four years. According to U.S. GAAP, the recognition of the acquisition, after recording the differences between Mexican GAAP and U.S. GAAP, resulted in Ps.4,708 of additional goodwill, which will be amortized over four years. Capitalized financing costs- The Company capitalizes the comprehensive financial result related to construction in progress, including the exchange losses and gain on monetary position. Under U.S. GAAP, only interest expense may be capitalized on U.S. dollar- denominated debt, and only interest expense, net of the related gain on monetary position, may be capitalized on Mexican peso-denominated debt. Capitalized preoperating expenses- Under Mexican GAAP, AGROBIOS and some subsidiaries of UNIK and GIRSA capitalized preoperating expenses amounting to Ps.116,538 related to the shrimp business and new production lines. Such expenses will be amortized over the term during which the shrimp business and the new production lines become fully operational. Under U.S. GAAP, such costs are expensed as incurred. Other pronouncements- In view of the simple capital structure of the Company, SFAS No. 128, "Earnings per Share", does not have any impact on the calculation of net majority income per share under U.S. GAAP. Beginning in 1998, SFAS No. 130, "Reporting Comprehensive Income", which requires the presentation of comprehensive income under U.S. GAAP, went into effect. Note 20 d) presents a reconciliation of majority net income under U.S. GAAP to comprehensive income (loss) F-36
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) under U.S. GAAP, in which the main reconciling item is the effect of restatement (result of holding non-monetary assets). Effect of newly adopted accounting standards- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 went into effect on January 1, 2001. This new standard requires recognition of all derivative financial instruments on the balance sheet as either assets or liabilities and the measurement of such instruments and the hedged items at their fair value. Changes in the fair value of the derivatives will be recognized currently in earnings, unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature of the instruments. Although the Company does not presently have any significant derivative instruments or engage in any significant hedging activities, there can be no assurance that the Company will not do so in the future. See note 18 for a description of the Company's current limited hedging activities. Convenience translation statements- U.S. dollar amounts shown in the financial statements have been included solely for the convenience of the reader and are translated from Mexican pesos, as a matter of arithmetic computation only, at the exchange rate quoted by Banco de Mexico as of December 31, 2000 of Ps.9.65 per U.S. dollar. Such translation should not be construed as a representation that the Mexican peso amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other exchange rate. 20) RECONCILIATION OF MEXICAN GAAP TO US GAAP: (a) Reconciliation of net majority income- [Enlarge/Download Table] 1998 1999 2000 2000 ------------ ------------ ------------ ----------- Net income applicable to majority interest under Mexican GAAP Ps.1,131,806 Ps.1,935,073 Ps. 274,895 $ 28,486 US GAAP adjustments: Deferred income taxes (833,972) (373,777) 622,893 64,548 Deferred income taxes under Mexican GAAP -- -- 99,658 10,327 Deferred employee profit sharing.................... (50,466) (100,178) (57,100) (5,917) Capitalized exchange loss net of gain on monetary position................................. (60,363) 23,276 37,216 3,857 Goodwill of POLIFOS................................. -- 3,666 -- -- Goodwill of Canada de Santa Fe...................... (3,016) -- 3,016 313 Full absorption costing............................. 24,561 (47,311) (98,531) (10,210) Payments received for rights to enter into lease agreements........................................ (2,228) 380 6,533 677 Write-down of fixed assets.......................... 49 680 -- -- Goodwill of VELCON.................................. -- -- 4,708 488 F-37
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) [Enlarge/Download Table] Additional depreciation on foreign origin fixed assets restated using the NCPI method............. (24,431) (29,096) (108,113) (11,203) Restatement of cost of land for development and real estate projects using the NCPI method........ (41,773) (8,758) (60,649) (6,285) Reduction in depreciation expense of corfuerte......................................... (3,889) 15,820 (65,793) (6,818) Withdrawal of pension fund assets and amortization of gains under SFAS No. 87........... 8,404 5,747 5,248 544 Capitalization of preoperating expenses............. (9,289) (740) (27,283) (2,827) Benefit of tax consolidation of prior years......... 168,309 (145,327) (123,973) (12,847) Effects of inflation accounting on U.S. GAAP adjustments....................................... 814,915 545,734 373,211 38,675 Effects on minority interest of U.S. GAAP adjustments....................................... 287,373 (93,162) (390,592) (40,477) ------------ ------------ ------------ ----------- 274,184 (203,046) 220,449 22,845 ------------ ------------ ------------ ----------- Net income under U.S. GAAP............................. Ps.1,405,990 Ps.1,732,027 Ps. 495,344 $ 51,331 ============ ============ ============ =========== Weighted average shares outstanding (000's) 1,506,981 1,489,733 1,418,126 1,418,126 ============ ============ ============ =========== Net income per share under U.S. GAAP Ps. 0.93 Ps. 1.16 Ps. 0.35 $ 0.04 ============ ============ ============ =========== (b) Reconciliation of majority shareholders' equity- [Enlarge/Download Table] 1999 2000 2000 ------------- ------------ ----------- Majority shareholders' equity under Mexican GAAP................. Ps.12,537,712 Ps.9,011,757 $ 933,861 US GAAP adjustments: Deferred income taxes ......................................... (3,837,850) (2,922,997) (302,901) Deferred income taxes under Mexican GAAP ...................... -- 1,644,919 170,457 Deferred employee profit sharing .............................. (910,715) (890,766) (92,307) Capitalized exchange loss and gain on monetary position ....... (412,373) (375,157) (38,876) Goodwill of VELCON ............................................ -- 4,708 488 Goodwill of POLIFOS ........................................... (19,695) (19,695) (2,041) Goodwill of Canada de Santa Fe ................................ (3,016) -- -- Full absorption costing ....................................... 98,531 -- -- Payments received for rights to enter into lease agreements ... (6,848) -- -- Write-down of fixed assets .................................... (3,916) (3,916) (406) Adjustment for changes to the NCPI method in the restatement of land held for development and real estate projects, foreign origin machinery and goodwill ................................ 2,386,672 3,018,085 312,755 Additional depreciation on foreign origin fixed assets restated using the NCPI method ............................... (118,337) (226,450) (23,466) Restatement of cost of land held for development and real estate projects sold using the NCPI method ................... (59,322) (119,971) (12,432) Reduction in depreciation expense of CORFUERTE ................ 47,095 (18,702) (1,938) Capitalization of preoperating expenses ....................... (89,255) (116,538) (12,076) Withdrawal of pension fund assets and amortization of gains under SFAS No.87 ....................................... (49,661) (40,529) (4,200) Effects on minority interest of U.S. GAAP adjustments ......... 1,069,140 678,548 70,314 ------------- ------------ --------- (1,909,550) 611,539 63,371 ------------- ------------ --------- Majority shareholders' equity under U.S. GAAP ................... Ps.10,628,162 Ps.9,623,296 $ 997,232 ============= ============ ========= (c) Reconciliation of the changes in majority shareholders' equity under US GAAP- [Enlarge/Download Table] 1999 2000 2000 -------------- ------------- ----------- Majority shareholders' equity at beginning of year........ Ps. 10,126,985 Ps. 10,628,162 $ 1,101,364 F-38
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) [Enlarge/Download Table] Net income under U.S. GAAP ............................. 1,732,027 495,344 51,331 Effect of restatement .................................. (2,060,375) (1,021,521) (105,858) Adjustment for changes to the NCPI method in the restatement of land held for development and real estate projects, foreign origin machinery and goodwill 952,089 631,413 65,431 Dividends paid ......................................... -- (409,848) (42,471) Repurchase of shares ................................... (122,564) (700,254) (72,565) -------------- ------------- ----------- Majority shareholders' equity at end of year .............. Ps. 10,628,162 Ps. 9,623,296 $ 997,232 ============== ============== =========== (d) Comprehensive income (loss) under US GAAP- [Enlarge/Download Table] 1998 1999 2000 2000 -------------- -------------- -------------- -------------- Majority net income under U.S. GAAP.................... Ps. 1,405,990 Ps. 1,732,027 Ps. 495,344 $ 51,331 Other comprehensive loss Result from holding nonmonetary assets With adjustments under U.S. GAAP.................. (515,408) (1,108,286) (569,901) (58,746) -------------- -------------- -------------- -------------- Comprehensive income (loss) under U.S. GAAP............ Ps. 890,582 Ps. 623,741 Ps. (74,557) $ (7,415) ============== ============== ============== ============== 21) CONDENSED FINANCIAL INFORMATION OF DINE, S.A. DE C.V. AND SUBSIDIARIES: The condensed consolidated balance sheets and statements of income (loss) of Dine, S.A. de C.V. and its subsidiaries as of and for the periods reported in the accompanying financial statements are as follows: [Enlarge/Download Table] ASSETS 1999 2000 ------------ ------------ Current assets.................................................... Ps. 801,519 Ps.2,207,582 Land held for development and real estate projects................ 3,765,789 3,737,802 Investment in shares.............................................. 91,602 108,235 Property and equipment............................................ 1,613,103 283,611 Other assets...................................................... 43,582 88,420 ------------ ------------ Total assets................................................ Ps.6,315,055 Ps.6,425,650 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities............................................... Ps. 161,910 Ps. 270,000 Long-term debt.................................................... 1,529,625 1,408,900 Reserve for separation payments................................... 10,761 377 Deferred income taxes............................................. - 17,937 Majority shareholders' equity..................................... 3,853,848 3,784,476 Minority interest................................................. 759,451 943,960 ------------ ------------ Total liabilities and shareholders' equity.................. Ps.6,315,595 Ps.6,425,650 ============ ============ 1998 1999 2000 ---------- ----------- ------------ Revenues.......................................................... Ps.895,293 Ps. 616,721 Ps.1,234,042 Costs 446,342 267,047 616,734 ---------- ----------- ------------ F-39
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DESC, S.A. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998, 1999 AND 2000 (Continued) [Enlarge/Download Table] Gross profit...................................................... 448,951 349,674 617,308 Operating expenses................................................ 128,654 190,381 325,089 Comprehensive result of financial................................. 318,331 (77,454) 111,123 Other (income) expenses, net...................................... (34,666) 20,527 (32,651) Provisions for income and assets taxes............................ 40,802 36,862 74,243 Equity in income (loss) of associated (2,273) 9,197 (101) companies....................................................... ---------- ----------- ------------ Net consolidated income (loss) for the year....................... Ps. (1,897) Ps. 188,555 Ps. 139,605 =========== =========== ============ F-40
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REPORT OF INDEPENDENT AUDITORS Mexico City, January 19, 2001, except for Note 2(b) To the Stockholders' Meeting of GIRSA, S.A. de C.V. We have examined the consolidated balance sheets of GIRSA, S.A. de C.V., and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and changes in financial position for each of the three years ended December 31, 2000, 1999 and 1998. These consolidated financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Mexico and the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements and are prepared in accordance with generally accepted accounting principles. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. As mentioned in Noted 2(1) to the consolidated financial statements, starting on January 1, 2000, the Company adopted the guidelines in the amended Bulletin D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit-sharing". Accounting practices used by the Companies in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico, but do not conform with accounting principles generally accepted in the United States of America. A description of these differences and partial reconciliation as permitted by Form 20-F of the Securities and Exchange Commission of consolidated net income and shareholders' equity to U.S. generally accepted accounting principles is set forth in notes 20, 21 and 22. In our opinion, the aforementioned consolidated financial statements present fairly in all material aspects, the consolidated financial position of GIRSA, S.A. de C.V. and Subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations, the changes in their stockholders' equity and the changes in their financial position for each of the three years ended December 31, 2000, 1999 and 1998, in conformity with accounting principles generally accepted in Mexico. PricewaterhouseCoopers By s/Alfonso Infante Lozola ------------------------ Alfonso Infante Lozola Public Accountant F-41
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REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of Agroken, S.A. de C.V. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Agroken, S.A. de C.V. and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, stockholders' equity and changes in financial position for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Mexico, which are substantially the same as those followed in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with generally accepted accounting principles in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico but do not conform with generally accepted accounting principles in the United States. A description of these differences and a partial reconciliation as permitted by the regulations of the U.S. Securities and Exchange Commission of consolidated net income and stockholders' equity to generally accepted accounting principles in the United States are set forth in Notes 17 and 18. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Agroken, S.A. de C.V. and subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations, their stockholders' equity and the changes in their financial position for the years then ended, in conformity with accounting principles generally accepted in Mexico. As mentioned in Note 3 to the accompanying financial statements, effective January 1, 2000, the Company adopted the requirements of the new Mexican accounting Bulletin D-4, Accounting for Income Tax, Asset Tax and Employee Profit Sharing, issued by the Mexican Institute of Public Accountants. The new Bulletin D-4 requires the recognition of deferred taxes on all temporary differences in balance sheet accounts for financial and tax reporting purposes. Through December 31, 1999 deferred taxes were recognized only on temporary differences that were considered to be non-recurring and that had a known turnaround time. Mancera, S.C. Member of Ernst & Young International by s/Augustin Aguilar ------------------------------- C.P.C. Augustin Aguilar Mexico, D.F. January 29, 2001 F-42
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REPORT OF INDEPENDENT AUDITORS Board of Directors Authentic Acquisition Corporation We have audited the accompanying consolidated balance sheets of Authentic Acquisition Corporation and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Authentic Acquisition Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. s/ Ernst & Young LLP January 19, 2001 F-43
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REPORT OF INDEPENDENT AUDITORS To the Stockholders of Grupo Corfuerte, S.A. de C.V. and Subsidiaries: We have audited the accompanying consolidated balance sheets of GRUPO CORFUERTE, S.A. DE C.V. AND SUBSIDIARIES (all incorporated in Mexico and collectively referred to as the "Company") as of December 31, 1999 and 2000, and the related consolidated statements of income, changes in stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Nair Industrias, S.A. de C.V., Pesquera Nair, S.A. de C.V. and Propemaz, S.A. de C.V. for the year ended December 31, 1998, which statements reflect total assets of 26% and total revenues of 2% in 1998 of the related consolidated totals. Those financial statements were audited by other independent auditors, whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards in Mexico, which are substantially the same as those followed in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in accordance with generally accepted accounting principles in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other independent auditors provide a reasonable basis for our opinion. Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico but do not conform with generally accepted accounting principles in the United States. A description of these differences and a partial reconciliation as permitted by the regulations of the U.S. Securities and Exchange Commission of consolidated net income and stockholders' equity to generally accepted accounting principles in the United States are set forth in Notes 19 and 20. In our opinion, based on our audits and the audit reports of the other independent auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grupo Corfuerte, S.A. de C.V. and Subsidiaries as of December 31, 1999 and 2000, and the results of their operations, the changes in their stockholders' equity and changes in their financial position for each of the three years in the period ended December 31, 1998, 1999 and 2000, in conformity with accounting principles generally accepted in Mexico. As mentioned in Note 3 to the accompanying financial statements, effective January 1, 2000, the Company adopted the requirements of the new Mexican accounting Bulletin D-4, Accounting for Income Tax, Asset Tax and Employee Profit Sharing, issued by the Mexican Institute of Public Accountants. The new Bulletin D-4 requires the recognition of deferred taxes on all temporary differences in balance sheet accounts for financial and tax reporting purposes. Through December 31, 1999 deferred taxes were F-44
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recognized only on temporary differences that were considered to be non-recurring and that had a known turnaround time. Mancera, S.C. Member of Ernst & Young International by s/Augustin Aguilar --------------------------------------- C.P.C. Augustin Aguilar Mexico, D.F. January 31, 2001 F-45
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REPORT OF INDEPENDENT AUDITORS To the Stockholders of Aquanova, S.A. de C.V. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Aquanova, S.A. de C.V. and Subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, changes in shareholders' equity and changes in financial position for the three years ended December 31, 1998, 1999 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Mexico, which are substantially the same as those followed in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with generally accepted accounting principles in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Notes 9 and 10 to the accompanying financial statements, in the years ended December 31, 1999 and 2000 the Company did not restate its property, plant and equipment and preoperating expenses as required by Mexican Accounting Principles Bulletin B-10 Accounting Recognition of the Effects of Inflation on Financial Information, as amended, issued by the Mexican Institute of Public Accountants. Consequently, the financial information for the year ended December 31, 1998, is not comparable with the information for years ended December 31, 1999 and 2000. Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico but do not conform with generally accepted accounting principles in the United States. A description of these differences and a partial reconciliation as permitted by the U.S. Securities and Exchange Commission of consolidated net income and stockholders' equity to generally accepted accounting principles in the United States are set forth in Notes 18 and 19. In our opinion, except for the nonrecognition of the effects of inflation on property, plant and equipment and preoperating expenses in 1999 and 2000, as mentioned in the third paragraph above, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Aquanova, S.A. de C.V. and Subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations, changes in their shareholders' equity and changes in their financial position for each of the three years ended December 31, 1998, 1999 and 2000, in conformity with accounting principles generally accepted in Mexico. Mancera, S.C. Member of Ernst & Young International by s/Jose Maria Tabares -------------------------------- C.P.C. Jose Maria Tabares January 29, 2001 F-46
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REPORT OF INDEPENDENT AUDITORS To the Stockholders of Agrobios Corporativo, S.A. de C.V. We have audited the accompanying balance sheets of Agrobios Corporativo, S.A. de C.V. as of December 31, 1999 and 2000, and the related statements of operations, shareholders' equity and changes in financial position for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Mexico, which are substantially the same as those followed in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with generally accepted accounting principles in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with generally accepted accounting principles in Mexico but do not conform with generally accepted accounting principles in the United States. A description of these differences and a partial reconciliation as permitted by the regulations of the U.S. Securities and Exchange Commission of consolidated net income and stockholders' equity to generally accepted accounting principles in the United States are set forth in Notes 13 and 14. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Agrobios Corporativo, S.A. de C.V. at December 31, 1999 and 2000, and the results of its operations, the changes its shareholders' equity and the changes in its financial position for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in Mexico. As mentioned in Note 3 to the accompanying financial statements, effective January 1, 2000, the Company adopted the requirements of the new Mexican accounting Bulletin D-4, Accounting for Income Tax, Asset Tax and Employee Profit Sharing, issued by the Mexican Institute of Public Accountants. The new Bulletin D-4 requires the recognition of deferred taxes on all temporary differences in balance sheet accounts for financial and tax reporting purposes. Through December 31, 1999 deferred taxes were recognized only on temporary differences that were considered to be non-recurring and that had a known turnaround time. Mancera, S.C. Member of Ernst & Young International by s/Augustin Aguilar --------------------------------------- C.P.C. Augustin Aguilar Mexico, D.F. January 29, 2001 F-47
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EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1. English translation of Registrant's bylaws, as amended on April 26, 2001. 2.1. Indenture, dated as of October 17, 1997, among Dine, S.A. de C.V., as Issuer, Desc, S.A. de C.V., as Guarantor, and Bankers Trust Company, as Trustee, relating to Dine's 8 3/4% Guaranteed Notes due 2007 (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-9150 of Desc, S.A. de C.V.).

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