UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of April , 2004
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Commission File Number: 001-13196
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DESC, S.A. DE C.V.
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(Translation of registrant's name into English)
PASEO DE LOS TAMARINDOS 400-B, BOSQUES DE LAS LOMAS, 05120 MEXICO, D.F., MEXICO
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(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F | |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes |_| No |X|
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___________
The following is included in this report on Form 6-K:
Item
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1. Financial Statements of the Registrant for the years ended
December 31, 2003 and 2002, together with the independent
auditors' report
2. Consolidated Financial Statements of Cantiles de Mita, S.A.
de C.V. for the years ended December 31, 2003 and 2002,
together with the independent auditors' report
ITEM 1
Desc, S.A. de C.V.
Financial statements for the years
ended December 31, 2003 and
2002, and Independent Auditors'
Report Dated March 26, 2004
Desc, S.A. de C.V.
Independent Auditor's Report and Financial
Statements 2003 and 2002
Table of contents Page
Independent Auditors' Report 1
Balance Sheets 3
Statements of Loss 4
Statements of Changes in Stockholders' Equity 5
Statements of Changes in Financial Position 6
Notes to the Financial Statements 7
Independent Auditors' Report to the Board
of Directors and Stockholders of Desc, S.A.
de C.V.:
We have audited the accompanying balance sheets of Desc, S.A de C.V. (the
"Company") as of December 31, 2003 and 2002, and the related statements of loss,
changes in 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.
The financial statements of the chemical and food segments were audited by other
auditors whose reports 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 such other auditors. Those statements reflect total assets
constituting 42% of consolidated total assets as of December 31, 2003, and 2002,
and total revenues constituting 54% and 53%, respectively, of consolidated total
revenues for the years then ended. Additionally, the Company's investment in the
aforementioned entities as of December 31, 2003 and 2002 represents 39% and 34%,
respectively, of total investment in shares of subsidiaries and 89% and 93%,
respectively, of the equity in net income of subsidiaries.
We conducted our audits 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 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 and the reports of
the other auditors provide a reasonable basis for our opinion.
As mentioned in Notes 1b. and 10 to the accompanying financial statements, in
December 2003 the Company satisfactorily concluded negotiations to restructure a
significant portion of its short and long-term debt.
As mentioned in Note 3a. to the accompanying financial statements, as of
December 31, 2003 the Company and its subsidiaries early adopted the provisions
of new Bulletin C-15, "Impairment of the Value of Long-lived Assets and their
Disposal", which establishes that an impairment loss has occurred if the present
value of estimated net future cash flows of a cash generating unit is less than
the book value of long-lived assets, tangible or intangible. The effect in
thousands of pesos derived from the application of this principle was the
recognition of $29,675 of impairment in the value of the goodwill with a charge
to 2003 results. The effect in the subsidiaries generated a decrease in the
investment in shares of subsidiaries of $1,117,067 and a charge to the equity in
the net loss of subsidiaries for the same amount.
As discussed in Note 2, the accompanying financial statements have been prepared
in compliance with legal regulations that require presentation of the Company's
financial statements as a legal entity. Accordingly, the investment in shares of
subsidiaries is accounted for by use of the equity method. Consolidated
financial statements are presented separately, on which we issued an unqualified
opinion on March 26, 2004, and should be consulted for decision-making purposes.
In our opinion, based on our audits and the reports of the other auditors, such
financial statements present fairly, in all material respects, the financial
position of Desc, S.A. de C.V. as a legal entity, as of December 31, 2003 and
2002, and the results of its operations, changes in its stockholders' equity and
changes in its financial position for the years then ended in conformity with
accounting principles generally accepted in Mexico.
The accompanying financial statements have been translated into English for the
convenience of users.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member firm of Deloitte Touche Tohmatsu
/s/ Luis Javier Fernandez Barragan
C.P.C. Luis Javier Fernandez Barragan
March 26, 2004
2
Desc, S.A. de C.V.
Balance sheets
As of December 31, 2003 and 2002
Expressed in thousands of constant Mexican pesos
2003 2002
Assets
Current assets:
Cash and cash equivalents $ 286,453 $ 1,314,009
Accounts receivable from subsidiaries 6,756,643 4,951,442
Other accounts receivable 192,235 374,956
------------- -------------
Total current assets 7,235,331 6,640,407
Investment in shares of:
Subsidiaries 10,435,230 11,229,255
Associated companies 104,486 107,817
------------- -------------
10,539,716 11,337,072
Property, net 239,263 307,879
Deferred income taxes 32,617 --
Other assets, net 517,290 428,769
------------- -------------
Total $ 18,564,217 $ 18,714,127
============= =============
Liabilities and stockholders' equity
Current liabilities:
Bank loans $ 26,374 $ 1,806,572
Accounts payable and accrued liabilities 323,973 402,006
Accounts payable to subsidiaries 1,257,629 631,803
------------- -------------
Total current liabilities 1,607,976 2,840,381
Long-term debt 10,434,269 7,922,192
Deferred income taxes -- 33,918
Related parties - long-term 183,762 --
------------- -------------
Total liabilities 12,226,007 10,796,491
Stockholders' equity:
Capital stock 11,715,914 11,715,914
Paid-in surplus 1,170,390 1,170,390
Retained earnings 17,525,927 19,766,314
Reserve for repurchase of shares 996,847 996,847
Cumulative effect of initial recognition of
deferred income taxes (1,887,308) (1,887,308)
Cumulative effect of restatement (23,036,402) (23,690,416)
Adjustment of additional employee
retirement liability of subsidiaries (147,158) (154,105)
------------- -------------
Total stockholders' equity 6,338,210 7,917,636
------------- -------------
Total $ 18,564,217 $ 18,714,127
============= =============
The accompanying notes are part of these financial statements.
3
Desc, S.A. de C.V.
Statements of loss
For the years ended December 31, 2003 and 2002
Expressed in thousands of constant Mexican pesos
2003 2002
Revenues:
Dividends received $ 102,452 $ 286,113
Equity in net income (loss) of subsidiaries-
For continuing operations (net of
dividends received) (586,757) (508,901)
For discontinued operations 14,513 (451,224)
For change in accounting principle (1,117,067) --
------------- -------------
Equity in net losses of subsidiaries (1,586,859) (674,012)
Administrative expenses 107,512 65,376
Other (expenses) income (108,471) 56,328
Integral financial cost:
Interest income 412,061 366,319
Interest expense (905,404) (630,835)
UDIS variation (93,847) (120,648)
Exchange gain (loss), net (133,781) (293,352)
Monetary position gain 182,466 202,485
------------- -------------
(538,505) (476,031)
------------- -------------
Loss before provision for deferred
income taxes and change in
accounting principle (2,341,347) (1,159,091)
Provision for deferred income taxes (130,635) (74,546)
------------- -------------
Loss before change in accounting
principle (2,210,712) (1,084,545)
Change in accounting principle (29,675) --
------------- -------------
Net loss for the year $ (2,240,387) $ (1,084,545)
============= =============
The accompanying notes are part of these financial statements.
4
Desc, S.A. de C.V.
Statements of changes in stockholders' equity
For the years ended December 31, 2003 and 2002
Expressed in thousands of constant Mexican pesos
Capital stock
----------------------------------------------
Number of Paid-in Retained
shares Historical Restatement surplus earnings
Balances, January 1, 2002 1,369,079,376 $ 17,798 $ 11,698,116 $ 1,170,390 $ 21,279,795
Dividends declared -- -- -- -- (428,936)
Comprehensive income (loss) -- -- -- -- (1,084,545)
------------- ------------- -------------- ------------- -------------
Balances, December 31, 2002 1,369,079,376 17,798 11,698,116 1,170,390 19,766,314
Comprehensive income (loss) -- -- -- -- (2,240,387)
------------- ------------- -------------- ------------- -------------
Balances, December 31, 2003 1,369,079,376 $ 17,798 $ 11,698,116 $ 1,170,390 $ 17,525,927
============= ============= ============== ============= =============
** TABLE CONTINUED...**
Cumulative Adjustment
effect of additional
of initial employee
Reserve for recognition Cumulative retirement Total
repurchase of deferred effect of liability of Stockholders'
of shares income taxes restatement subsidiaries equity
Balances, January 1, 2002 $ 996,847 $ (1,887,308) $ (24,106,568) $ -- $ 9,169,070
Dividends declared -- -- -- -- (428,936)
Comprehensive income (loss) -- -- 416,152 (154,105) (822,498)
------------- ------------- -------------- ------------- -------------
Balances, December 31, 2002 996,847 (1,887,308) (23,690,416) (154,105) 7,917,636
Comprehensive income (loss) -- -- 654,014 6,947 (1,579,426)
------------- ------------- -------------- ------------- -------------
Balances, December 31, 2003 $ 996,847 $ (1,887,308) $ (23,036,402) $ (147,158) $ 6,338,210
============= ============= ============== ============= =============
** TABLE COMPLETE **
The accompanying notes are part of these financial statements.
5
Desc, S.A. de C.V.
Statements of changes in financial position
For the years ended December 31, 2003 and 2002
Expressed in thousands of constant Mexican pesos
2003 2002
Operating activities:
Loss before change in accounting principle $ (2,210,712) $ (1,084,545)
Add (deduct)- Items which do not require (generate)
resources-
Equity in net losses of subsidiaries 1,586,859 674,012
Depreciation and amortization 53,089 43,295
Goodwill write-off 99,236 --
Deferred income taxes (130,635) (74,546)
------------ ------------
(602,163) (441,784)
Changes in operating assets and liabilities-
Other accounts receivable 182,721 136,336
Accounts payable and accrued liabilities 128,282 (169,587)
Accounts receivable from subsidiaries, net (1,179,375) (2,154,230)
------------ ------------
(868,372) (2,187,482)
Change in accounting principle (29,675) --
------------ ------------
Net resources used in operating activities (1,500,210) (2,629,265)
------------ ------------
Financing activities:
Payments of bank loans and long-term debt (6,257,742) (1,551,986)
Proceeds from short-term bank loans and long-term debt 7,361,105 5,171,179
Increase in bank loans and long-term debt due to merger -- 786,952
Effect of the variance on constant pesos on short-term bank
loans and long-term debt (371,484) (303,389)
Related parties - long-term 124,482 --
Deferred income taxes 64,100 350,011
Dividends paid (206,315) (440,469)
Adjustment of additional employee retirement liability of
subsidiaries 6,947 (154,105)
------------ ------------
Net resources generated by financing activities 721,093 3,858,193
------------ ------------
Investing activities:
Net increase in stockholders' equity of subsidiaries (254,236) (2,896)
Dividends received 102,452 286,113
Retirements of properties, net 64,644 17,076
Increase in properties due to merger -- (146,380)
Other assets (161,299) (125,832)
Other assets due to merger -- (51,611)
------------ ------------
Net resources applied to investing activities (248,439) (23,530)
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,027,556) 1,205,398
Cash and cash equivalents:
Balance at the beginning of the year 1,314,009 108,611
------------ ------------
Balance at the end the year $ 286,453 $ 1,314,009
============ ============
The accompanying notes are part of these financial statements.
6
Desc, S.A. de C.V.
Notes to the financial statements
As of December 31, 2003 and 2002
Expressed in thousands of constant Mexican pesos
1. Principal activities and significant events
Activities- Desc, S.A. de C.V. ("DESC" or the "Company") is the controlling
stockholder of a group of companies whose principal activities are carried
out in the automotive, chemical, food and real estate industries. The
Company has no employees and therefore no labor obligations.
Significant events-
a. The economic slowdown experienced in the last few years had a
significant impact in the United States of America and Mexico, with
adverse consequences on the results of DESC, primarily in the
automotive and chemical sectors. For this reason, during 2003 and 2002
DESC decided to reviewing its investment portfolio and realigning its
operating structure to reflect market conditions. Therefore, during
2002 DESC decided to close the following non-strategic businesses:
spark plugs and electric parts from the automotive sector, the natural
pigments business in the chemicals sector, and in the food sector the
hog raising operation in the Bajio region and the shrimp farming
business, which was donated to the Instituto Tecnologico de Estudios
Superiores de Monterrey; it also began a downsizing program which
continued during 2003, during which period the group's work force was
reduced by 15.1%.
b. In December 2003 the Company satisfactorily concluded the agreement
with bank creditors to refinance syndicated loans and a significant
part of the Company's short-term debt. The total amount of the
restructured debt was approximately US$667,000 (US$445,700 and
$1,223,000 of long-term loans and US$112,000 of revolving credit and
letters of credit), which represents around 63% of the Company's
consolidated debt. The terms of the negotiation include maturity of
the debt after five years and a grace period of 30 months as of
January 2004 for payment of principal. The interest rates obtained for
the dollar debt are LIBOR rate plus a variable interest margin, while
the rate for the Mexican peso debt is TIIE (Interbank interest rate)
plus a variable interest margin (see Note 10).
c. Continuing with the programs mentioned in subsection a) above, the
following resolutions were adopted at the Stockholders' Ordinary
General and Special Meeting held on April 28, 2003:
i. Merge DESC with Industrias Resistol, S.A. de C.V., with DESC
surviving as the merged company. Such merger went into effect for
accounting and tax purposes as of September 29, 2003, DESC sold
basically all of the assets of the aforementioned subsidiary
engaged in the manufacture and sale of adhesives and
waterproofing materials as of September 30, 2003. As a result of
such asset sale, the Company generated an income of $31,897,
which is recorded in the statement of loss under the heading
"Other expenses".
ii. Merge DESC with Industrias Ruiz Galindo, S.A. de C.V., with DESC
surviving as the merged company. Such merger went into effect for
accounting and tax purposes as of May 1, 2003, for which reason
as of this date Industrias Ruiz Galindo, S.A. de C.V. ceased to
exist as a legal entity.
7
2. Basis of presentation
a. Financial statements as a legal entity - The accompanying financial
statements have been prepared in compliance with legal regulations
that require presentation of the Company's financial statements as a
legal entity. Accordingly, all investments in shares of subsidiaries
are valued by the equity method. Consolidated financial statements are
presented separately, on which the independent auditors issued an
unqualified opinion dated March 26, 2004. Such consolidated financial
statements should be consulted for decision-making purposes.
b. Investments in shares- Investments in shares have been recorded using
the equity method, based on the financial statements prepared using
the same accounting polices of the Company.
Equity in results and changes in net worth of the subsidiaries bought
and sold during the year are included in the financial statements from
or up to the transaction date and are restated in purchasing power of
the Mexican peso of December 31, 2003.
These financial statements should be read in conjunction with the
consolidated financial statements of Desc, S.A. de C.V. and
subsidiaries. A summary of selected consolidated captions is as
follows:
2003 2002
Total assets $ 26,734,990 $ 30,469,705
============ ============
Total liabilities $ 16,828,773 $ 18,644,222
============ ============
Total stockholders' equity $ 9,906,217 $ 11,825,483
============ ============
Net sales $ 21,755,055 $ 20,360,380
============ ============
Operating income $ 842,464 $ 1,081,300
============ ============
c. Conversion of financial statements of subsidiaries- The financial
statements of foreign subsidiaries, whose operation is not integrated
into that of the Mexican companies (foreign entity), are restated
using the national inflation index of the respective country and are
converted to Mexican pesos at the exchange rate in effect at the end
of the year. The financial statements in local currency of foreign
companies whose operations are integrated with those of the Mexican
companies are converted at the exchange rates in effect at the
transaction closing or origin, depending on whether they are monetary
or nonmonetary items, and are restated by using the Mexican National
Consumer Price Index (NCPI). The conversion effects of the foreign
entity are recorded in stockholders' equity in the "Cumulative
restatement effect" account. Additionally, the conversion effects of
the integrated transactions are recorded in results of the year in net
comprehensive financing cost, within the "Monetary position gain"
account. Such effects are not material.
d. Comprehensive income (loss)- Comprehensive income (loss) is comprised
of the net income for the period plus (less) any gains or losses that
under specific accounting regulations are recorded directly in
stockholders' equity, such as the gain or loss from holding
nonmonetary assets. In 2003 and 2002, other comprehensive income is
comprised of the gain or loss from holding nonmonetary assets, the
effect of translation of foreign subsidiaries, and the adjustment of
additional employee retirement liability of subsidiaries.
8
e. Reclassifications- Certain amounts in the financial statements at
December 31, 2002 have been reclassified in order to conform to the
presentation of the financial statements at December 31, 2003.
3. Significant accounting policies
The accounting policies followed by the Company are in conformity with
generally accepted accounting principles 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 for inclusion therein.
Although 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 Company
are as follows:
a. Changes in accounting policies- The Company and its subsidiaries early
adopted the provisions of new Bulletin C-15, "Impairment in the value
of long-lived assets and their disposal" ("C-15"). C-15 establishes,
among other issues, that in the presence of indicators of impairment
of a long-lived asset in use, whether tangible or intangible,
including goodwill, entities must determine the possible loss from
impairment, unless they have evidence clearly demonstrating that such
indicators are of a temporary nature. To calculate the loss from
impairment requires the determination of the recovery value, now
defined as the higher of the net selling price of a cash generating
unit and its use value, which is the present value of future net cash
flows, at an appropriate discount rate. In the provisions prior to
C-15, net future cash flows referenced to the purchasing power in
effect at the evaluation date were used, without requiring the
discounting of such flows. The effect derived from the application of
this new principle was the recognition of $29,675 of impairment in the
value of the goodwill with a charge to 2003 results. The effect in the
subsidiaries generated a decrease in the investment in shares of
subsidiaries of $1,117,067 and a charge to the equity in the net loss
of subsidiaries for the same amount
Bulletin C-8, "Intangible Assets" (C-8), went into effect in 2003.
This bulletin establishes that project development costs should be
capitalized if they fulfill the criteria established for recognition
as assets. Any preoperating costs incurred after the effective date of
this Bulletin should be recorded as an expense, unless they meet
certain criteria. The unamortized balance of capitalized preoperating
costs under the former Bulletin C-8 will continue to be amortized.
During the year ended December 31, 2003, there was no adverse effect
derived from the application of new Bulletin C-8.
Bulletin C-9, "Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments" (C-9), establishes additional guidelines
clarifying the accounting for liabilities, provisions and contingent
assets and liabilities, as well as new standards for the use of
present value techniques to measure liabilities and accounting for the
early settlement of obligations. During the year 2003, there was no
effect derived from the application of new Bulletin C-9.
b. Recognition of the effects of inflation- The Company restates all of
its financial statements in terms of the purchasing power of the
Mexican peso as of the end of the latest period, thereby
comprehensively recognizing the effects of inflation. The prior year
amounts presented herein differ from those originally reported in
terms of Mexican pesos of the respective year. Consequently, all
financial statement amounts are comparable, both for the current and
the prior year, because all are stated in terms of Mexican pesos of
the same purchasing power.
9
c. Temporary investments- Temporary investments are stated at the lower
of acquisition cost plus accrued yields, or at market value, yields
are recorded in the statement of loss.
d. Property - This item is recorded at acquisition cost and is restated
by applying the NCPI factors. Depreciation is calculated using the
straight-line method applied to month-end balances based on the
average restated value of the year deducted from salvage value of 5%
of its restated value, and their estimated useful lives.
e. Financial instruments - Financial assets and liabilities resulting
from any type of financial instrument, except for investments in
financial instruments held to maturity, are presented in the balance
sheet at fair value. The effects of the valuation of a financial asset
or liability are recognized in results of operations of the respective
period. Investments in financial instruments held to maturity are
valued at acquisition cost. The costs and yields of financial
instruments are recognized in results of the period in which they
occur.
f. Derivative financial instruments - These instruments are traded only
with authorized institutions and trading limits have been established
for each institution. The Company does not carry out transactions with
derivative financial instruments for the purpose of speculation.
The derivative financial instruments currently used by the Company are
primarily hedge contracts to reduce its exposure to exchange rate
fluctuations. Premiums paid are amortized over the term of the
derivative financial instrument using the unpaid balance of the
liability being hedged.
Derivative financial instruments identified as hedges are valued by
applying the same valuation criteria used for the assets or
liabilities hedged, and the effects of their valuation are recognized
in results of operations, net of costs, expenses, or revenue from the
assets or liabilities whose risks are being hedged. The financial
assets or liabilities generated by these instruments are presented in
the balance sheet as a reduction of the liabilities or assets whose
risks are being hedged
g. Other assets- This line item is represented mainly by (i) patents
acquired in 1999, for their exploitation in certain countries, which
are being amortized over a 10-year period; (ii) debt placement
expenses that are amortized over the life of the corresponding debt;
(iii) goodwill which up to 2003, was amortized over a three-year
period, the terms over which the benefits from the investment were
realized.
h. Impairment of long-lived assets in use- The Company reviews the book
value of long-lived assets in use tangible and intangible, in the
presence of any indicator of impairment that might indicate that such
book value might not be recoverable, considering the higher of the
present value of future net cash flows or the net selling price, in
the event of their eventual disposal. The impairment is recorded
considering the amount by which the book value exceeds the higher of
the aforementioned values.
i. Provisions - Provisions are recognized for obligations that result
from a past event, that are probable to result in the use of economic
resources and that can be reasonably estimated. Such provisions are
recorded at net present values when the effect of the discount is
significant.
j. Income and asset taxes - Income tax (ISR) is recorded in results of
the year in which it is incurred. Deferred income tax assets and
liabilities are recognized for temporary differences resulting from
comparing the book and tax values of assets and liabilities, plus any
future benefits from tax loss carryforwards. Deferred ISR assets are
reduced by any benefits that, in the opinion of management, will
probably not be realized.
10
The asset tax paid that is expected to be recoverable is recorded as
an advance payment of ISR and is presented on the balance sheet with
deferred ISR.
k. Foreign currency balances and transactions - Foreign currency
transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable
exchange rate in effect at the balance sheet date. Exchange
fluctuations are recorded as a component of net comprehensive
financing cost (income) in the statements of income.
l. Restatement of stockholders' equity- This item consists of monetary
position result accumulated through the first restatement of the
financial statements and the gain (loss) from holding non-monetary
assets, because price levels increased above (below) inflation.
m. Integral financial cost- This represents the net effect of interest
earned and incurred, exchange gains and losses and the monetary
position gain, which is the result of maintaining monetary assets and
liabilities whose real purchasing power is modified by the effects of
inflation.
4. Cash and cash equivalents
2003 2002
Cash $ 19,133 $ 26,746
Restricted cash 16,400 --
Temporary investments 250,920 1,287,263
------------ ------------
$ 286,453 $ 1,314,009
============ ============
As part of the sale of the assets of Industrias Resistol, S.A. de C.V., the
Company received $53,539 in cash with formal restrictions as to its
availability, of which $16,400 represents short-term restricted cash, and
$37,139 on a long-term basis, recorded under the heading "Other assets".
5. Other accounts receivable
2003 2002
Recoverable taxes $ 74,273 $ 214,802
Other debtors 117,962 160,154
------------ ------------
$ 192,235 $ 374,956
============ ============
11
6. Investment in shares
2003 2002
---------------------------- ----------------------------
% of % of
Participacion Total Participacion Total
Principal subsidiaries:
Automotive segment-
Desc Automotriz, S.A. de C.V. 99.9% $ 3,177,132 99.9% $ 3,490,328
Chemical segment-
Industrias Negromex, S.A. de C.V. 99.9% 711,174 99.9% 611,302
Paratec, S.A. de C.V. -- -- 99.9% 141,519
Industrias Resistol, S.A. de C.V. -- -- 99.9% (12,481)
Quimir, S.A. de C.V. 99.9% 87,983 99.9% 53,587
Girsa Concentradora, S. A. de C.V. 99.9% 780,076 99.9% 759,606
Resirene, S.A. de C.V. 99.9% 191,242 99.9% 201,456
Rexcel, S.A. de C.V. 99.9% 105,326 99.9% 123,775
Dynasol Elastomeros, S.A. 50.1% 453,339 50.1% 447,989
Food segment-
Agroken, S.A. de C.V. 99.9% 543,613 99.9% 556,717
Corfuerte, S.A. de C.V. ("CORFUERTE") 96.1% 598,251 77.6% 368,091
Authentic Acquisition Corporation ("AAC") 99.9% 262,803 81.3% 1,013,300
Real estate segment-
Cantiles de Mita, S.A. de C.V. 96% 2,091,152 96% 1,321,481
Canada de Santa Fe, S.A. de C.V. 73% 889,975 73% 846,078
Promociones Bosques, S.A. de C.V. 100% 410,548 100% 429,312
Inmobiliaria Dine, S.A. de C.V. 100% 88,234 100% 64,739
Club Ecuestre Chiluca, S.A. de C.V. -- -- 78% 438,719
Other 44,382 373,737
------------ ------------
$ 10,435,230 $ 11,229,255
============ ============
To simplify Company's administrative structure, DESC was merged with DINE
on April 25, 2002, with DESC surviving as the merged company. Additionally
Club Ecuestre Chiluca, S.A. de C.V. and Paratec, S.A. de C.V. were merged
into Cantiles de Mita, S.A. de C.V. and Industrias Negromex, S.A. de C.V.
in June and September 2003, respectively.
Sale of certain assets of Industrias Resistol, S.A. de C.V. - As mentioned
in Note 1c, on September 29, 2003 the merger of Industrias Resistol, S.A.
de C.V. into DESC went into effect for accounting and tax purposes. On
September 30, 2003 DESC sold basically all the assets of such subsidiary
engaged in the manufacture and sale of adhesives and mortar proofing
materials suspending its operations in such businesses. Consequently, the
financial statements include the equity in the loss of the subsidiary
Industrias Resistol, S.A. de C.V. for the period from January 1 through
September 30, 2003 and as of December 31, 2002, of $(110,745) and
$(21,509), respectively.
Purchase of minority interests of CORFUERTE and AAC - As mentioned in Note
16, on November 11, 2003 the minority shareholders of the subsidiaries
CORFUERTE and AAC formally notified their decision to exercise the sale
option of their shares to DESC, which was formalized on January 29, 2004.
Consequently, as of November 11, 2003 the shareholding of DESC in such
subsidiaries increased from 77.6% to 96.1% and from 81.3% to 99.9%,
respectively. The amount paid was US$14.3 million ($156,194) and is
recorded as a liability in "Other payables and accrued liabilities". The
difference between the book value of the shares acquired and the amount
paid was recorded through adjustments to the investment in shares of those
subsidiaries.
12
7. Property
Annual
2003 2002 Depreciation %
Real estate property $ 191,545 $ 191,545 3.33 to 10.00%
Less- Accumulated depreciation (59,859) (50,079)
------------- ------------
131,686 141,466
Land 20,033 20,033
Projects-in-progress for sale 87,544 146,380
------------- ------------
$ 239,263 $ 307,879
============= ============
8. Other assets
Annual
2003 2002 Amortization %
UDI placement expenses, net $ 7,653 $ 10,613 14%
Secured bond placement expenses, net 7,355 11,817 28%
Syndicated loan fee, net 124,866 33,143 20%
Patents, net 186,926 172,185 10%
Goodwill, net -- 39,793 33%
Works of art 60,405 56,556
Trust fund of shares 92,206 103,894
Restricted cash long-term 37,139 --
Other assets not subject to amortization 740 768
------------- -------------
$ 517,290 $ 28,769
============= ============
9. Accounts payable and accrued liabilities
2003 2002
Accounts payable $ 51,739 $ 50,013
Account payable to minority investors 156,194 --
Interest payable 89,102 91,537
Dividends payable 2,013 208,328
Other accounts payable 24,925 52,128
------------- ------------
$ 323,973 $ 402,006
============= ============
a. On January 7, 2003, the Company's subsidiary Fenoquimia, S.A. de C.V.
was notified of a new ancillary claim filed by Sales Nacionales, S.A.
de C.V., in which the latter quantifies the aforementioned damages and
monetary losses in the amount of $159,804. Such claim was answered by
Fenoquimia, S.A. de C.V.; however, on December 11, 2003, the Company
reached an agreement with its counterparty to conclude this dispute,
with a one-time payment of $54,480 in cash and real estate assets, for
which there was a provision recorded in prior years.
13
b. Certain subsidiaries are engaged in lawsuits as plaintiffs and
defendants in the regular course of operations. These lawsuits always
involve uncertainty, and some of them may result in adverse judgments
for the companies. While it is impossible to determine the amount
involved in pending lawsuits, management believes that any resulting
liability would not materially affect the financial position or
results of operations of the companies.
10. Bank loans and long-term debt
2003 2002
Maturity Interest rate Amount Maturity Interest rate Amount
Syndicated loan-
US$445.7 million 2006 to 2008 LIBOR + 1.625
to LIBOR +4 $ 4,992,311 -- -- $ --
$1,223 million 2006 to 2008 TIIE + 1.125
to TIIE + 4 1,222,553 -- -- --
US$100 million 2006 LIBOR + 1.375
to LIBOR +3.5 1,119,980 -- -- --
US$97.17 million -- -- -- 2005 LIBOR + 1.375 1,046,779
US$177.83 million -- -- -- 2007 LIBOR + 1.625 1,915,699
$1,300 million -- -- -- 2007 TIIE + 0.9 1,351,610
Medium-term promissory notes-
680.6 million UDIS 2006 and 2007 9% and 8.20% 2,281,268 2006 and 2007 9% and 8.20% 2,282,519
Loans-
US$15 million -- -- -- 2004 3.85% 161,590
US$35 million -- -- -- 2004 3.75% 377,043
Secured bonds
US$73 million 2007 8.75% 818,157 2007 8.75% 786,952
------------ ------------
$ 10,434,269 $ 7,922,192
============ ============
As of December 31, 2003 and 2002, the LIBOR rate was 1.46% and 1.38%,
respectively, and TIIE was 7.90% and 8.45%, respectively.
14
Long-term debt maturities are as follows:
2006 $ 4,277,650
2007 4,084,997
2008 2,071,622
------------
$ 10,434,269
============
Short-term bank loans are denominated as of December 31, 2003 and 2002 are
denominated in US dollars and amount $26,374, and $1,806,572, respectively.
Debt refinancing- As mentioned in Note 1, during December 2003, an
agreement was satisfactorily reached with the bank creditors to refinance
the Company's syndicated loans and most of its short-term debt. The most
important terms of the financial restructuring signed on December 23, 2003
are indicated below:
a. Syndicated loan of US$445.7 million at the LIBOR interest rate plus a
variable margin depending on the index obtained in the consolidated
debt to operating profit financial ratio, less depreciation and
amortization, which fluctuates between 1.625 and 4.000, with
maturities between 2006 and 2008. As of December 31, 2003, the
variable margin is 3.5. The interest will be payable on a monthly or
quarterly basis.
b. Syndicated loan of $1,223 million, at an interest rate equal to TIIE
plus a variable margin depending on the index obtained in the
consolidated debt to operating profit financial ratio, less
depreciation and amortizations, which fluctuates between 1.125 and
4.000, with maturities from 2006 to 2008, respectively. As of December
31, 2003 the variable margin determined is 3.5. The interest will be
payable on a monthly basis.
c. Credit of US$112 million, divided into two tranches, (i) US$100
million revolving credit, at the LIBOR interest at rate plus a
variable margin depending on the index obtained in the consolidated
debt to operating profit financial ratio, less depreciation and
amortization, which fluctuates between 1.375 and 3.50, and (ii) US$12
million credit letters, both with maturity in 2006. As of December 31,
2003 the Company has applied dispositions against the tranche of
US$100 million, and the variable interest margin determined is 3.0.
The interest will be payable on a monthly or quarterly basis.
As part of the conditions negotiated, the operating subsidiaries and
certain holding subsidiaries were considered jointly and severally liable
and guarantors for the debt, and a package of concrete guarantees was
created consisting of fixed assets, accounts receivable of the real estate
sector and stock in certain subsidiaries.
The financing received establishes certain restrictions for the Company,
with which the Company has complied. The most important restrictions are:
- Maintain the interest coverage ratio in excess of 2.25. At the close
of 2003 the ratio is 2.91.
- Maintain the ratio of total debt of subsidiaries to consolidated debt
below 0.20. At the close of 2003 the ratio is 0.11.
- Maintain the ratio of consolidated debt to operating profit, plus
depreciation to amortization, at below 5.35 based on nominal pesos and
U.S. dollars. At the close of 2003 the ratio is 4.96.
- Maintain the ratio of consolidated debt to total capitalization below
0.55. At the close of 2003 the ratio is 0.53.
- Certain restrictions on the establishment of new liens.
- Restriction on the sale and investments in assets, as well as lease
transactions.
- Restriction on the sale of assets, except when performed at market
value and the proceeds obtained are used to pay the debt.
- Certain restrictions applicable to dividend declarations.
15
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 UDI value as of
December 31, 2003 was 3.352003, which is equal to $1,086,049 and
$1,195,219, respectively. The issues bear quarterly interest of 9% and
8.20%, respectively, and mature in 2006 and 2007, respectively. There are
no restrictions on the promissory notes.
Issuance of secured bonds- On October 9, 1997, DINE issued long-term bonds
guaranteed by DESC in international markets at 8.75% annual interest, with
principal and interest due and payable on October 9, 2007. As a result of
the merger between DESC and DINE, DESC acquired the obligations related to
the issue of such bonds.
At December 31, 2003 the book value of the bonds issued by DINE is US$73
million with a fair value of US$70.8 million.
11. Related parties
Club Ecuestre Chiluca, S.A. de C.V., a 77.26% subsidiary of the Company,
sold all of its territorial reserves for US$79.4 million. Prior to the sale
of such reserves, the Company acquired the remaining 22.74% interest from
minority shareholders (which in turn are the Company's main shareholders)
at their commercial value, which will be paid on the same terms and
conditions as the realization of the account receivable; i.e., four annual
payments from December 2004 to 2007. Therefore, such balance is presented
in the balance sheets as a long-term liability. The difference between the
purchase price of the minority interest and the book value of the shares
acquired is included in other expenses for the year ended December 31, 2003
as "Goodwill write-off from Club Ecuestre Chiluca, S.A. de C.V."
12. Stockholders' equity
During a Stockholders' Ordinary and Extraordinary General Meeting held on
April 28, 2003, the stockholders approved the following:
1. The merger of DESC and Industrias Resistol, S.A. de C.V., with DESC as
the surviving company. Such merger became effective for accounting and
tax purposes on September 29, 2003.
2. The merger of DESC and Industrias Ruiz Galindo, S.A. de C.V., with
DESC as the surviving company. Such merger became effective for
accounting and tax purposes on May 1, 2003; therefore, as of such date
Industrias Ruiz Galindo, S.A. de C.V. ceased to exist as a legal
entity
During a Stockholders' Ordinary and Extraordinary General Meeting held on
April 25, 2002, the stockholders approved the following:
1. Payment of cash dividends of 29 Mexican cents for each of the
outstanding shares, equivalent to $397,033, whose restated amount is
$428,936, payable in four quarterly payments in July and October 2002
and January and April 2003.
2. Merger of DESC and DINE, with DESC as the surviving company. Such
merger became effective for accounting and tax purposes on May 1,
2002; therefore, as of such date DINE ceased to exist as a legal
entity.
16
As of December 31, 2001, 2002, and 2003 capital stock is represented by:
Number of Historical
Shares Amount
Fixed portion-
Nominative Series "A" shares (without
withdrawal rights and which must
represent at least 51% of voting stock) 587,479,900 $ 7,637
Variable portion-
Nominative Series "B" shares (with
withdrawal rights and which may not
represent more than 49% of voting stock) 506,257,866 6,581
Series "C" shares (with voting
restrictions) 275,341,610 3,580
------------- ------------
1,369,079,376 $ 17,798
============= ============
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.
This shareholding structure was modified on March 8, 2004, as indicated in
Note 18.
Stockholders' equity, except restated paid-in capital and tax retained
earnings, will be subject to a tax at the rate in effect when the dividend
is distributed. In 2003, the rate was 34% and will be reduced by one
percentage point each year until reaching 32% in 2005. Any tax paid on such
distribution, may be credited against the income tax payable of the year in
which the tax on the dividend is paid and the two fiscal years following
such payment.
The annual net income of the Company is subject to the legal requirement
that 5% thereof be transferred to a legal reserve each year, until the
reserve equals 20% of capital stock. This reserve may not be distributed to
stockholders during the existence of the Company, except in the form of a
stock dividend.
During the year ended 2002 the Company distributed restated retained
earnings of $428,936, as dividends, reducing total equity to an amount
lower than restated capital stock, which for accounting purposes represents
a capital reduction.
The balances of the stockholders' equity tax accounts as of December 31
are:
2003 2002
Contributed capital account $ 9,105,963 $ 9,105,963
Net tax income account 4,190,160 4,394,401
------------ ------------
Total $ 13,296,123 $ 13,500,364
============ ============
13. Transactions and balances in foreign currency
The Company valued its foreign currency assets and liabilities, represented
mainly by U.S. dollars, at the exchange rates effective at December 31,
2003 and 2002 of 11.1998 and 10.3613 Mexican pesos per U.S. dollar,
respectively, as the Company expects to use foreign currency assets to
settle foreign currency liabilities.
17
As of December 31, 2002 and 2001, monetary assets and liabilities
denominated in U.S. dollars were as follows:
2003 2002
Current monetary assets 15,646 110,554
Monetary liabilities-
Current 2,355 170,197
Long-term 635,209 398,051
------------ ------------
Net liability position in foreign
currency 621,918 457,694
============ ============
During the years ended December 31, 2003 and 2002, the Company paid
interest in foreign currency amounting to US$42 million and US$19.1 million
respectively, and received interest by US$0.27 and US$0.8 million,
respectively.
As of March 26, 2004, the unaudited foreign exchange position was similar
to that at yearend, and the exchange rate was 11.0130 Mexican pesos per
U.S. dollar.
14. Transactions and balances with subsidiaries
2003 2002
Receivable-
Automotive segment-
Ejes Tractivos, S.A. de C.V. 55,415 51,708
Hayes Wheels Acero, S.A. de C.V. 292,025 --
Hayes Wheels Aluminio, S.A. de C.V. 349,730 --
Moresa, S.A. de C.V. 24,696 --
Morestana, S.A. de C.V. 29,181 31,128
Pinturas, Estampados y Montaje, S.A.
de C.V. 15,507 59,217
Pistones Moresa, S.A. de C.V. 241,879 255,850
Transmisiones y Equipos Mecanicos, S.A.
de C.V. 296,071 269,353
Chemical segment-
Bioquimex Natural, S.A. de C.V. 28,501 116,233
Dynasol Elastomeros, S.A. de C.V. 582,578 454,359
Fenoquimia, S.A. de C.V. 350,401 288,608
Forestaciones Operativas de Mexico, S.A.
de C.V. 33,854 22,283
Girsa Corporativo, S.A. de C.V. 12,351 75,893
H2Orizontes, S.A. de C.V. 32,051 13,666
Industrias Negromex, S.A. de C.V. 404,137 47,181
Industrias Resistol, S.A. de C.V. -- 69,678
Nhumo, S.A. de C.V. 100,771 58,724
Paratec, S.A. de C.V. 262 64,192
Paratec Elastomers, LLC 19,881 19,401
Plastiglas, S.A. de C.V. 22,928 18,138
Quimir, S.A. de C.V. 28,188 53,474
Resirene, S.A. de C.V. 187,470 135,581
Rexcel, S.A. de C.V. 220,087 181,593
Food segment-
Authentic Aquisition Corporation 245,595 --
Corfuerte, S.A. de C.V. 938,313 819,236
Grupo Porcicola Mexicano, S.A. de C.V. 694,028 684,168
Nutrimientos GPM, S.A. de C.V. -- 9,439
18
2003 2002
Real estate segment-
Bosques de Chiluca, S.A. de C.V. 46,449 30,519
Cantiles de Mita, S.A. de C.V. 862,801 813,873
Canada de Santa Fe, S.A. de C.V. -- 35,142
Club de Golf Punta Mita, S.A. de C.V. 26,664 24,531
Club Ecuestre Chiluca, S.A. de C.V. -- 93,205
Corporativo Dine, S.A. de C.V. 198,680 100,341
Holding Dicomex, S.A. de C.V. 36,203 16,680
Inmobiliaria Dine, S.A. de C.V. 21,523 6,883
Promotora Inmobiliaria Hidalguense, S.A.
de C.V. -- 2,305
Resort Club Punta Mita, S.A. de C.V. -- 27,639
Desc Corporativo, S.A. de C.V. 219,137 --
Other 139,286 1,221
------------ ------------
$ 6,756,643 $ 4,951,442
============ ============
Payable-
Automotive segment-
Desc Automotriz, S.A. de C.V. $ 801,485 $ 237,891
Spicer, S.A. de C.V. -- 310,890
Chemical segment-
CID Centro de Investigacion y Desarrollo,
S. A. de C. V. 374,983 6,814
Girsa Concentradora, S.A. de C.V. 21,626 --
Tecno-Industria, R. F., S. A. de C. V. -- 12,474
Real estate segment-
Bosques de las Lomas, S.A. de C.V. -- 23,057
Canada de Santa Fe, S.A. de C.V. 6,543 --
Inmobiliaria Thiers, S.A. de C.V. 7,564 --
Promociones Bosques, S.A. de C.V. 15,221 31,837
Aeropycsa, S.A. de C.V. 20,410 --
Other 9,797 8,840
------------ ------------
$ 1,257,629 $ 631,803
============ ============
Transactions with subsidiaries derived from the following:
2003 2002
Administrative expenses $ 4,984 $ 5,288
============ ============
Interest income $ 392,131 $ 352,833
============ ============
Interest expense $ 54,243 $ 69,941
============ ============
15. Income and asset taxes
The Company is subject to income taxes ("ISR") and tax on assets ("IMPAC").
ISR is computed by taking into consideration the taxable and deductible
effects of inflation, such as depreciation calculated on restated constant
prices, which permit the deduction of current costs, and taxable income is
increased or reduced on certain monetary assets and liabilities through the
annual adjustment for inflation, which is similar to the monetary position
result. ISR is calculated in terms of currency when the transactions
occurred and not in terms of the currency at yearend. Up to 2002, the
income tax rate was 35%, with the obligation to pay this tax each year at
the 30% rate, with the remaining 5% payable when income is distributed.
19
The tax rate was 35% in 2002 and 34% in 2003 and reduces by one percentage
point each year until reaching 32% in 2005. The deduction for employee
statutory profit sharing ("PTU") and the obligation to withhold taxes on
dividends paid to individuals or foreign residents were also eliminated.
IMPAC is calculated by applying 1.8% to the Company's asset position, as
defined in the law, and is payable only to the extent that it exceeds ISR
payable for the same period. If in any year IMPAC exceeds the ISR payable,
the IMPAC payment for such excess may be reduced by the amount by which ISR
exceeded IMPAC in the three preceding years and any required payment of
IMPAC can be credited against the excess of ISR over IMPAC during the next
10 years
DESC is subject to ISR and IMPAC with its subsidiaries on a consolidated
basis in the proportion in which the Company holds the voting stock of its
subsidiaries at the balance sheet date. As of January 1, 2002, the
proportion is calculated based on the average daily equity percentage that
DESC holds of its subsidiaries during the year. The tax results of the
subsidiaries are consolidated at 60% of such proportion. Estimated payments
of ISR and IMPAC of both DESC and its subsidiaries are made as if the
Company did not file a consolidated tax return.
Tax loss carryforwards- As of December 31, 2003, the Company has tax loss
carryforwards, which will be indexed for inflation through the year
applied, in the following restated amounts:
Maturity Amount
2010 $ 1,110,496
2011 100,359
2012 576,857
------------
$ 1,787,712
============
On December 12, 2003, the Company won the lawsuit involving the deduction
of the loss from the sale of shares obtained in 2000, as an operating tax
loss; consequently, as of that date such loss is presented within tax loss
carryforwards.
Deferred income taxes- The tax effects of the temporary differences that
generated deferred tax liabilities (assets) are as follows:
2003 2002
Property $ (29,401) $ (32,285)
Reserves and provisions (21,996) (101,778)
Tax loss carryforwards (572,067) (468,587)
Tax losses applied 592,141 609,190
Other (1,294) 27,378
------------ ------------
$ (32,617) $ 33,918
============ ============
16. Financial instruments
The Company has contracted exchange rate forwards and calls on U.S. dollar
debts, fixing the exchange rate to hedge against exchange losses on U.S.
dollar loans. The exchange result of the forward or call is recorded in the
integral financing result, by offsetting the exchange result from the
liability hedged, while the asset generated is deducted from the hedged
liability. As of December 31, 2003 the Company has four contracts to buy
and sell U.S. dollars for a total amount of US$2.1 million maturing during
2004.
The Company also has interest rate swaps to manage the interest rate risk
on its variable interest debt. The Company has entered into interest rate
swaps in which it pays amounts calculated based on fixed interest rates and
receives amounts calculated based on variable interest rates. The
difference between such amounts is recorded in the net integral financing
cost, offsetting the effect of the variable interest rate on the hedged
loans. The asset generated in the swap is deducted from the payable
interest hedged.
20
The market value of the derivative contracts mentioned above is estimated
based on quoted market prices to terminate the contracts at the reporting
date. As of December 31, 2003 the market value of the financial instruments
is $47,405, and the net loss recorded during the year for the forwards,
calls and swaps was $124,928.
Sales options in the food sector- With regard to the 1998 acquisition of
CORFUERTE and AAC, companies in the food sector, the Company executed
contracts known as "puts" with its minority shareholders so that at a given
date and amount, DESC would undertake to acquire the shareholding packages
of such minority shareholders.
On November 11, 2003, the minority shareholders of CORFUERTE and AAC
formally notified their decision to exercise their put options to DESC,
which was formalized on January 29, 2004. Accordingly, as of the date, the
shareholding percentage of DESC in such subsidiaries increased from 77.6%
to 96.1% and from 81.3% to 99.9%, respectively. The amount paid was US$14.3
million ($156,194) and is recorded in the balance sheets as a liability
under the heading of "Other payables and accrued liabilities."
17. Other (expense) income
2003 2002
Gain on sale of assets of Industrias
Resistol, S.A. de C.V. $ 31,897 $ --
Goodwill write-off from Club Ecuestre
Chiluca, S.A. de C.V. (59,280) --
Goodwill write-off from Industrias Ruiz
Galindo, S.A. de C.V. (39,956) --
Preoperating expenses and patent
amortization -- (26,155)
Loss on sale of shares (8,015) (12,837)
Royalties 10,769 9,600
Gain (loss) on sale of property (43,102) 4,015
Trust fund of share restatement -- 31,751
Analysis and adjustment of taxes (17,048) 45,261
Other, net 16,264 4,693
------------ ------------
$ (108,471) $ 56,328
============ ============
18. Subsequent events
Resolutions adopted at stockholders' meetings- At a Stockholders' Special
Meeting and a Stockholders' Ordinary and Extraordinary Meeting held on
March 8, 2004, the following resolutions were adopted:
a. The mandatory conversion of the totality of the Series "C" shares into
Series "B" shares, and the cancellation of the inscription of the
Series "C" shares in the National Securities Registry. This agreement
went into effect on March 16, 2004. As of that date, the American
Depositary Shares (ADS), which are registered with the Securities and
Exchange Commission, and are traded in the New York Stock Exchange,
Inc., will represent 20 Series "B" shares.
b. The voluntary conversion of the Series "A" shares into Series "B"
shares and the voluntary conversion of Series "B" shares into Series
"A" shares, by those shareholders who so request. The Series "A"
shares have not been and will not be registered under the 1933
Securities Act, or under any other applicable law in jurisdictions
other than Mexico. Consequently, the voluntary conversion will be
offered only in Mexico and the US shareholders of DESC will not be
able to participate.
c. The amendments to the corporate bylaws of DESC, which include the
elimination of the restrictions on foreigners holding Series "B"
shares.
d. Proposal to perform a capital stock increase in the amount of $2,738
million (US$248 million), through the issuance of 912,719,584 new
ordinary shares at a subscription price of three pesos per share.
21
With regard to the proposed capital increase, DESC entered into a Share
Subscription Collaboration Agreement with Inversora Bursatil, S.A. de C.V.
Casa de Bolsa, Grupo Financiero Inbursa ("Inbursa"). Such agreement
establishes that, if the shareholders do not exercise their entire right of
first refusal regarding the shares subject to the increase, DESC will be
obligated to offer, and Inbursa will be obligated to subscribe, subject to
certain conditions, for itself or on account of third parties, up to the
equivalent of $2,000 million, in unsubscribed shares at the same price of
three pesos per share. The rights of first refusal to such subscription
will be offered only in Mexico.
Close of operations of Fenoquimia, S.A. de C.V. - On February 17, 2004, the
Company decided to begin closing down the operation of Fenoquimia, S. A. de
C. V., which is engaged in the production and sale of phenol.
The investment in shares of the aforementioned subsidiary as of December 31
2003 and 2002 amounts $(282,527) and $(246,157), respectively, and the
equity in the net loss $(72,720) and $(86,564), respectively.
Joint investment with Hayes Lemmerz, Int. - On January 15, 2004 Desc
Automotriz, S.A. de C.V. concluded its joint investment with Hayes Lemmerz,
Int. ("HLI"). To do this, the assets of the aluminum wheel rim plant were
sold to HLI and 40% of the shares owned by HLI, were acquired for US$1.00,
so that now Desc Automotriz, S.A. de C.V. owns 100% of the shares of the
Company that manufactures steel wheel rims. In 2004 the dissolution of the
joint investment will be recorded as an item of stockholders' equity.
19. New accounting principles
In May 2003, the IMCP issued Bulletin C-12, "Financial Instruments of a
Debt or Equity Nature or a Combination of Both" (C-12), whose application
is mandatory for financial statements of periods beginning on or after
January 1, 2004, although early adoption is encouraged. C-12 is the
compilation of the standards issued by the IMCP with respect to the issue
of debt or equity financial instruments, or a combination of both, and
includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between
liabilities and stockholders' equity and establishes the rules for
classifying and valuing the components of debt and equity of combined
financial instruments in the initial recognition. Subsequent recognition
and valuation of liabilities and stockholders' equity of the financial
instruments is subject to the standards issued previously in the applicable
bulletins. The Company believes that the effects of adopting this new
accounting principle will not have significant effects on its financial
position and results of operations.
* * * * * *
22
ITEM 2
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Consolidated Financial Statements
for the Years Ended December 31, 2003 and 2002, and Independent
Auditors' Report Dated January 27, 2004
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Independent Auditors' Report and Consolidated Financial Statements 2003 and 2002
Table of contents Page
Independent Auditors' Report 1
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Changes in Financial Position 6
Notes to Consolidated Financial Statements 7
Independent Auditors' Report to the Board of Directors and Stockholders of
Cantiles de Mita, S.A. de C.V.:
We have audited the accompanying balance sheets of Cantiles de Mita, S.A. de C.V
and Subsidiary (the "Company") as of December 31, 2003 and 2002, and the related
statements of income, changes in stockholders' equity and changes in financial
position for the years then ended all expressed in thousand of Mexican pesos of
purchasing power of December 31, 2002. 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 Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and that they are prepared in accordance with accounting principles
generally accepted in Mexico. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the accompanying consolidated financial statements,
during a General Extraordinary Stockholders' Meeting held on June 5, 2003, the
stockholders approved to merge the Company with its affiliated company, Club
Ecuestre Chiluca, S. de R.L. de C.V., with the Cantiles de Mita, S.A. de C.V.
remaining as the merging entity, acquiring all the rights and obligations of the
merged company beginning June 5, 2003. The effects of the merger were recorded
from a tax and legal standpoint as of the date in which the merger occurred. As
a result, in accordance with Mexican Law, the Company lost the future benefits
of the tax loss carryforwards and recoverable tax on assets paid and canceled a
deferred income tax benefit $41,189 in 2003. Additionally, in accordance with
accounting principles generally accepted in Mexico, the accompanying financial
statements combine both entities as if the merger had taken place at the
beginning of 2002.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company sold its shares in its subsidiary Bosques de Chiluca, S.A. de C.V.
in May 2003. Accordingly, the results of operations of Bosques de Chiluca, S.A.
de C.V. were included in the accompanying consolidated statements of income
through the date of the sale, in conformity with accounting principles generally
accepted in Mexico.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Cantiles de Mita, S. A. de C.
V. and Subsidiary as of December 31, 2003 and 2002, and the results of its
operations, changes in its stockholders' equity and changes in its financial
position for the years then ended in conformity with accounting principles
generally accepted in Mexico.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
A Member Firm of Deloitte Touche Tohmatsu
/s/ Miguel Angel del Barrio Burgos
C.P.C. Miguel Angel del Barrio Burgos
January 27, 2004
2
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Consolidated Balance Sheets
As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
Assets 2003 2002
Cash and temporary investments $ 2,311 $ 92,439
Accounts receivable, net 1,076,748 206,292
Due from related parties 202,507 49,940
Land held for development and real estate projects 2,160,376 2,767,648
Investment in shares 3,224 3,349
Furniture and equipment, net 2,218 2,970
Other assets, net 238 241
----------- -----------
Total $ 3,447,622 $ 3,122,879
=========== ===========
Liabilities and stockholders' equity
Accounts and notes payable to contractors $ 1,577 $ 3,765
Due to related parties and holding company 974,064 1,014,202
Other accounts payable and accrued liabilities 81,290 60,006
Deferred income tax 304,816 58,462
----------- -----------
Total liabilities 1,361,747 1,136,435
Stockholders' equity:
Capital stock 1,214,803 1,214,803
Retained earnings 733,814 538,787
Cumulative effect of deferred income tax (139,069) (139,069)
Excess in restated stockholders' equity 276,327 230,284
----------- -----------
Majority stockholders' equity 2,085,875 1,844,805
Minority stockholders' equity in subsidiary -- 141,639
----------- -----------
Total stockholders' equity 2,085,875 1,986,444
----------- -----------
Total $ 3,447,622 $ 3,122,879
=========== ===========
See accompanying notes to consolidated financial statements.
3
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Consolidated Statements of Income
For the years ended December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
2003 2002
Revenues from sale of land $ 1,162,370 $ 374,087
Cost of sale of land 586,511 192,408
----------- -----------
Gross profit 575,859 181,679
Operating expenses 119,914 85,520
----------- -----------
Operating income 455,945 96,159
Other expenses, net 8,365 2,640
Net comprehensive financing cost (income):
Interest income (12,736) (6,855)
Interest expense 96,477 69,393
Exchange loss (gain), net 2,989 (24,430)
Monetary position gain (3,031) (44,079)
----------- -----------
83,699 (5,971)
----------- -----------
Income before income tax 363,881 99,490
Income tax expense 169,749 68,233
----------- -----------
Consolidated net income $ 194,132 $ 31,257
=========== ===========
Allocation of consolidated net income:
Net income of majority stockholders $ 195,027 $ 35,428
Net loss of minority stockholders (895) (4,171)
----------- -----------
$ 194,132 $ 31,257
=========== ===========
See accompanying notes to consolidated financial statements.
4
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Grupo Desc, S.A. de C.V.)
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
Cumulative Excess in Minority
effect of restated Stock- Total
deferred stock- holders' stock-
Capital stock Retained income holders' in holders'
Historical Restatement earnings taxes equity Subsidiary equity
Balances as of January 1, 2002 $ 296,183 $ 918,620 $ 503,359 $ (139,069) $ 126,205 $ 141,493 $ 1,846,791
Comprehensive income (loss) -
Consolidated net income -- -- 35,428 -- -- (4,171) 31,257
Effect from holding nonmonetary assets -- -- -- -- 104,079 4,317 108,396
---------- ----------- ---------- ---------- ---------- ---------- -----------
-- -- 35,428 -- 104,079 146 139,653
---------- ----------- ---------- ---------- ---------- ---------- -----------
Balances as of December 31, 2002 296,183 918,620 538,787 (139,069) 230,284 141,639 1,986,444
Decrease in minority interest in
subsidiary's capital stock from sale
of subsidiary -- -- -- -- -- (139,490) (139,490)
Comprehensive income (loss) -
Consolidated net income -- -- 195,027 -- -- (895) 194,132
Effect from holding nonmonetary assets -- -- -- -- 46,043 (1,254) 44,789
---------- ----------- ---------- ---------- ---------- ---------- -----------
-- -- 195,027 -- 46,043 (2,149) 238,921
---------- ----------- ---------- ---------- ---------- ---------- -----------
Balances as of December 31, 2003 $ 296,183 $ 918,620 $ 733,814 $ (139,069) $ 276,327 $ -- $ 2,085,875
========== =========== ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
5
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Consolidated Statements of Changes in Financial Position
For the years ended December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
2003 2002
Operating activities:
Consolidated net income $ 194,132 $ 31,257
Items which did not require resources:
Depreciation 904 920
Deferred income tax 157,451 59,975
--------- ---------
352,487 92,152
Change in operating assets and liabilities:
(Increase) decrease in:
Account receivable, net (875,226) (29,625)
Due from related parties (135,195) (16,908)
Investment in real estate projects (162,044) (148,989)
Cost of land 586,511 192,408
Decrease (increase) in:
Accounts and notes payable to contractors (2,188) (9,825)
Due to related parities and holding company 48,618 (187,900)
Other accounts payable and accrued liabilities 28,096 35,716
--------- ---------
Net resources used in operating activities (158,941) (72,971)
--------- ---------
Financing activities:
Due to holding company (Desc, S. A. de C. V.) (40,264) 206,169
Variation in due to holding company in constant pesos (35,219) (42,536)
--------- ---------
Net resources (used in) generated by financing
activities (75,483) 163,633
--------- ---------
Investing activities:
Loss on sale of subsidiary 144,320 --
Acquisition of furniture and equipment, net (152) (2,199)
Investment in shares 125 84
Other assets 3 --
--------- ---------
Net resources generated by (used in) investing
activities 144,296 (2,115)
--------- ---------
Cash and temporary investments:
(Decrease) increase (90,128) 88,547
Balance at beginning of year 92,439 3,892
--------- ---------
Balance at end of year $ 2,311 $ 92,439
========= =========
See accompanying notes to consolidated financial statements.
6
Cantiles de Mita, S.A. de C.V. and Subsidiary
(A wholly-owned subsidiary of Desc, S.A. de C.V.)
Notes to Consolidated Financial Statements
For the years ended December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
1. Nature of business and significant event
Activity - Cantiles de Mita, S.A. de C.V. (the "Company") is a wholly-owned
subsidiary of Desc, S.A. de C.V. (DESC) and is engaged mainly in the
acquisition and sale of real estate, as well as the development and sale of
all types of real estate projects.
The Company is managed by an Administrative Board, which allows the Company
to function without hiring personnel. Consequently, the Company is not
obligated to pay employee profit sharing nor does it have employee benefit
liabilities.
Significant event - The economic crisis of the last few years has
significantly affected the real estate market in Mexico. The Company has
continuously discussed and established strategies to face this downturn in
the economy, such as the divestiture and sale of its territorial reserves.
During 2003 the Company sold one of its territorial reserve located in
Chiluca, Estado de Mexico.
2. Basis of presentation and operating cycle
Explanation for translation into English - The accompanying financial
statements have been translated from Spanish into English for use outside
of Mexico. These financial statements are presented on the basis of
accounting principles generally accepted in Mexico (MEX GAAP). Certain
accounting practices applied by the Company that conform with MEX GAAP may
not conform with accounting principles generally accepted in the country of
use.
Operating cycle - The operating cycle of the Company's real estate
activities fluctuate from a term of approximately 18 to 60 months.
Accordingly, the accompanying balance sheets have not been classified into
current and long term, so that the Company's financial position is
reflected more accurately.
Consolidation of financial statements - The 2002 consolidated financial
statements include those of the Cantiles de Mita, S.A. de C.V. (Cantiles)
and its subsidiary, Bosques de Chiluca, S.A. de C.V. (Bosques), whose
shareholding percent was 51%. The 2003 consolidated financial statements
include those of Cantiles and, through May 2003, its 51% of its share in
the operations of Bosques. In May 2003, the Company sold its shareholding
percentage in Bosques de Chiluca, as discussed below.
Merger of Club Ecuestre Chiluca, S. de R.L. de C.V. - During General
Extraordinary Stockholders' Meeting held on June 5, 2003, the stockholders
approved to merge the Cantiles with its affiliated company, Club Ecuestre
Chiluca, S. de R. L. de C. V., with the Cantiles remaining as the merging
company and acquiring all the rights and obligations of the merged company
beginning June 5, 2003, the date when the merger went into effect. The
merger was recorded from a tax and legal standpoint as of the date the
merger occurred. As such, in accordance with Mexican Law, the Company lost
the future benefits of the tax loss carryforwards and recoverable tax on
assets paid and canceled a deferred income tax benefit of $41,189 in 2003.
7
In accordance with accounting principles generally accepted in Mexico, a
retroactive effect of the merger is presented. As such, the accompanying
financial statements present combined information of both entities as if
the merge occurred at the beginning of 2002. Consequently, the financial
statements as of and for the year ended December 31, 2002, are different
from those originally issued in the prior year.
Comparability - Significant events affecting the comparability of the
financial statements are:
a. Sale of subsidiary - As discussed above, the Company sold its shares
in its subsidiary Bosques de Chiluca, S.A. de C.V. in May 2003.
Accordingly, the results of operations of Bosques de Chiluca, S.A. de
C.V. were included in the accompanying consolidated statements of
income through the date of the sale, in conformity with accounting
principles generally accepted in Mexico. The financial information of
Bosques as of and though the date of the sale transaction, in Mexican
pesos of purchasing power of December 31, 2003, is summarized below:
Balance sheet:
Total assets $ 325,486
Total liabilities (42,506)
---------
Stockholders' equity $ 282,980
=========
Income statement:
Costs and expenses $ 2,802
Income tax benefit (925)
---------
Net loss $ (1,877)
=========
Comprehensive income (loss) - Comprehensive income (loss) presented in the
accompanying statement of changes in stockholders' equity represents the
Company's total activity during each year, and is comprised of the net
income of the year, plus other comprehensive income (loss) items of the
same period which, in accordance with MEX GAAP, are presented directly in
stockholders' equity without affecting the statements of income. In 2003
and 2002, the other comprehensive income (loss) items consist of the effect
from holding nonmonetary assets.
Reclassifications - Certain amounts in the financial statements as of and
for the year ended December 31, 2002 have been reclassified in order to
conform to the presentation of the financial statements as of and for the
year ended December 31, 2003.
3. Summary of significant accounting policies
The accounting policies followed by the Company are in conformity with MEX
GAAP, which require that management make certain estimates and use certain
assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Although these estimates are based on
management's best knowledge of current events, actual results may differ.
The significant accounting policies of the Company are as follows:
8
a. New accounting policies - The Company early adopted Bulletin C-15,
"Impairment in the Value of Long-Lived Assets and Their Disposal" (C-15),
issued by the Mexican Institute of Certified Public Accountants. C-15
establishes, among other things, new rules for the calculation and
recognition of impairment losses for long-lived assets and their reversal.
It also provides guidance as to indicators of impairment in the carrying
amount of tangible and intangible long-lived assets in use, including
goodwill. If such indicators of impairment exist, companies must test for
impairment unless there is conclusive evidence that the indicators of
impairment are temporary. The calculation of such loss requires the
determination of the recoverable value, which is now defined as the greater
of the net selling price of a cash-generating unit and its value in use,
which is the net present value of discounted future net cash flows. The
accounting principles issued prior to this new Bulletin used future net
cash flows, without requiring the discounting of such cash flows. Since the
long-lived assets of the Company do not have any indicators of impairment
as established in this new bulletin, the early adoption of C-15 did not
have a material effect on the Company's consolidated financial position or
results of operations.
Beginning January 1, 2003, the Company adopted the provisions of new
Bulletin C-8, "Intangible Assets" ("C-8"), which established that project
development cost should be capitalized if they fulfill the criteria
established for recognition as assets preoperating cost that are not
considered development cost should be recorded as a period expense; and
intangible assets considered to have indefinited useful lives are not
amortized, but instead are subject to impairment tests. The unamortized
balance of capitalized preoperating costs up to December 31, 2002 under the
former Bulletin C-8 will continue to be amortized according to the
provisions of that Bulletin. The adoption of C-8 did not have a material
effect on the Company's financial position or results of operations.
Beginning January 1, 2003, the Company also adopted the provisions of new
Bulletin C-9, "Liabilities, Provisions, Contingent Assets and Liabilities
and Commitments" ("C-9"), which establishes additional guidelines
clarifying the accounting for provisions, accruals and contingent
liabilities, and establishes new standards for the use of present value
techniques to measure liabilities and accounting for the early settlement
of substitution of obligations. The adoption of C-9 did not have a material
effect on the Company's financial position or results of operations.
b. Recognition of the effects of inflation - The Company restates its
financial statements to Mexican peso purchasing power of the most recent
balance sheet date presented. Accordingly, the financial statements of the
prior year have been restated to Mexican pesos of purchasing power of
December 31, 2003 and, therefore, differ from those originally reported in
the prior year.
c. Temporary investments - Temporary investments are stated at the lower of
acquisition cost plus accrued yields, or estimated net realizable value.
d. Land held for development and real estate projects - Land held for
development represents land reserves, which together with developed land
and ongoing and completed real estate projects, are considered inventories,
as they are held for sale. They are recorded at acquisition, development
and construction costs, usually in U.S. dollars, and are restated based on
the devaluation factor of the Mexican peso against the U.S. dollar, for the
purpose of showing values in accordance with the current situation of the
real estate market, without exceeding net realizable value.
e. Investment in shares - Investment in shares is represented by the shares of
certain beach clubs in the Punta Ixtapa project, which are accounted for
under the cost method, restated using factors derived from the National
Consumer Price Index (NCPI) from the date of acquisition through year-end.
9
f. Furniture and equipment - Furniture and equipment are initially recorded at
acquisition cost and restated using the NCPI. Depreciation is calculated
using the straight-line method based on remaining useful lives of the
related assets, as follows:
% of
depreciation
Furniture and office equipment 10.00
Transportation equipment 25.00
Computer equipment 30.00
g. Financial instruments - Financial assets and liabilities resulting from any
type of financial instrument, except for investments in financial
instruments held to maturity, are presented in the balance sheet at fair
value. The effects of the valuation of a financial asset or liability are
recognized in results of operations of the respective period. Investments
in financial instruments held to maturity are valued at acquisition cost.
The costs and yields of financial instruments are recognized in results of
the period in which they occur. Dividends from equity financial instruments
are recognized in results of operations of the same period in which the
fair value of the financial instrument is adjusted by such dividends.
h. Income tax and tax on assets - Income tax (ISR) is recorded in results of
the year in which it is incurred. Deferred income tax assets and
liabilities are recognized for temporary differences resulting from
comparing the book and tax values of assets and liabilities plus any future
benefits from tax loss carryforwards. Deferred ISR assets are reduced by
any benefits about which there is uncertainty as to their realizability.
The tax on assets paid that is expected to be recoverable is recorded as an
advance payment of ISR and is presented on the balance sheet with deferred
ISR liability (increasing the deferred ISR assets).
i. Foreign currency balances and transactions - Foreign currency transactions
are recorded at the applicable exchange rate in effect at the transaction
date. Monetary assets and liabilities denominated in foreign currency are
translated into Mexican pesos at the applicable exchange rate in effect at
the balance sheet date. Exchange fluctuations are recorded as a component
of net comprehensive financing cost (income) in the statements of income.
j. Excess in restated stockholder's equity - Represents the accumulated
monetary position result through the initial restatement of the financial
statements and the gain (loss) from holding nonmonetary assets, which
resulted form restating certain nonmonetary assets above (below) inflation
of the land held for development and real estate projects, less the related
deferred income tax effect.
k. Revenue and cost recognition - The revenues from and cost of sales of
urbanized land are recognized in results when the sales are formalized
and/or when a deposit that guarantees the transaction is received. The
individual cost is assigned to land and the real estate project considering
the related sales value within the total project, in order to maintain the
same profit margin throughout the project.
Revenues and costs of the real estate projects are originally recorded as a
deferred credit for construction commitments and as real estate
projects-in-progress. They are recognized in results based on the
percentage-of-completion method.
Revenues, costs and expenses are restated from the month in which they
arise through year-end, based on factors derived from the NCPI.
10
l. Monetary position gain - Monetary position result, which represents the
erosion (increase) of purchasing power of monetary items caused by
inflation, is calculated by applying NCPI factors to monthly net monetary
position. Gains result from maintaining a net monetary liability position.
4. Cash and temporary investments
2003 2002
Cash $ 2,311 $ 59,624
Temporary investments -- 32,815
------------ ------------
$ 2,311 $ 92,439
============ ============
5. Accounts receivable, net
2003 2002
Trade accounts $ 1,086,078 $ 139,931
Allowance for present value of
noncurrent trade accounts (34,378) --
------------ ------------
1,051,700 139,931
Recoverable taxes 20,150 35,419
Sundry debtors 4,898 30,942
------------ ------------
$ 1,076,748 $ 206,292
============ ============
The expected collection date of accounts receivable from customers, without
considering the present value reserve, are as follows:
2003
2004 $ 188,219
2005 252,342
2006 251,553
2007 and thereafter 393,964
------------
$ 1,086,078
============
6. Land held for development and real estate projects
2003 2002
Undeveloped land $ 947,491 $ 1,596,612
Developed land 56,634 79,962
Real estate projects in-progress 1,152,781 1,083,827
Advances to contractors 3,470 7,247
------------ ------------
$ 2,160,376 $ 2,767,648
============ ============
11
The detail of Company's undeveloped land and real estate projects- in-
progress as of December 31, 2003, is as follows:
Square meters
available for Current status
Project Location % of DESC Product sale of the project
I. Undeveloped land
--------------------
Punta Mita Punta Mita, 100 Vacation homes 2,523,896 Planning and
Nayarit presale
Punta Ixtapa Punta Ixtapa, 100 Vacation homes 48,142 Planning
Guerrero
II. Developed land
--------------------
Santa Fe Reserve Santa Fe, 73 Corporate offices 11,745 Sale of land
Cuajimalpa,
Mexico, D.F.
Punta Ixtapa Punta Ixtapa 100 Vacation homes 121,569 Sale
Guerrero
La Estadia Atizapan, 77.25 Homes 26,188 Sale
Edo. de
Mexico
III. Real estate
projects-in-progress
--------------------
Punta Mita Punta Mita, 100 Vacation homes 2,701,198 Presale and
Nayarit construction
work supervision
Punta Ixtapa- The Company entered into a transfer-of-ownership and
guarantee trust agreement with Fonatur through Inmobiliaria Akko, S.A. de
C.V. to develop a vacation resort in Ixtapa, Gro. (Punta Ixtapa).
Under the trust, the Company is committed mainly to build a housing
development consisting of condominiums and villas and leave a portion of
the land for commercial and office space, and single-family homes, as well
as for the construction of a sports club. All these structures are part of
the equity of the trust.
If the clauses of the agreement are not complied with by the Company,
Fonatur may elect to request the execution of the trust guarantee within a
term not exceeding one year or demand compulsory compliance thereof. In
both instances, the Company would be obligated to pay for all the damages
caused. However, as of December 31, 2003, this project, which is identified
in Section II of the developed land, has been completed. Consequently,
management believes it is unlikely that the Company will fail to meet its
obligations with Fonatur.
Punta Mita- Punta Mita is a tourist development located north of Bahia de
Banderas in the state of Nayarit with an overall area of over 700 hectares
to be built and developed in five stages; the first stage considers the
sale of lots for housing and hotel construction and the construction of a
golf course, which opened late in 1999. This project has required
meticulous urban planning as well as providing basic services to the lots.
This consisted of the construction of, among others, a 20-kilometer long
aqueduct.
12
During 2003 and 2002, the Company continued the development of land of the
first stage of project Punta Mita and the sale of the residential lots.
Under the trust entered into with Fideicomiso Bahia de Banderas, the
Company is committed to develop a vacation resort consisting of a hotel,
golf course, and a housing development consisting of condominiums and
villas.
7. Furniture and equipment
2003 2002
Furniture and office equipment $ 1,795 $ 1,795
Transportation equipment 4,438 4,340
Computer equipment 301 305
------------ ------------
6,534 6,440
Less- Accumulated depreciation (4,316) (3,470)
------------ ------------
Total $ 2,218 $ 2,970
============ ============
8. Other accounts payable and accrued liabilities
2003 2002
Advances from customers $ 18,377 $ 1,068
Sundry creditors 52,359 41,071
Payable taxes 10,554 17,867
------------ ------------
Total $ 81,290 $ 60,006
============ ============
9. Stockholders' equity
a. As of December 31, 2003 and 2002, capital stock consisted of:
Number of
Shares Amount
Fixed Capital:
Nominative Series "A" shares 4,005 $ 11
Variable Capital:
Nominative Series "A" shares 459,990 1,162
Nominative Series "B" shares 116,770,356 295,010
------------ ------------
117,234,351 $ 296,183
============ ============
b. During General Extraordinary Stockholders' Meeting held on June 5,
2003, the stockholders approved to merge the Company with its
affiliated company, Club Ecuestre Chiluca, S. de R.L. de C.V., with
the Company remaining as the merging company and acquiring all the
rights and obligations of the merged company. See further discussion
in Note 2. As a result, the previous series of shares for each
respective company were cancelled and exchanged for a new series of
shares for the merged entity.
c. Common stock consists of nominative shares. Series A shares represents
1% of the total stock and may be owned only by Mexican citizens.
Series B shares represents 99% of the total stock and have no
ownership limitations. Variable capital may be increased without
limitation.
13
d. Stockholders' equity, except restated paid-in capital and tax retained
earnings, will be subject to a tax at the rate in effect when the
dividend is distributed. In 2003, the rate was 34% and will be reduced
by one percentage point each year until reaching 32% in 2005. Any tax
paid on such distribution, may be credited against future income tax
payable of the year in which the tax on the dividend is paid the two
fiscal years following such payment. As a result of the fiscal 2003
tax reform, tax paid on the distribution of stockholders' equity as of
January 1, 2003, can only be credited against income tax for the year
in which the dividend tax is paid and in the next two years
10. Foreign currency balances and transactions
a. The Company valued their assets and liabilities in foreign currency,
mainly in U.S. dollars, in pesos using the exchange rates in effect at
the close of each fiscal year, as the Company expects to use assets in
foreign currency to settle liabilities also denominated in foreign
currency. At December 31, the foreign currency position is as follows:
Thousand of U.S. dollars
2003 2002
Monetary assets 97,037 21,199
Monetary liabilities (104,605) (17)
------------ ------------
Monetary (liability) asset
position, net (7,568) 21,182
============ ============
Equivalent in thousands of
Mexican pesos $ (84,760) $ 219,473
============ ============
b. During the fiscal years ended December 31, 2002 and 2003, the Company
performed transactions in foreign currency that were converted to and
recorded in Mexican pesos at the exchange rates in effect on the date
of each transaction. Transactions in foreign currency were as follows:
Thousand of U.S. dollars
2003 2002
Sales (106,997) (34,813)
============ ============
Interest income (38) (331)
============ ============
Other income (9) (30)
============ ============
Selling expenses 2,138 1,902
============ ============
Interest expense 4,179 9,503
============ ============
Other expenses 1,030 144
============ ============
As discussed in Note 3d., the land held for development and real
estate projects is recorded at acquisition, development and
construction costs, usually in U.S. dollars, and restated based on the
devaluation factor of the Mexican peso against the U.S. dollar, for
the purpose of showing values in accordance with the current situation
of the real estate market. Furthermore, the cost of sales is
denominated in foreign currency are translated into Mexican pesos at
the applicable exchange rate in effect at the month before were the
sale occurred.
14
c. The exchange rates in effect at the date of the balance sheet and of
issuance of the financial statements where as follows:
December 31, January 27,
2003 2002 2004
U.S. dollar $ 11.1998 $ 10.3613 $ 10.9178
============ ============ ============
11. Balances and transactions with related parties and holding company
During 2003 and 2002, the Company had the following transactions with
affiliated companies and other related parties:
2003 2002
Interest income $ (10,506) $ (1,549)
============ ============
Interest expense $ 96,211 $ 69,369
============ ============
Management services $ 54,690 $ 65,478
============ ============
Loss from share purchases $ 10,587 $ --
============ ============
As of December 31, 2003 and 2002, balances receivable and payable with
affiliated companies were as follows:
2003 2002
Due from related parties-
Operadora de Nayarit, S.A. de C.V. $ 140,393 $ --
Inmobiliaria Dine, S.A. de C.V. 34,163 31,218
Club de Golf Punta Mita, S.A. de C.V. 22,900 12,469
Turistica Akko, S.A. de C.V. 4,343 4,396
Resort Club Punta Mita, S.A. de C.V. -- 1,857
Bosques de las Lomas, S.A. de C.V. 575 --
Bosques de Chiluca, S.A. de C.V. 133 --
------------ ------------
$ 202,507 $ 49,940
============ ============
Due to related parties and holding company-
Desc, S.A. de C.V. (holding company) $ 862,795 $ 938,278
Corporativo Dine, S.A. de C.V. 86,974 40,544
Canada de Santa Fe, S.A. de C.V. 24,295 35,380
------------ ------------
$ 974,064 $ 1,014,202
============ ============
The amount due to DESC includes a promissory note that is due on demand,
renewable on an annual basis and bears interest at a variable rate. At
December 31, 2003, such rate was 8.75%.
15
12. Income taxes and tax on assets
In accordance with Mexican tax law, the Company is subject to tax on assets
(IMPAC) and income tax (ISR), which takes into consideration the taxable
and deductible effects of inflation.
The ISR rate was 35% in 2002 and 34% in 2003, and will be reduced by one
percentage point each year until reaching 32% in 2005. In 2002, the
obligation to withhold taxes on dividends paid to individuals or foreign
residents were eliminated.
IMPAC is calculated by applying 1.8% to the Company's asset position, as
defined in the law, and is payable only to the extent that it exceeds ISR
payable for the same period. If in any year IMPAC exceeds the ISR payable,
the IMPAC payment for such excess may be reduced by the amount by which ISR
exceeded IMPAC in the three preceding years and any required payment of
IMPAC is creditable against the excess of ISR over IMPAC of the following
ten years.
DESC (holding company) incurs consolidated ISR and IMPAC with its
subsidiaries in the proportion in which Desc owns the voting stock of the
Company at the balance sheet date. As of January 1, 2002, the proportion is
calculated based on the average daily equity percentage that Desc owns of
the Company during the year. The tax results of the subsidiaries are
consolidated at 60% of such proportion. Provisional payments of ISR and
IMPAC of both Desc and its subsidiaries are made as if the Company did not
file a consolidated tax return.
a. Income tax expense consist of the following:
2003 2002
Deferred $ 116,262 $ 59,975
Effect of deferred tax asset due to
merger 41,189 --
Current asset tax paid 12,298 8,258
------------ ------------
$ 169,749 $ 68,233
============ ============
b. The reconciliation of the statutory and effective ISR rates expressed
as a percentage of income before ISR for the years ended December 31,
2003 and 2002 is as follows.
2003 2002
Tax provision at statutory rate 34% 35%
Permanent differences-
Inflationary component, net (3%) (18%)
Nondeductible expenses 1% 11%
Effect of deferred tax asset due
to merger 11% --
Others 4% 41%
------------ ------------
Effective tax rate 47% 69%
============ ============
16
c. At December 31, 2003 and 2002, the main items comprising the liability
balance of deferred income tax are as follows:
2003 2002
Deferred income tax (asset) liability:
Undeveloped land and real estate
projects in-progress $ 377,477 $ 251,904
Furniture and equipment 111 202
Advances from clients (6,064) 363
Effect of tax loss carryforwards (50,467) (170,527)
Recoverable asset tax paid (16,241) (23,480)
------------ ------------
Net deferred income tax liability $ 304,816 $ 58,462
============ ============
d. Tax loss carryforwards and recoverable tax on assets paid for which
the deferred income tax asset and prepaid income tax, respectively,
have been recognized can be recovered subject to certain conditions.
Restated amounts as of December 31, 2003 and expiration dates are as
follows:
Tax loss Recoverable
Year of carryfor- tax
expiration wards on assets
2010 $ 28,511 $ --
2011 124,418 2,427
2012 -- 1,516
2013 -- 12,298
------------ ------------
$ 152,929 $ 16,241
============ ============
13. Commitments
Al December 31, 2003, DESC has given guarantees to its banking creditors,
in order to resturcture its long-term liabilities. Such guarantees involve
certain accounts receivable and shares of the Company.
14. New accounting principles
In May 2003, the IMCP issued Bulletin C-12, "Financial Instruments of a
Debt or Equity Nature or a Combination of Both" (C-12), whose application
is mandatory for financial statements of periods beginning on or after
January 1, 2004, although early adoption is encouraged. C-12 is the
compilation of the standards issued by the IMCP with respect to the issue
of debt or equity financial instruments, or a combination of both, and
includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between
liabilities and stockholders' equity and establishes the rules for
classifying and valuing the components of debt and equity of combined
financial instruments in the initial recognition. Subsequent recognition
and valuation of liabilities and stockholders' equity of the financial
instruments is subject to the standards issued previously in the applicable
bulletins. The Company has not fully assessed the effects of adopting this
new accounting principle on its financial position and results of
operations.
* * * * * *
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Desc, S.A. de C.V.
------------------
(Registrant)
Date: May 5, 2004 By /s/ Arturo D'Acosta Ruiz
----------------- ---------------------------------
(Signature)
Name: Arturo D'Acosta Ruiz
Title: Chief Financial Officer