Prepared by R.R. Donnelley Financial -- FORM 20-F
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 20-F
 
(Mark One)
 
¨
  
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
x
  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the fiscal year ended December 31, 2001
 
OR
 
¨
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from                      to                     
 
Commission file number 1-13196
 
DESC, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
 
Not Applicable
(Translation of Registrant’s name into English)
 
United Mexican States
(Jurisdiction of incorporation or organization)
 
Paseo de los Tamarindos 400-B, Bosques de las Lomas, 05120 Mexico, D.F.
(Address of principal executive offices)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class

 
Name of each exchange on which registered

American Depositary Shares, each representing Twenty Series C Shares(1)
 
New York Stock Exchange, Inc.
Series C Shares, without expression of par value(2)
 
New York Stock Exchange, Inc.

(1)
 
Evidenced by American Depositary Receipts (ADRs).
(2)
 
Not for trading, but only in connection with the registration of the American Depositary Shares.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
8 3/4% Guaranteed Notes due 2007 of Desc, S.A. de C.V.
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
Series A Common Stock: 587,479,900
 
Series B Common Stock: 506,257,866
 
Series C Common Stock: 275,341,610
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x Yes  ¨ No
 
Indicate by check mark which financial statement item the registrant has elected to follow.     ¨ Item 17  x Item 18


Table of Contents
TABLE OF CONTENTS
 
    
Page

  
4
  
4
  
4
  
4
  
17
  
41
  
58
  
62
  
64
  
65
  
67
  
89
  
90
  
91
  
91
  
91
  
91
  
91
  
92
  
92
  
92
  
92

i


Table of Contents
 
Presentation of Information
 
In this annual report:
 
 
 
“Autoparts Sector” means the numerous companies of Desc that operate our autoparts business as more fully described in Item 4. “Information on our Company—Autoparts”;
 
 
 
“Chemical Sector” means the numerous companies of Desc that operate our chemical business as more fully described in Item 4. “Information on our Company—Chemicals”;
 
 
 
“Depositary” means Citibank, N.A., as depositary, under that certain Amended and Restated Deposit Agreement, dated as of June 29, 1994, effective as of July 20, 1994, amended as of July 15, 1996, among Desc, Citibank, and all holders and beneficial owners from time to time of American Depositary Receipts (“ADRs”), evidencing American Depositary Shares (“ADSs”), issued thereunder. Each ADS currently represents twenty Series C shares of Desc;
 
 
 
“Dine” means División Dine, S.A. de C.V., formerly a wholly owned subsidiary of Desc engaged in the real estate business; at our shareholders’ meeting held on April 25, 2002, our shareholders approved the merger of Dine with and into Desc, with Desc surviving the merger. This merger was completed in the second quarter of 2002;
 
 
 
“Dollars” and “$” refer to the currency of the United States of America;
 
 
 
“Financial Statements” means Desc’s audited consolidated financial statements for the years ended December 31, 2001, 2000 and 1999;
 
 
 
“GAAP” means generally accepted accounting principles in the indicated country;
 
 
 
“Girsa” means Girsa, S.A. de C.V., formerly a wholly owned subsidiary of Desc engaged in our chemicals business. At our shareholders’ meeting held on November 29, 2001, our shareholders approved the merger of Girsa into Desc, with Desc surviving the merger. This merger was completed in December 2001.
 
 
 
“Mexico” means the United Mexican States;
 
 
 
“Mexican government” means the Mexican federal government;
 
 
 
“NCPI” means the Mexican National Consumers Price Index, a measure of inflation in Mexico;
 
 
 
“Noon Buying Rate” means the noon buying rate in New York City for cable transfers in Pesos as certified for customs purposes by the U.S. Federal Reserve Bank, expressed in Pesos per $1.00;


Table of Contents
 
 
 
“Pesos” and “Ps.” refer to the currency of Mexico. Except as otherwise indicated, all Peso amounts reflect thousands of Pesos;
 
 
 
“Real Estate Sector” means the numerous companies of Desc that operate our real estate business as more fully described in Item 4. “Information on our Company—Real Estate”;
 
 
 
“Food Sector” means the numerous companies of Desc that operate our branded-food and pork businesses as more fully described in Item 4. “Information on our Company—Food”;
 
 
 
“SEC” means the U.S. Securities and Exchange Commission;
 
 
 
“Unik” means Unik, S.A. de C.V., a wholly owned subsidiary of Desc engaged in the autoparts business; and
 
 
 
“we,” “our,” “us” and similar terms, as well as “Desc,” mean Desc, S.A. de C.V. and its consolidated subsidiaries, unless the context indicates otherwise.
 
Our fiscal year ends on December 31 of each year, and references to “fiscal year” reflect a 52-week period.
 
Our Financial Statements are expressed in Pesos and prepared in accordance with Mexican GAAP, which differ from U.S. GAAP in significant respects, in particular by requiring Mexican companies to recognize effects of inflation. Please see notes 17 and 18 to our Financial Statements for a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Desc.
 
The Mexican Institute of Public Accountants has issued Bulletin B-10, “Recognition of the Effects of Inflation on Financial Information”, as amended, and Bulletin B-12, “Statement of Changes in Financial Position”. These bulletins outline the inflation accounting methodology mandatory for all Mexican companies reporting under Mexican GAAP. Mexican GAAP provide for the recognition of effects of inflation by restating nonmonetary assets and liabilities using the NCPI, restating the components of shareholders’ equity using the NCPI and recording gains or losses in purchasing power due to the holding of monetary liabilities or assets. Mexican GAAP also require that all financial information be presented in constant Pesos, having the same purchasing power for each period indicated taking into account inflation, as of the date of the most recent balance sheet presented. The effect of these inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP.
 
In this annual report, all financial data presented in Pesos for all periods in the Financial Statements, unless otherwise indicated, have been restated in constant Pesos as of December 31, 2001. Dollar amounts, unless otherwise indicated, are stated on a nominal, that is, noninflation adjusted, basis, except for convenience translations of Peso amounts.
 
Solely for your convenience, this annual report contains translations of Peso amounts into Dollars. We have used an exchange rate of Ps.9.26 per Dollar for these translations, which is the exchange rate quoted by Banco de México on December 31, 2001. The Noon Buying Rate was Ps.9.156 per $1.00 on December 31, 2001. Translations contained in this annual report do not

2


Table of Contents
constitute representations that the stated Peso amounts actually represent Dollar amounts or vice versa, or that amounts could be or could have been converted into Dollars or Pesos, as the case may be, at any particular rate.
 
Cautionary Statement for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995
 
This annual report includes “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology such as “estimate,” “project,” “believe,” “anticipate,” “intend,” “expect,” “plan,” “may,” “will,” “would,” “could,” or “should” or the negative of these words or other variations of these words or other similar expressions. These forward-looking statements reflect the views of our management with respect to our future financial performance and future events. All forward-looking statements contained in this annual report, including those presented with numerical specificity, however, are uncertain. They are based on assumptions and affected by risks and uncertainties that could cause actual results to differ materially from our expectations described in these forward-looking statements. These factors include, among other things, the following:
 
 
 
changes in the Mexican economy or in other economies in which our products are sold, including rates of inflation, economic growth and currency fluctuations;
 
 
 
Mexican political instability, including the reversal of market-oriented reforms and economic recovery measures or the failure of those reforms and measures to achieve their goals;
 
 
 
fluctuations in the demand of our products or for products in which our products are incorporated;
 
 
 
competitive product and pricing pressures in both the domestic and international markets; and
 
 
 
foreign currency rate fluctuations and fluctuations in other market rate sensitive instruments to which we are a party.
 
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. We do not undertake any obligation or intend to publicly update or revise any forward-looking state­ments, whether as a result of new information, future events or otherwise.
 
Statements Regarding Competitive Position
 
Statements made in Item 4. “Information on our Company” and Item 5. “Operating and Financial Review and Prospects” referring to our competitive position are based on our belief and, in some cases, on a range of sources, including market studies by consultants retained by Desc, independent market information provided by Mexican notaries and our internal assessment of market share based on the financial results and performance of market participants and analysis of various market indicators.

3


Table of Contents
PART I
 
Item 1.    Identity of Directors, Senior Management and Advisers
 
Items 1.A and 1.B are not applicable. Item 1.C, Auditors, is as follows: Ruiz, Urquiza y Cía, S.C., a former member firm of Andersen Worldwide, S.C., entered into agreements with Galaz, Gómez Morfín, Chavero, Yamazaki, S.C., the Mexican national practice of Deloitte Touche Tohmatsu (“DTT”), that provide for the association of Ruiz, Urquiza y Cía, S.C. with Galaz, Gomez Morfín, Chavero, Yamazaki, S.C. (and therefore with DTT) effective on June 10, 2002. Prior to June 10, 2002, Ruiz, Urquiza y Cía, S.C. was subject to the quality control procedures of Arthur Andersen LLP required for foreign associated firms that are embodied in the requirements of the SEC Practice Section of the American Institute of Certified Public Accountants. Subsequent to that date, Deloitte & Touche LLP has performed the quality control procedures with respect to Ruiz, Urquiza y Cía, S.C.’s audit of the financial statements for the year ended December 31, 2001 included in this annual report on Form 20-F.
 
Item 2.    Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.    Key Information
 
Selected Financial Data
 
The following table presents selected consolidated financial data of Desc for the fiscal years 1997, 1998, 1999, 2000 and 2001. You should read this information in conjunction with the Financial Statements included elsewhere in this annual report.
 
The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S. GAAP, in particular by requiring Mexican companies to recognize effects of inflation. Notes 17 and 18 to the Financial Statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to Desc, and a reconciliation to U.S. GAAP of Desc’s net income and shareholders’ equity. The effect of inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP. Net income information included in the following tables consists of “majority net income,” as referred to in the Financial Statements, and therefore is net of minority interests attributable to third party equity interests in some of our subsidiaries, unless the context otherwise requires.
 
Mexico experienced high inflation in some of the periods covered by the Financial Statements. The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 15.7% in 1997, 18.6% in 1998, 12.3% in 1999, 9.0% in 2000 and 4.4% in 2001. In accordance with Mexican GAAP rules on inflation accounting, the Financial Statements recognize effects of inflation and restate data for prior periods in constant Pesos of December 31, 2001. Accordingly, financial data for all periods in the selected consolidated financial information derived from the Financial Statements and presented below have been restated in constant Pesos of December 31, 2001.

4


Table of Contents
 
Selected Consolidated Financial Information
 
   
Year ended December 31,

 
   
1997

   
1998

   
1999

   
2000

   
2001

   
Convenience
Translation(15)
2001

 
   
(In thousands, except for net income (loss) per share/ADS) and weighted average shares outstanding)
 
Income statement data:
                                               
Mexican GAAP:
                                               
Net sales
 
 
Ps. 24,484,247
 
 
 
Ps. 27,328,695
 
 
 
Ps. 26,445,249
 
 
 
Ps. 24,471,455
 
 
 
Ps. 20,639,099
 
 
      $
2,228,844
 
Cost of sales
 
 
17,827,368
 
 
 
19,689,608
 
 
 
19,059,886
 
 
 
18,213,161
 
 
 
15,393,175
 
 
 
1,662,330
 
Gross profit
 
 
6,656,879
 
 
 
7,639,087
 
 
 
7,385,363
 
 
 
6,258,294
 
 
 
5,245,924
 
 
 
566,514
 
Operating expenses
 
 
2,955,350
 
 
 
3,697,115
 
 
 
3,903,366
 
 
 
3,895,314
 
 
 
3,577,368
 
 
 
386,324
 
Operating income
 
 
3,701,529
 
 
 
3,941,972
 
 
 
3,481,997
 
 
 
2,362,980
 
 
 
1,668,556
 
 
 
180,190
 
Comprehensive financial result
 
 
72,246
 
 
 
(1,505,838
)
 
 
466,191
 
 
 
(720,339
)
 
 
(306,445
)
 
 
(33,093
)
Impairment of fixed assets
 
 
(33,620
)
 
 
(39,401
)
 
 
(230,457
)
 
 
(158,721
)
 
 
(92,092
)
 
 
(9,945
)
Other income (expense), net
 
 
14,932
 
 
 
(101,955
)
 
 
(251,865
)
 
 
(446,953
)
 
 
(508,983
)
 
 
(54,966
)
Provision for income taxes and employee profit sharing
 
 
380,197
 
 
 
555,430
 
 
 
929,027
 
 
 
578,412
 
 
 
147,654
 
 
 
15,946
 
Equity in associated companies and unconsolidated subsidiaries
 
 
(63,242
)
 
 
(138,210
)
 
 
48,530
 
 
 
(10,756
)
 
 
(114,086
)
 
 
(12,320
)
Income before extraordinary items, profit on the sale of subsidiaries, extraordinary items and change in accounting policy
 
 
3,311,647
 
 
 
1,601,138
 
 
 
2,585,369
 
 
 
447,799
 
 
 
499,296
 
 
 
53,920
 
Profit on the sale of subsidiaries
 
 
—  
 
 
 
124,781
 
 
 
160,516
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Extraordinary items
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
69,606
 
 
 
(282,083
)
 
 
(30,463
)
Change in accounting policy
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
130,290
 
 
 
—  
 
 
 
—  
 
Net consolidated income for the year
 
 
3,311,647
 
 
 
1,725,919
 
 
 
2,745,885
 
 
 
647,695
 
 
 
217,213
 
 
 
23,457
 
Minority interest
 
 
(568,184
)
 
 
(544,274
)
 
 
(725,601
)
 
 
(360,695
)
 
 
(175,859
)
 
 
(18,991
)
Majority net income
 
 
2,743,463
 
 
 
1,181,645
 
 
 
2,020,284
 
 
 
287,000
 
 
 
41,354
 
 
 
4,466
 
Majority net income per share(1)
 
 
1.81
 
 
 
0.78
 
 
 
1.36
 
 
 
0.20
 
 
 
0.03
 
 
 
0.00
 
Majority net income per ADS(2)
 
 
36.20
 
 
 
15.60
 
 
 
27.20
 
 
 
4.00
 
 
 
0.60
 
 
 
0.06
 
Dividends per share
 
 
0.18
 
 
 
0.66
 
 
 
0.00
 
 
 
0.62
 
 
 
0.30
 
 
 
0.03
 
Dividends per ADS(16)
 
 
3.60
 
 
 
13.20
 
 
 
0.00
 
 
 
12.40
 
 
 
6.00
 
 
 
0.60
 
U.S. GAAP amounts:
                                               
Net sales
 
 
Ps. 24,484,740
 
 
 
Ps. 27,326,369
 
 
 
Ps. 26,445,646
 
 
 
Ps. 24,478,876
 
 
 
Ps. 20,639,099
 
 
      $
2,228,844
 
Operating income
 
 
3,175,932
 
 
 
3,700,028
 
 
 
2,689,881
 
 
 
1,345,480
 
 
 
897,383
 
 
 
96,910
 
Majority net income (loss)
 
 
1,553,015
 
 
 
1,467,903
 
 
 
1,808,297
 
 
 
517,156
 
 
 
(121,850
)
 
 
(13,159
)
Majority net income (loss) per share(1)
 
 
1.02
 
 
 
0.97
 
 
 
1.21
 
 
 
0.36
 
 
 
(0.09
)
 
 
(0.01
)
Majority net income (loss) per ADS(2)
 
 
20.40
 
 
 
19.40
 
 
 
24.20
 
 
 
7.20
 
 
 
(1.80
)
 
 
(0.20
)
Dividends per share
 
$
0.02
 
 
$
0.07
 
 
$
0.00
 
 
$
0.07
 
 
$
0.03
 
 
      $
0.03
 
Dividends per ADS(16)
 
$
0.40
 
 
$
1.40
 
 
$
0.00
 
 
$
1.40
 
 
$
0.60
 
 
      $
0.60
 
Balance sheet data (at period end):
                                               
Mexican GAAP:
                                               
Assets:
                                               
Total current assets
 
 
Ps. 9,690,402
 
 
 
Ps. 10,201,214
 
 
 
Ps. 10,488,618
 
 
 
Ps. 11,467,783
 
 
 
Ps. 8,126,016
 
 
      $
877,540
 
Land held for development and real estate projects in progress
 
 
3,383,240
 
 
 
4,364,153
 
 
 
3,931,616
 
 
 
3,902,396
 
 
 
3,911,751
 
 
 
422,435
 
Property, plant and equipment, net
 
 
15,688,007
 
 
 
17,443,009
 
 
 
16,221,559
 
 
 
14,770,924
 
 
 
12,564,756
 
 
 
1,356,885
 
Total assets
 
 
30,775,162
 
 
 
35,183,321
 
 
 
33,733,780
 
 
 
33,526,207
 
 
 
27,494,608
 
 
 
2,969,180
 
Liabilities:
                                               
Short-term debt(3)
 
 
3,786,373
 
 
 
4,473,278
 
 
 
4,262,638
 
 
 
3,903,515
 
 
 
3,072,320
 
 
 
331,784
 
Long-term debt(4)
 
 
6,812,767
 
 
 
8,773,196
 
 
 
7,333,837
 
 
 
8,845,792
 
 
 
7,022,435
 
 
 
758,362
 
Total liabilities
 
 
14,021,150
 
 
 
17,356,654
 
 
 
15,451,373
 
 
 
19,179,837
 
 
 
15,496,640
 
 
 
1,673,503
 
Shareholders’ equity:
                                               
Capital Stock
 
 
10,559,966
 
 
 
10,557,247
 
 
 
10,557,042
 
 
 
10,555,486
 
 
 
10,555,487
 
 
 
1,139,901
 
 

5


Table of Contents
 
    
Year ended December 31,

 
    
1997

    
1998

    
1999

    
2000

    
2001

    
Convenience
Translation(15)
2001

 
    
(In thousands, except for net income (loss) per share/ADS) and weighted average shares outstanding
 
Total shareholders’ equity including minority interest(5)
  
16,754,012
 
  
17,826,667
 
  
18,282,407
 
  
14,346,370
 
  
11,997,968
 
  
 
1,295,677
 
Total liabilities and shareholders’ equity(5)(6)
  
30,775,162
 
  
35,183,321
 
  
33,733,780
 
  
33,526,207
 
  
27,494,608
 
  
 
2,969,180
 
U.S. GAAP amounts:
                                           
Property, plant and equipment, net
  
Ps. 16,223,965
 
  
Ps. 18,165,395
 
  
Ps. 17,312,351
 
  
Ps. 15,959,109
 
  
Ps. 13,938,465
 
  
    $
1,505,234
 
Total assets
  
31,792,956
 
  
36,290,883
 
  
35,640,589
 
  
35,762,912
 
  
30,282,304
 
  
 
3,270,227
 
Short-term debt
  
3,786,373
 
  
4,473,278
 
  
4,262,638
 
  
3,903,515
 
  
3,072,320
 
  
 
331,784
 
Long-term debt
  
6,812,767
 
  
8,773,196
 
  
7,333,837
 
  
8,845,792
 
  
7,022,435
 
  
 
758,362
 
Shareholders’ equity(5)
  
10,973,266
 
  
10,572,930
 
  
11,096,176
 
  
9,859,348
 
  
9,041,731
 
  
 
976,429
 
Other data under Mexican GAAP:
                                           
Working capital(7)
  
Ps. 4,499,484
 
  
Ps. 4,868,083
 
  
Ps. 4,866,051
 
  
Ps. 6,047,386
 
  
Ps. 2,650,292
 
  
    $
286,209
 
Depreciation and amortization(8)
  
1,003,420
 
  
1,190,813
 
  
1,189,258
 
  
1,235,906
 
  
1,207,830
 
  
 
130,435
 
EBITDA(9)
  
4,704,949
 
  
5,132,785
 
  
4,671,255
 
  
3,598,886
 
  
2,876,386
 
  
 
310,625
 
Capital expenditures(10)
  
3,165,319
 
  
4,641,764
 
  
2,947,368
 
  
1,923,350
 
  
719,196
 
  
 
77,667
 
Investment in real estate projects(11)
  
168,592
 
  
568,948
 
  
414,310
 
  
698,053
 
  
699,801
 
  
 
75,572
 
Dividends paid
  
272,228
 
  
995,181
 
  
0
 
  
427,896
 
  
407,825
 
  
 
44,042
 
Dividends paid to minority interest
  
252,379
 
  
306,936
 
  
0
 
  
46,629
 
  
365,850
 
  
 
39,509
 
Number of employees
  
22,152
 
  
23,664
 
  
20,878
 
  
22,320
 
  
19,344
 
  
 
19,344
 
Weighted average shares outstanding
  
1,515,183
 
  
1,506,981
 
  
1,489,733
 
  
1,418,126
 
  
1,369,006
 
  
 
1,369,006
 
Net sales under Mexican GAAP:
                                           
Autoparts Sector
  
Ps. 10,016,662
 
  
Ps. 11,355,532
 
  
Ps. 11,332,462
 
  
Ps. 11,417,172
 
  
Ps. 9,397,929
 
  
    $
1,014,895
 
Chemicals Sector
  
9,098,736
 
  
8,828,659
 
  
7,930,339
 
  
8,263,335
 
  
6,868,608
 
  
 
741,750
 
Food Sector
  
4,778,517
 
  
6,183,885
 
  
6,236,482
 
  
3,733,284
 
  
3,546,165
 
  
 
382,955
 
Real Estate Sector
  
564,236
 
  
934,797
 
  
915,047
 
  
1,039,512
 
  
807,222
 
  
 
87,173
 
Desc(12)
  
26,096
 
  
25,822
 
  
30,919
 
  
18,152
 
  
19,175
 
  
 
2,071
 
    

  

  

  

  

  


Total
  
Ps. 24,484,247
 
  
Ps. 27,328,695
 
  
Ps. 26,445,249
 
  
Ps. 24,471,455
 
  
Ps. 20,639,099
 
  
    $
2,228,844
 
Cost of sales and operating expenses under Mexican GAAP:
                                           
Autoparts Sector
  
Ps. 8,512,532
 
  
Ps. 9,625,462
 
  
Ps. 9,524,164
 
  
Ps. 9,747,003
 
  
Ps. 8,365,555
 
  
    $
903,408
 
Chemicals Sector
  
7,630,629
 
  
7,469,192
 
  
6,954,193
 
  
7,718,991
 
  
6,391,651
 
  
 
690,243
 
Food Sector
  
4,154,779
 
  
5,626,965
 
  
5,813,487
 
  
3,691,920
 
  
3,471,717
 
  
 
374,915
 
Real Estate Sector
  
419,979
 
  
600,367
 
  
592,615
 
  
877,713
 
  
662,142
 
  
 
71,506
 
Desc(13)
  
64,799
 
  
64,737
 
  
78,793
 
  
72,848
 
  
79,478
 
  
 
8,582
 
    

  

  

  

  

  


Total
  
Ps. 20,782,718
 
  
Ps. 23,386,723
 
  
Ps. 22,.963,252
 
  
Ps. 22,108,475
 
  
Ps. 18,970,543
 
  
    $
2,048,654
 
Operating income under Mexican GAAP:
                                           
Autoparts Sector
  
Ps. 1,504,130
 
  
Ps. 1,730,070
 
  
Ps. 1,808,298
 
  
Ps. 1,670,169
 
  
Ps. 1,032,374
 
  
    $
111,487
 
Chemicals Sector
  
1,468,107
 
  
1,359,467
 
  
976,146
 
  
544,344
 
  
476,957
 
  
 
51,507
 
Food Sector
  
623,738
 
  
556,920
 
  
422,995
 
  
41,364
 
  
74,448
 
  
 
8,040
 
Real Estate Sector
  
144,257
 
  
334,430
 
  
322,432
 
  
161,799
 
  
145,080
 
  
 
15,667
 
Desc
  
(38,703
)
  
(38,915
)
  
(47,874
)
  
(54,696
)
  
(60,303
)
  
 
(6,511
)
    

  

  

  

  

  


Total
  
Ps. 3,701,529
 
  
Ps. 3,941,972
 
  
Ps. 3,481,997
 
  
Ps. 2,362,980
 
  
Ps. 1,668,556
 
  
    $
180,190
 

(1)
 
Net income per share was calculated by dividing net income by the weighted average number of shares outstanding during the period retroactively reflecting the 5:1 stock split effected on September 8, 1998.
(2)
 
Calculated as if the applicable number of outstanding shares were all represented by ADSs at a ratio of 20 weighted average shares outstanding per ADS.
(3)
 
At December 31, 2001, Ps.2,846,028 of short-term debt represented the Peso equivalent of Dollar-denominated borrowing and the balance of Ps.226,292 of short-term debt represented Peso-denominated borrowings.

6


Table of Contents
 
(4)
 
Excludes current portion of long-term debt. At December 31, 2001, Ps.4,911,522 of long-term debt represented the Peso equivalent of Dollar-denominated borrowings, and the balance of Ps. 2,110,913 of long-term debt represented Peso-denominated borrowings.
(5)
 
Includes variable capital shares. See Note 13 to the Financial Statements for more information about shareholders’ equity.
(6)
 
Includes minority interest which does not constitute shareholders’ equity under U.S. GAAP.
(7)
 
Defined as current assets except for cash, less current liabilities except for short-term bank loans and current portion of long-term debt and notes payable.
(8)
 
Does not include amortization of goodwill or amortization of an inactive plant in our Autoparts Sector.
(9)
 
Defined as earnings before interest expense, tax, depreciation and amortization. We have included earnings before interest, taxes, depreciation and amortization (“EBITDA”) data as a convenience only, because some investors and analysts use it to measure a company’s ability to service debt. EBITDA is not a measure of financial performance under either Mexican GAAP or U.S. GAAP and should not be considered an alternative to net income as a measure of operating performance. In evaluating EBITDA, investors should consider that the methodology applied in calculating EBITDA may differ among companies and analysts. Investors relying on EBITDA should take into account that the amount of EBITDA may not be available for debt service due to other commitments and uncertainties in the operation of business.
(10)
 
Includes expenditures related to the Santa Fe shopping mall in which we had a 50.1% interest, including acquisitions of land, construction costs, permits, architects’ and engineering fees and related items. Does not include expenditures for other projects in our Real Estate Sector.
(11)
 
Includes expenditures made during the relevant period for acquisitions of land, construction costs, permits, architects’ and engineering fees and related items, other than expenditures related to the Santa Fe shopping mall.
(12)
 
Represents sales by services company.
(13)
 
Represents operating expenses allocable to the holding company.
(14)
 
For 1997, 1998 and 1999, reflects primarily the adjustment to market value of our investment in Grupo Financiero Santander Mexicano, which we sold in 2000. For 2000, reflects principally the equity in Paratec, S.A. de C.V. and Dynasol Elastómeros and for 2001 reflects equity in Aquanova, S.A. de C.V.
(15)
 
U.S. dollar amounts shown in the Financial Statements have been included solely for the convenience of the reader and are translated from Mexican pesos, as a matter of arithmetic computation only, at the rate quoted by Banco de México for December 31, 2001 of 9.26 Mexican pesos per U.S. dollar. Such translation should not be interpreted as a representation that the Mexican peso amounts have been, could have been, or could in the future be, translated into U.S. dollars at this or any other exchange rate.
(16)
 
Dividends per ADS was calculated by dividing the total dividends by the weighted average number of shares outstanding during the period retroactively reflecting the 5:1 stock split effected on September 8, 1998, and multiplying that amount by 20.
 
Exchange Rates
 
Since November 1991, Mexico has had a free market for foreign exchange. Until December 21, 1994, Banco de México, the Mexican Central Bank, kept the Peso-Dollar exchange rate within a range prescribed by the Mexican government through intervention in the foreign exchange market. Within the range, the Banco de México generally intervened to reduce day-to-day fluctuations in the exchange rate.
 
On December 21, 1994, the Mexican government announced its decision to suspend intervention by Banco de México and to allow the Peso to float freely against the Dollar. The Peso declined sharply in December 1994 and continued to fall under conditions of high volatility in 1995. During 1996 and 1997, the Peso did not fall as quickly and was less volatile. In the last quarter of 1997 and for most of 1998, the foreign exchange markets were affected significantly by the financial crises in Asia and Russia and financial turmoil in various other countries, including Brazil and Venezuela. The Peso depreciated against the Dollar by 2.65% in 1997 and 22.68% in 1998, appreciated against the Dollar by 4.24% in 1999, depreciated against the Dollar by 1.47% in 2000 and appreciated against the Dollar by 4.80% in 2001. There can be no assurance that the Mexican government will maintain its current policies concerning the Peso or that the Peso will not experience a significant depreciation or appreciation in the future.
 
Except for the period from September through December 1982 during the Mexican liquidity crisis, Banco de México consistently has made foreign currency available to Mexican private sector entities, such as Desc, to meet their foreign currency obligations and has not adopted any measure to control the availability of foreign currency since November 1991.

7


Table of Contents
 
Nevertheless, if there were renewed shortages of foreign currency, Banco de México might not continue to make foreign currency available to private sector companies, and foreign currency needed by Desc to service foreign currency obligations might be available for purchase in the open market only at substantial additional cost.
 
The following table lists, for the periods indicated, the period-end, average, high and low Noon Buying Rate for the purchase and sale of Dollars, presented in each case as the average between the purchase and sale rates, expressed in Pesos per Dollar:
 
    
Noon Buying Rate

Year Ended December 31,

  
High

  
Low

  
Average(1)

  
Period End

1997
  
8.410
  
7.717
  
7.917
  
8.070
1998
  
10.630
  
8.040
  
9.152
  
9.901
1999
  
10.600
  
9.242
  
9.553
  
9.480
2000
  
10.087
  
9.183
  
9.459
  
9.618
2001
  
9.972
  
8.946
  
9.334
  
9.156
Most Recent 6 months:

                   
December 2001
  
9.245
  
9.090
         
January 2002
  
9.250
  
9.095
         
February 2002
  
9.170
  
9.048
         
March 2002
  
9.114
  
9.005
         
April 2002
  
9.375
  
9.002
         
May 2002
  
9.713
  
9.407
         

(1)
 
Average of month–end rates.
 
On June 28, 2002, the Noon Buying Rate was Ps.9.980 to $1.00.
 
Fluctuations in the exchange rate between the Peso and the Dollar will affect the price of the ADSs on the NYSE. To the extent Desc pays cash dividends and other cash distributions (including the net proceeds from any sale of securities, property or rights distributed to the owners of Series C shares) denominated in Pesos, the Depositary must convert or cause to be converted, as soon as possible, such amounts into Dollars, to the extent that the Depositary in its judgment can do so on a reasonable basis and in accordance with applicable law. As a result, any exchange rate fluctuations will affect the Dollar amounts received by the holders of the ADSs upon conversion of any such Peso-denominated dividend payment or distribution.

8


Table of Contents
RISK FACTORS
 
You should carefully consider the risk factors described below in addition to the other information presented in this document. If we do not successfully address any of the risks described below, we could experience a material adverse effect on our business, operating results and financial condition and the ADS price of Desc may decline. We cannot assure you that we will successfully address all of these risks.
 
Risk Factors Relating to Our Operations
 
Failure to receive dividends from our subsidiaries may affect our cash flows
 
We are structured as a holding company that operates through approximately 100 direct and indirect subsidiaries. Accordingly, we rely on dividends from our subsidiaries to generate the funds necessary to meet debt service obligations of Desc. The ability of our subsidiaries to pay dividends is subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits reflected in its year-end financial statements (approved by its shareholders), only if such payment is approved by its shareholders, and then only after the creation of a required legal reserve and the set off or satisfaction of losses, if any, incurred in previous fiscal years. Dividends and other payments by some of our direct and indirect subsidiaries are shared with substantial minority shareholders of some of those subsidiaries. Therefore, Desc’s cash flows could be affected if it does not receive dividends from its subsidiaries.
 
Inability to renew technological assistance and licensing agreements may affect our competitive position and revenues
 
Some of our subsidiaries conduct all or a portion of their businesses through joint ventures or technological alliances with Mexican and non-Mexican partners. Certain of these partners and other Mexican and non-Mexican companies also license technology and other intellectual property (e.g., trade names) to these subsidiaries for use in the manufacture and sale of various products, including most autoparts. We believe that these ventures, alliances and license arrangements give us access to advanced technology that we otherwise would not be able to develop and provide us with important competitive advantages. However, we cannot assure that in the future certain of these partners will not prefer to conduct business directly in Mexico and terminate their relationships with us in view of the easing of the limitations on foreign investment, the reduction of import duties and tariffs that has occurred in recent years and as a result of the continued implementation of the North American Free Trade Agreement or for other reasons. Accordingly, we cannot assure you that we will be successful in renewing any of our technology, license, joint venture or other agreements or arrangements upon their expiration, in renewing these agreements or arrangements on terms as favorable as the present ones, in forming similar alliances with other partners or in developing equivalent technologies independently.
 
Environmental laws could result in added expenditures or liabilities
 
Our operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The fundamental environmental law in the Mexican federal system is the Ley General del Equilibrio Ecológico y la Protección al Ambiente (the Mexican General Law of Ecological Balance and Environmental Protection or the “Ecological Law”). Under the Ecological Law, the Mexican government has implemented an aggressive program to

9


Table of Contents
protect the environment by promulgating rules concerning water, land, air and noise pollution, and hazardous substances. The Mexican government also has enacted regulations concerning the importation and exportation of hazardous materials and hazardous waste. In addition, Mexican regulatory authorities have promulgated various health and environmental regulations and standards, which are applicable to our pork business, in order to control and eliminate the spread of infections and other types of diseases in the Mexican Bajio region.
 
We, and particularly our Chemical Sector, use and produce a substantial amount of substances and emissions that are or could become subject to regulatory control. We believe that all of our facilities and real estate investments presently are in substantial compliance with applicable environmental laws and regulations as currently enforced. However, we have no basis for predicting what effect, if any, stricter enforcement of existing laws and regulations or the adoption of additional environmental laws and regulations would have on our results of operations, cash flows or financial condition.
 
Risks Relating to Autoparts Sector
 
The automotive industry is highly cyclical and could adversely affect our revenues and results of operations
 
Our Autoparts Sector is directly affected by domestic and foreign automotive production and sales. Automotive production and sales are highly cyclical and impacted by the strength of the economy generally, by prevailing interest rates and by other factors. The largest U.S. and foreign automobile manufacturers were affected by the slowdown of the U.S. economy and, therefore, have reduced or delayed their output, which has adversely affected Unik, as well as the automotive parts industry in Mexico. We cannot predict when the slowdown of the U.S. economy will end or make any assurances that it will not become more severe.
 
We are dependent on a small group of principal customers and the sales of certain products and the loss of these customers could affect our revenues and results of operations
 
Our largest customers in our Autoparts Sector are DaimlerChrysler, Ford, General Motors, Volkswagen and Renault-Nissan. In 2001, these customers represented 58% of our total sales, of which DaimlerChrysler accounted for 21%, General Motors accounted for 15%, Ford accounted for 12%, Volkswagen accounted for 5% and Renault-Nissan accounted for 5%, and aggregate sales to Original Equipment Manufacturers (“OEMs”) represented 83% of our total autoparts sales. Although we have had a long-standing relationship with each of these customers, if we lost any significant portion of our sales to any of these customers, it would adversely affect our business and operating results.
 
In 2001, a significant percentage of our sales was derived from the following products: transmissions (26.3%), front and rear axles (17.1%), pickup boxes and stamping products (12.8%), constant velocity joints (11.5%), tappets, pistons and piston pins (6.0%), proppeller shafts (6.3%) and aluminum and steel wheels (4.9%). A significant decrease in the sales of any of these products could also adversely affect our business and operating results.

10


Table of Contents
 
The OEM supplier industry is highly competitive, which could affect our net sales and operating expenses
 
The automotive industry is characterized by a small number of OEMs that are able to exert considerable pressure on automotive parts suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. In addition, the OEM supplier industry is highly competitive, with price, quality and technological innovation as the primary elements of competition. We cannot assure you that our business will not be adversely affected by increased competition in the markets in which we operate.
 
Labor relations may affect our revenues and results of operations
 
We consider our relations with our employees and their union representatives to be on good terms, but cannot assure you that future contract negotiations with union representatives will be favorable to us or that a change in the nature of these relationships will not result in labor interruptions, or that work stoppages or other labor unrest will not occur in the ordinary course of these relationships.
 
Risks Relating to our Chemical Sector
 
Our chemicals business is cyclical and may be adversely affected by events and conditions beyond our control
 
The chemicals industry is a highly cyclical business. Ethylene- and Benzene- derivative products, such as petrochemicals, are particularly heavily impacted by the business cycles of the chemicals industry. Our chemicals business may also be affected by other events or conditions that are beyond our control, including changes or developments in domestic or foreign economic markets, increases in natural gas prices or the cost of raw materials, competition from other chemicals manufacturers, changes in the availability or supply of chemical products generally and unscheduled downtime of plants. These external factors may cause fluctuations in the demand for our chemical products and fluctuations in our prices and our margins, which may adversely affect our financial results, income and cash flow.
 
The principal raw materials used in our chemicals business (styrene monomer, butadiene and natural gas) are subject to substantial price fluctuations, which may adversely affect the financial results of our Chemical Sector; however, the current depressed price of these principal raw materials has had a positive effect on our margins for synthetic rubber and polystyrene. We cannot predict when the prices of these principal raw materials will recover.
 
Material events affecting our customers may affect the results of operations of our Chemical Sector
 
Our sales volumes of synthetic rubber and carbon black have decreased because of the shutdown of three tire manufacturing facilities, one of which occurred in 2000 and the other two in 2001 (one of which subsequently reopened in May 2002). We have partly offset the reduction in sales volume by increasing our sales to new and existing customers. We are unable to predict and, therefore, cannot plan for events such as these. In addition, the slowdown of the U.S. economy has increased competition from U.S. and other chemical manufacturers, which has put added pressure on the pricing of our products.

11


Table of Contents
 
Risks Relating to our Food Sector
 
A decrease in the supply of tomatoes and hot peppers may adversely affect our sales in the Food Sector
 
Our domestic and U.S. branded food operations may be adversely affected if there is a shortfall in the tomato harvests in Mexico or the United States and, to a lesser extent, the hot pepper harvests in Mexico. The size of the harvest of these products varies based upon weather conditions and other factors, none of which is within our control.
 
The prices of our pork products may decline as a result of lower-priced U.S. pork imports
 
In May 2002, the U.S. Farm Security and Rural Investment Act of 2002 (the “Farm Bill”) was enacted into law, which, among other things, grants subsidies to U.S. pork producers. As a result of these subsidies, U.S. pork producers have been exporting pork to Mexico at prices below the Mexican market. Mexican pork producers are considering adopting several protective measures in response to these exports. These lower-priced U.S. pork imports may result in the depression of Mexican pork prices and, thereby, reduce our net sales and adversely affect our results of operations.
 
Risks Relating to our Real Estate Sector
 
The value of our real estate investments is subject to factors and conditions outside of our control
 
Our revenue from real estate operations and the value of our real estate properties are affected by many factors outside of our control, including the overall economic conditions in Mexico and the conditions of the Mexican Real Estate Sector. Our real estate business would be adversely affected if these external factors led to reduced demand for our properties or to increased costs and we were not able to reflect this increase in the price of our projects.
 
Risks Relating to Our Controlling Shareholder and Capital Structure
 
Certain members of the Senderos family effectively control our management and their interests may differ from those of other securityholders
 
As of April 25, 2002, the date of our last general shareholders’ meeting, Fernando Senderos Mestre, our chairman and chief executive officer, and his immediate family approximately own (beneficially or of record) 61.41% of our Series A shares, 49.74% of our Series B shares and 28.85% of our Series C shares. As a result of the shares owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre exercises voting control (see Item 6. “–Compensation of Directors and Officers” for information about these additional shares), the Senderos family has the power to elect a majority of our board of directors, to control the general management of Desc and to determine the outcome of substantially all matters requiring shareholder approval, including the payment of dividends, except in those limited instances requiring the vote of the holders of the Series C shares.

12


Table of Contents
 
Future sales of our shares by the controlling shareholder may affect the stock prices of our securities
 
Sales of Desc shares held by the Senderos family may adversely affect the trading price of the Series A, Series B and Series C shares on the Bolsa Mexicana de Valores, S.A. de C.V. (the “Mexican Stock Exchange”) and the price of the ADSs on the New York Stock Exchange (“NYSE”). The Senderos family is not subject to any contractual restrictions that limit their right to dispose of their Series A, B and C shares. Members of the Senderos family have been shareholders of Desc since its inception in 1973 and, as long-term investors, we believe that their current intention is to maintain their shareholdings in Desc.
 
Market for the ADSs and the Series C shares is limited
 
The Series C shares are listed on the Mexican Stock Exchange, which is Mexico’s only stock exchange. There is no public market outside of Mexico for the Series C shares. The ADSs are listed on the NYSE. The Mexican securities market is not as large or as active as securities markets in the United States and certain other developed market economies. As a result, the Mexican securities market has experienced less liquidity and more volatility than has been experienced in such other markets. These market characteristics may limit the ability of a holder of ADSs to sell the underlying Series C shares and may also affect the market price of the Series C shares and the ADSs.
 
Desc is subject to different corporate disclosure and accounting standards than U.S. companies
 
As a listed company, we are required to provide annual audited and quarterly unaudited financial information to the Mexican Stock Exchange and the Comisión Nacional Bancaria y de Valores (the National Banking and Securities Commission or the “CNBV”) and to file certain information with the SEC pursuant to U.S. law. However, you may not be able to obtain as much publicly available information about foreign issuers of securities traded in the United States as is regularly published by or about U.S. issuers of publicly traded securities.
 
Mexican companies must prepare their financial statements in accordance with Mexican GAAP. Mexican GAAP differs in significant respects from U.S. GAAP, including, but not limited to, the treatment of capitalized interest, deferred income taxes, minority interest, amortization of negative goodwill and inventory valuations. In particular, all Mexican companies must incorporate the effects of inflation directly in their accounting records and in published financial statements. The effects of inflation accounting under Mexican GAAP are not eliminated in a reconciliation to U.S. GAAP. For this and other reasons, the presentation of Mexican financial statements and reported earnings may differ from that of U.S. companies. See Notes 17 and 18 to the Financial Statements.
 
Holders of ADSs are not entitled to attend shareholders’ meetings, and they may only vote through the Depositary
 
Under our bylaws, a shareholder must deposit its shares with our secretary or with a Mexican custodian in order to attend a shareholders’ meeting. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to attend shareholders’ meetings. A holder of ADSs also will not be permitted to vote its shares directly at a shareholders’ meeting or to appoint a proxy to do so. Rather, a holder of ADSs is entitled to instruct the Depositary as to

13


Table of Contents
how to vote its shares represented by the ADS in accordance with the procedures provided in the deposit agreement with respect to the ADSs.
 
You may not be entitled to participate in any future preemptive rights offering, which may result in a dilution of your equity interest in Desc
 
Under Mexican law, if we issue new shares for cash as a part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in Desc. Rights to purchase shares in these circumstances are commonly referred to as preemptive rights. We may not legally be permitted to allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase unless (1) we file a registration statement with the SEC with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of ADS in the United States and any other factors that we consider important in determining whether to file a registration statement.
 
We cannot make any assurances that we will file a registration statement with the SEC to allow holders of ADSs in the United States to participate in a preemptive rights offering or that an exemption from the registration requirements of the U.S. Securities Act of 1933 will be available. As a result, the equity interests of holders of ADSs would be diluted to the extent that ADS holders cannot participate in a preemptive rights offering. See Item 10. “Additional Information—Bylaws—Share Capital” for additional information concerning the ability of holders of Series C shares to participate in preemptive offerings.
 
Minority shareholder protections in Mexico are different from those in the United States
 
Under Mexican law, the protections provided to minority shareholders are different from those in the United States. Specifically, the law respecting fiduciary duties of directors is not well developed, there is no procedure for class actions or shareholder derivative actions and the procedural requirements for bringing shareholder lawsuits are different. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholder than it would be for minority shareholders in the United States.
 
Risks Relating to Mexico
 
Economic and political developments in Mexico may adversely affect our business
 
We are a Mexican corporation and substantially all of our assets (including our manufacturing facilities) are located in Mexico. For this reason, our financial condition, results of operations, prospects and ability to pay amounts when due on our indebtedness may be affected by factors, such as inflation, interest rates, currency fluctuations, taxation, social instability, new regulatory environments and other political or economic developments, in or affecting Mexico, over which we have no control.

14


Table of Contents
 
A downturn in the Mexican economy may adversely affect Desc
 
Beginning in December 1994, Mexico experienced an economic crisis characterized by exchange rate instability and devaluation of the Peso, high inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemploy­ment. The economic crisis was caused in part from a series of internal disruptions and political and economic events that adversely affected the Mexican economy and undermined the confidence of investors in Mexico.            
 
In the second half of 1997 and in 1998, economic crises in Asia, Russia, and Brazil resulted in very volatile global financial conditions, large outflows of capital from emerging market countries such as Mexico, and volatile exchange rates for emerging markets’ currencies such as the Peso. As a result, Mexico experienced higher interest rates, slower economic growth and higher inflation during the second half of 1997 and during all of 1998. Mexican interest rates, which had declined to an average of 19.7% per annum in 1997, increased in 1998 to an average of 24.7% per annum. Gross Domestic Product, or “GDP”, growth declined from 6.76% in 1997, to 4.83% in 1998. Inflation, which had declined to 15.7% in 1997 increased to 18.6% in 1998.
 
The current slowdown in the U.S. economy has adversely affected the Mexican economy and our businesses. In particular, the slowing U.S. economy has led to a decrease in automotive production in the United States, which has affected our autoparts business. Although we believe that the actions taken by the U.S. Federal Reserve Board in lowering interest rates may accelerate a recovery of the U.S. economy, we cannot provide any assurance that this downturn will not continue or become more severe.
 
If the Mexican economy experiences a recession or if inflation and interest rates increase significantly or other adverse economic conditions affect Mexico, such as those experienced beginning in December 1994, our business, financial condition and results of operation could suffer.
 
Political events in Mexico may affect the financial condition and results of operations of Desc
 
Since the Mexican federal government has exercised and continues to exercise significant influence over many aspects of the Mexican economy, its actions concerning the economy or regulating certain industries could have a significant effect on Mexican private sector entities, including Desc, and on market conditions, prices and returns on Mexican securities.
 
In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition National Action Party (Partido Accion Nacional or “PAN”) won the presidency, and he assumed office on December 1, 2000. His victory ended more than 70 years of presidential rule by the Institutional Revolutionary Party (the Partido Revolucionario Institucional or “PRI”). Neither the PRI nor the PAN succeeded in securing a majority in the Mexican Congress or Senate.
 
We cannot assure you that future developments in the Mexican political or social environment or that the policies of the Mexican government, over which we have no control, will not adversely affect our financial condition, results of operations or prospects.

15


Table of Contents
 
Devaluations or changes of the Peso relative to the Dollar may adversely affect our financial condition and results of operation
 
In the past, the value of the Peso has been subject to significant fluctuations with respect to the Dollar, and it may fluctuate significantly in the future. Fluctuations in the exchange rate between the Peso and the Dollar will affect the Dollar value of an investment in our equity securities and of dividend and other distribution payments on those securities.
 
As of June 2002, 68% of our indebtedness was in Dollars and 32% was in Pesos, and we may incur additional non-Pesos-denominated indebtedness in the future. In addition, the price we pay for certain raw materials is set by reference to international prices fixed in currencies other than Pesos, and the majority of our purchases of equipment are Dollar-denominated. Consequently, declines in the value of the Peso relative to other currencies will increase our interest costs in Pesos and result in foreign exchange losses, and will increase the Peso cost of certain of our raw materials and capital expenditures. We generally do not hedge against the risk of exchange rate fluctuations.
 
Foreign currency availability may impair our ability to make Dollar-denominated payments
 
Except for the period from September through December 1982 during the Mexican liquidity crisis, Banco de México consistently has made foreign currency available to Mexican private sector entities, such as Desc, to meet their foreign currency obligations and has not adopted any measure to control the availability of foreign currency since November 11, 1991. Nevertheless, if there were renewed shortages of foreign currency, Banco de México might not continue to make foreign currency available to private sector companies, and foreign currency needed by Desc to service its foreign currency obligations might be available for purchase in the open market only at a substantial additional cost.
 
An increase in inflation may adversely affect our financial condition and results of operation
 
During most of the 1980s and in 1995 and 1996, Mexico experienced high levels of inflation. In the past, inflation has led to high interest rates, devaluations of the Peso and (during the 1980s) substantial government controls over exchange rates and prices, which at times adversely affected our operating revenues and margins. High rates of inflation relative to the rate of devaluation of the Peso against the Dollar reduce our operating margins in business segments where costs are generally denominated in Pesos while sales are denominated in Dollars, such as autoparts. The annual rates of inflation, as measured by changes in the NCPI, were 12.3%, 9.0% and 4.4% for the years 1999, 2000 and 2001, respectively. We cannot assure you that Mexico will not experience high inflation in the future.
 
Developments in other emerging market countries may affect our business or the market price of our securities
 
The market value of securities of Mexican companies to varying degrees is affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. For example, in October 1997, prices of both Mexican debt securities and Mexican equity securities dropped substantially due to a sharp drop in the value of Asian markets. Similarly, during the second half of 1998, prices of Mexican

16


Table of Contents
securities were adversely affected by the economic crises in Russia and Brazil. A serious deterioration in the political and economic situation in Argentina occurred in December 2001, including high inflation levels and the rapid devaluation of the Argentine peso against the Dollar (which has not had the same affect on Mexico as has been the case with previous emerging market country crises). We can make no assurance that the market value of our securities would not be adversely affected by events elsewhere, especially in emerging market countries.
 
Item 4.    Information on our Company
 
History and Development of our Company
 
Desc is a corporation (sociedad anónima de capital variable) organized under the laws of Mexico. It was incorporated in 1973 under the name “Desc, Sociedad de Fomento Industrial, S.A. de C.V.” On April 28, 1994, we changed our name to “Desc, S.A. de C.V.” The duration of Desc is 99 years from the date of its incorporation.
 
Our executive offices are located at Paseo de los Tamarindos 400-B, Bosques de las Lomas, 05120 México, D.F., México, and our telephone number at that address is (5255) 5261-8000.
 
Desc’s agent for service for actions brought by the SEC pursuant to the requirements of the U.S. federal securities laws is CT Corporation System, which is located at 111 Eighth Avenue, 13th Floor, New York, NY 10011.
 
Principal Capital Expenditures and Divestitures
 
The following table lists our capital expenditures and other investments by business segment for the periods shown. Capital expenditures and other investments may include investments in or acquisitions of assets or the capital stock of existing businesses. A more-detailed explanation of Desc’s principal capital expenditures and divestitures is described under each of the business segments below.
 
    
Year ended December 31,

    
1999

  
2000

  
2001

    
(In millions)
Autoparts Sector
  
Ps.        906.9
  
Ps.    1,145.6
  
Ps.        305.7
Chemical Sector
  
994.3
  
350.8
  
239.9
Food Sector
  
806.0
  
331.3
  
168.7
Real Estate Sector(1)
  
631.4
  
791.8
  
702.3
Desc 
  
23.1
  
1.9
  
2.4
    
  
  
Total
  
Ps.    3,361.7
  
Ps.    2,621.4
  
Ps.    1,419.0
    
  
  

(1) Includes investments in real estate projects and investments in real estate for rent.

17


Table of Contents
 
Business Overview
 
General
 
We are a diversified holding company and one of the largest companies in Mexico. We are engaged in four principal sectors: autoparts, chemicals, food and real estate. Our autoparts business is conducted through Unik, which is a wholly owned subsidiary as well as a holding company with no significant operations. Our food business was conducted through our wholly owned subsidiary, Agrobíos, S.A. de C.V. until December 1999, when Agrobíos was merged into Desc. As a result of the merger, our food business now is conducted through three principal operating subsidiaries: Agroken, S.A. de C.V. (pork), a wholly owned subsidiary, Corfuerte, S.A. de C.V. (the surviving corporation after a merger between Grupo Corfuerte, S.A. de C.V. and Corfuerte, S.A. de C.V.) (branded foods in Mexico), a wholly owned subsidiary, and Authentic Acquisition Corporation, Inc. (“Authentic Acquisition Corporation) (branded foods in the U.S.), a wholly owned subsidiary. Our chemical business was conducted through Girsa until December 2001, when Girsa was merged into Desc. As a result of the merger, our chemical business is now conducted by Desc through Girsa Corporativo, S.A. de C.V., a wholly owned subsidiary of Desc. Our real estate business was conducted through Dine until May of 2002, when Dine was merged into Desc. Our real estate business is now conducted by Desc through its real estate subsidiaries.
 
The following charts depict the percentage of our 2001 consolidated net sales and operating income by business segment:
 
LOGO

18


Table of Contents
 
LOGO
 
The following chart depicts the percentage of book value of our investments in each of our business segments at December 31, 2001:
 
LOGO

19


Table of Contents
 
Sales information by geographic market
 
The following table shows the approximate aggregate sales of Desc’s products for each of the past three years by geographic region:
 
    
Net sales for the years ended December 31,

Region

  
1999

  
2000

  
2001

    
(Thousands of Pesos)
Continental Europe
  
Ps.          377,261
  
Ps.          399,754
  
Ps.          604,593
North America
  
9,181,815
  
9,126,647
  
7,228,481
Asia
  
552,032
  
638,135
  
669,768
México(1)
  
15,887,026
  
13,744,719
  
11,285,969
Rest of the world
  
447,115
  
562,200
  
850,288
    
  
  
Total
  
Ps.    26,445,249
  
Ps.    24,471,455
  
Ps.    20,639,099
    
  
  

(1)
 
In 1999, we divested our poultry business.            
 
Autoparts
 
Our autoparts business, which is conducted through our wholly owned subsidiary Unik, manufactures 41 different types of autoparts products, including light, medium and heavy duty manual transmissions and clutches, constant velocity joints, rear and front traction axles, tappets, pistons and piston pins, pick-up truck bodies and other stamped metal products, propeller shafts, steel and aluminum wheels, gears, gaskets, seals, alternators, ignition coils and spark plugs.
 
We are one of the largest independent autoparts manufacturers in Mexico. For the years ended December 31, 1999, 2000 and 2001, our autoparts business contributed 51.9%, 69.1% and 59.7%, respectively, of our consolidated operating income and 42.9%, 46.7% and 45.5%, respectively, of our consolidated net sales.
 
The following table presents the net sales generated by our principal autoparts parts products for the years ended December 31, 1999, 2000 and 2001, and the percentage of this segment’s 2001 net sales that is represented by these products:

20


Table of Contents
 
    
Net sales

    
% of net
sales

 
    
1999

    
2000

    
2001

    
2001

 
    
(Thousands of Pesos)
 
Transmissions
  
Ps.      4,003,862
(1)
  
Ps.      3,391,782
(1)
  
Ps.    2,475,273
 
  
26.3
%
Rear and front traction axles
  
1,620,515
 
  
1,805,557
 
  
1,603,669
 
  
17.1
 
Pick-up truck bodies and other stamped metal products
  
976,542
 
  
1,289,570
 
  
1,207,072
 
  
12.8
 
Constant velocity joints
  
1,070,363
 
  
1,174,007
 
  
1,083,903
 
  
11.5
 
Motor valves and tappets, pistons and piston pins
  
1,104,825
 
  
924,015
 
  
564,779
(2)
  
6.0
 
Propeller shafts
  
728,344
 
  
708,489
 
  
592,817
 
  
6.3
 
Steel and aluminum wheels
  
486,101
 
  
665,005
 
  
460,818
 
  
4.9
 
Gears
  
460,502
 
  
445,815
 
  
364,478
 
  
3.9
 
Other autoparts
  
881,408
 
  
1,012,932
 
  
1,045,120
 
  
11.2
 
    

  

  

  

Total
  
Ps.    11,332,462
 
  
Ps.    11,417,172
 
  
Ps.    9,397,929
 
  
100.0
%
    

  

  

  

(1)
 
Includes sales from our clutch business, which we sold in July 2001.
(2)
 
During October 2001, Desc swapped 60% of its valve business for 40% of TRW Inc.’s piston business (pistons, pins and tappets). As a result, TRW acquired 100% of the valve business and Unik retained 100% of the pistons, pins and tappets business and the “Moresa” brand.
 
Unik’s capital expenditures during 2001 were $32.1 million. These funds were used mainly to expand and modernize our plants for axles, forgings, gears, constant velocity joints and transmissions. Our technological improvement projects continue to be state of the art.
 
Our autoparts business has received numerous quality awards from the Mexican government, clients and joint venture partners. Transmisiones y Equipos Mecánicos S.A. de C.V. (“Tremec”), our subsidiary which manufactures manual transmissions, received the “Zero Defects” award from Renault-Nissan and from the Mexican government the National Award for Electric Power Saving in 2001, the National Technology Award in 2000 and the National Export Award in 1998. In addition, Tremec was a finalist for the National Quality Prize in 2001 and received the “Supplier of the Year” award from General Motors in 1997. Cardanes, S.A. de C.V., our subsidiary that manufactures propeller shafts and universal joints, received the “Dana Quality Leadership Process” and the “Supplier of the Year” from General Motors in 2001. Pintura, Estampado y Montaje, S.A. de C.V. (PEMSA), our subsidiary that manufactures pick-up bodies and other stamped metal products, and Velcon, S.A. de C.V., our subsidiary which manufactures constant velocity joints, each also received a “Supplier of the Year” award from General Motors in 2001, and Pistones Moresa, S.A. de C.V., our subsidiary which manufactures pistons, received this award in 1998. In 2001, Velcon, TF Victor and Morestana received the “Yurio Shoh” award from Nissan. In 1998, Tremec was awarded the Shingo Prize for Excellence in Manufacturing, which recognizes manufacturing excellence in the United States, Canada and Mexico and is considered one of the “Triple Crown” of industrial excellence awards, along with the Baldridge National Quality Award and the Deming Prize. The Shingo Prize is administered by the College of Business at Utah State University in partnership with the National Association of Manufacturers of the U.S. We believe that these awards are attributable, in part, to the ongoing implementation of Unik’s total quality improvement efforts. All of our plants that supply OEMs are QS–9000 certified, which qualifies them as approved suppliers to DaimlerChrysler, Ford and General Motors and Tremec, Cardanes and TF Victor have received 1S0-14001 certification,

21


Table of Contents
which is an international standard for environmental management.
 
Market overview; competition
 
We sell autoparts to domestic OEMs for installation in new cars and trucks, as well as to distributors for resale in the autoparts aftermarket. Our significant OEM customers include DaimlerChrysler, Ford, Freightliner, General Motors, John Deere, Kenworth, Navistar, Renault-Nissan, Ssangyong, Volkswagen, Volvo and ZF-Meritor.
 
Both the OEM market and the aftermarket for autoparts are highly competitive with regard to price and quality. We compete with numerous domestic and foreign manufacturers of autoparts. We continually seek to maintain a competitive advantage over other manufacturers with respect to productivity and product quality. We accomplish this in part through technical assistance and license agreements with leading foreign manufacturers of autoparts, the development of our own technology, our knowledge of the markets in which we compete and our ability to achieve manufacturing efficiencies.
 
The table below presents information concerning our domestic and export sales of autoparts. Approximately 92% of our exports of autoparts are to the United States and Canada.
 
    
% of net sales

    
1999

  
2000

  
2001

Domestic market
                    
OEMs
  
 
19%
  
 
21%
  
 
18%
Aftermarket
  
 
17%
  
 
17%
  
 
17%
Export market(1)
  
 
64%
  
 
62%
  
 
65%
Total export sales ($ in millions)
  
$
638.1
  
$
686.6
  
$
638.1

(1)
 
Includes “indirect” exports by OEMs that purchase parts from us.
 
Technological assistance and licensing agreements
 
Most of our major autoparts are produced using technology and licenses from leading international automobile manufacturers and autoparts producers. Through these arrangements, we have access to up-to-date technology necessary to manufacture automotive components competitively in world markets. In many cases, these arrangements not only provide us with technological information, but also give us access to worldwide markets and customers. The following are the most significant of these arrangements:
 
Licensor

  
Product

Dana Corporation
  
Rear and front traction axles, propeller shafts and universal joints
GKN Industries Limited
  
Constant velocity joints
Hayes Lemmerz International, Inc.
  
Steel wheels and aluminum wheels
Delphi Automotive Systems Corporation
  
Spark plugs

22


Table of Contents
 
In general, under technology and license agreements, these foreign manufacturers provide us with technological assistance or license their proprietary technology to us in return for a fee based upon a percentage of sales. These technology assistance and license agreements typically were entered into for initial fixed terms, however, many are renewed on an annual or biannual basis, and could now be terminated by either party on relatively short notice. We also develop our own technology with respect to some automotive products, such as transmissions, pistons, piston pins, stamping products and tappets, and work with our partners to jointly develop technologies for specific applications.
 
We also are partners with some of these foreign manufacturers in joint venture companies that produce various automobile parts utilizing technology licensed by the foreign joint venture partner. In the fourth quarter of 2000, we restructured the ownership of Velcon, our joint venture with Dana Corporation and GKN Industries Limited, which manufactures constant velocity joints. As a result of this restructuring, Unik increased its ownership to 51%, GKN increased its ownership to 49% and Dana exited this subsidiary.
 
During October 2001, Desc reached an agreement to swap 60% of its valve business for 40% of TRW Inc.’s piston business (pistons, pins and tappets). This transaction ended the partnership between TRW and Unik, as TRW acquired 100% of the valve business. However, Unik retained 100% of the pistons, pins and tappets business and retained the “Moresa” brand, a leader in the Mexican autoparts market. During July 2001, Desc sold its heavy duty and medium duty truck clutch business of Transmisiones TSP, S.A. de C.V. to Eaton Corporation.
 
The following is a list of the most significant of our joint ventures and the percentage ownership of the foreign partner in the joint venture:
 
Joint Venture Partner

  
Joint Venture Company

    
% Ownership
By Joint Venture
        Partner        

Dana Corporation
  
Spicer, S.A. de C.V.
    
49.0
GKN Industries Limited
  
Velcon, S.A. de C.V.
    
49.0
Hayes LemmerzInternational, Inc.
  
Hayes Wheels de México, S.A. de C.V.
    
40.0
Delphi Automotive Systems Corporation
  
Bujías Mexicanas, S.A. de C.V.
    
40.0
 
Distribution arrangements
 
Our autoparts products generally are sold by means of purchase orders which require us to supply products for particular model releases during finite terms of up to six months. We have been seeking to increase our participation in the export market, and our autoparts exports have increased 38.5% from $461.2 million in 1997 to $638.1 million in 2001. In 1997, exports represented 58% of Unik’s total sales, while in 2001 exports represented 65% of its total sales.
 
Suppliers
 
The primary raw materials for the autoparts products that we manufacture are iron castings, steel and aluminum. We believe that the markets for these materials are highly price competitive, and we have never experienced difficulty in obtaining these commodities. We

23


Table of Contents
 
believe that there will continue to be a large number of producers of the requisite castings, steel and aluminum, and adequate worldwide supplies of these materials, for the foreseeable future.
 
Properties/plants
 
During the past few years, we have implemented a modernization program to improve our existing autoparts manufacturing facilities and also build new facilities to replace outdated facilities. We invested approximately Ps.906,916 in this program in 1999, Ps.1,145,618 in 2000 and Ps.305,662 in 2001. We believe that the resulting improvements in efficiency, the increased flexibility in utilizing excess plant capacity and decreases in fixed costs derived from the this modernization program have enabled us to improve operating margins from 1999 levels, although the improved margins also reflect the increase of capacity utilization from 70% in 1999 to 75% in 2000. In 2001, the average capacity utilization decreased to 63% because of the economic slowdown in the U.S.
 
We produce our autoparts at 21 plants located throughout Mexico and one plant located in the United States. The following table presents the principal products produced at each of the most significant of these plants and their locations and their respective rates of utilization:
 
Products

 
Location of plant

 
Utilization

Front and rear axles
 
La Presa, Estado de México
 
63%
Heavy-duty transmissions and clutches
 
Pedro Escobedo, Querétaro; Knoxville, Tennessee
 
30%
Light and medium-duty manual transmissions
 
Querétaro, Querétaro
 
65%
Steel wheels
 
Tlalnepantla, Estado de México
 
57%
Aluminum wheels
 
Chihuahua, Chihuahua
 
33%
Pistons
 
Celaya, Guanajuato; Saltillo, Coahuila
 
50%
89%
Pick-up truck bodies and other stamped metal parts
 
Celaya, Guanajuato
 
80%
Constant velocity joints
 
Celaya, Guanajuato
 
82%
Ignition coils, alternators
 
Tlalnepantla, Estado de México
 
57%
Spark plugs
 
Tlalnepantla, Estado de México
 
31%

24


Table of Contents
 
Products

  
Location of plant

    
Utilization

    
México
      
Propeller shafts and universal joints
  
Querétaro, Querétaro
    
65%
Steel forging
  
Tlaxcala, Tlaxcala;
Querétaro, Querétaro
    
53%
Gears
  
Querétaro, Querétaro
    
82%
Gaskets and seals
  
Naucalpan, Estado de México
    
51%
Piston pins
  
Celaya, Guanajuato
    
47%
Tappets
  
Aguascalientes,
Aguascalientes
    
58%
 
Chemicals
 
We conduct our chemical business through Girsa Corporativo, S.A. de C.V., a wholly owned subsidiary of Desc. The Chemical Sector produces and sells chemicals and is the leading (and in some cases the only) producer of some of these chemical products in Mexico. Our main chemical products include synthetic rubber, polystyrene, carbon black, methyl methacrylate or MMA, specialty lattices, phosphates, acrylics, natural pigments, laminates, particle board, adhesives and glues, waterproofing additives and sealants. For the years ended December 31, 1999, 2000 and 2001, the Chemical Sector contributed 28.0%, 23.0% and 28.6%, respectively, of our consolidated operating income, and 30.0% and 33.8% and 33.3%, respectively, of our consolidated net sales.
 
The following table presents the net sales generated by our principal Chemical Sector products for the years ended December 31, 1999, 2000 and 2001, and the percentage of this segment’s 2001 net sales that is represented by these products:

25


Table of Contents
 
    
Net sales

  
% of net sales

 
    
1999

  
2000

  
2001

  
2001

 
    
(Pesos in thousands)
 
Synthetic rubber
  
Ps.    1,523,426
  
Ps.    2,084,782
  
Ps.    1,772,751
  
25.8
%
Phosphates
  
1,491,551
  
1,326,794
  
1,202,383
  
17.5
 
Polystyrene
  
878,427
  
1,324,075
  
1,033,254
  
15.0
 
Carbon black
  
718,223
  
695,604
  
535,463
  
7.8
 
Particle board & laminates
  
643,159
  
632,109
  
382,018
  
5.6
 
Fester products (mainly asphalt coatings) and Acritón Products (mainly acrylic waterproofing)
  
563,556
  
485,760
  
441,984
  
6.4
 
Acrylics sheet
  
448,721
  
483,120
  
417,328
  
6.1
 
Adhesives and sealants
  
408,331
  
450,573
  
414,574
  
6.0
 
Natural pigments
  
592,107
  
592,107
  
199,131
  
2.9
 
Phenol
  
515,547
  
324,604
  
377,735
  
5.5
 
Emulsions (specialty lattices)
  
147,291
  
122,718
  
91,987
  
1.3
 
    
  
  
  

Total
  
Ps.    7,930,339
  
Ps.    8,263,335
  
Ps.    6,868,608
  
100.0
%
    
  
  
  

 
Our chemical products are used in the manufacture of a wide variety of other products, including asphalt and plastic modifiers, disposable packaging, tires and other industrial rubber goods, automotive rubber parts, footwear and carpeting. We sell our chemical products in Mexico and export markets, exporting products to over 50 countries in 2001. Our export sales were $228.7 million in 2001 and $254 million in 2000.
 
Resirene, S.A. de C.V. (“Resirene”), a subsidiary of Desc which manufactures polystyrene, won the National Quality Award in 2000. We are the only business in Mexico that has received this award five times (with our autoparts subsidiary Engranes Cónicos having received the award in 1994, our autoparts subsidiary Velcon having received the award in 1995, our chemical subsidiary Industrias Negromex, S.A. de C.V. (“INSA”), which manufactures synthetic rubber, having received the award in 1996 and our chemical subsidiary Nhumo S.A. de C.V. (“Nhumo”), which manufactures carbon black, having received the award in 1997). In addition, INSA, Nhumo, and Resirene and our subsidiaries Bioquimex Natural, S.A. de C.V., Plastiglás de México, S.A. de C.V., Rexcel, S.A. de C.V., Quimir, S.A. de C.V. and Industrias Resistol, S.A de C.V., each has received ISO-9002 or ISO-9001 certification, which are international standards for quality management and assurance adopted by more than 90 countries, thus enhancing our reputation as a reliable, high quality supplier of chemicals. In 1997, Nhumo became the first carbon black business in the world to receive ISO-14001 certification, an international standard for environmental management.
 
Market overview; competition
 
Desc is Mexico’s only producer of synthetic rubber, methyl methacrylate and carbon black, and has a leadership position in the production of polystyrene. The majority of our chemical products are sold in both the domestic and export markets. The domestic market accounted for 68% of our chemicals sales in 2001, and the export market accounted for 32% of such sales. We compete with foreign companies in chemicals such as Shell, Dow Chemical, ICI,

26


Table of Contents
BASF, Degussa, Georgia Gulf, Firestone, Albright & Wilson, FMC, Cyro, Wilson Art International, McMillan and Helm in both the Mexican and international markets.
 
Certain of our products, such as low-pressure laminates, glues, adhesives, acrylic and asphalt roofing systems, however, are sold primarily in the domestic market, where we compete with companies such as National Starch, HB Fuller, Henkel, Alkoat, Johns Mansville and Comex. We believe that we have a leadership position in the production of phosphates, acrylic laminates, natural pigments and laminated plastics and that we are the national leader in adhesives, glues and sealants. Our Resistol brand name is the most widely-recognized brand name for adhesives and glues throughout Mexico. We consider our Resistol, Fester, Acritón and Resikón brand names and the extensive national distribution systems for these lines of products to be significant competitive advantages.
 
The chemicals industry is a cyclical business that has experienced depressed conditions since 1998 resulting in lower prices. Although we believe that the chemicals industry has begun to recover and that our focus on specialty products and low-cost production during the last few years is likely to mitigate the effects of adverse conditions in the global chemicals market, this might not be the case.
 
Technology
 
With respect to the majority of our chemical businesses, we utilize proprietary technology that we have developed or acquired from third parties. Our carbon black business, for example, utilizes technology developed by Cabot Corporation, our partner in this business and a world leader in carbon black research, development and production. Our polysterene business utilizes technology originally licensed from Monsanto which the Chemical Sector has improved and adapted over the years. Similarly, our synthetic rubber business utilizes technology originally licensed from Phillips Petroleum which the Chemical Sector has improved and adapted over the years. More recently, we have entered into reciprocal technological exchange agreements in connection with our joint ventures in synthetic rubber with Repsol Química, which is a world leader in synthetic rubber research, development and production.
 
Supply arrangements and suppliers
 
Petróleos Mexicanos (“Pemex”) is one of the principal suppliers of raw materials to our chemical businesses. We have executed agreements with Pemex with respect to styrene monomer, hydrogen cyanide, carbon black feedstock, natural gas and methanol. These agreements contain contractual assurances as to product quality and volumes and provide for competitive pricing. We also purchase raw materials from numerous other domestic and foreign suppliers. The market for these raw materials is highly price competitive and we believe that there generally is an adequate supply of these raw materials.

27


Table of Contents
Products
 
The following table presents information with respect to our chemical products:
 
Product

  
Principal Uses

  
Raw Materials Necessary
to Produce Product

Synthetic rubber
  
Production of tires, footwear, asphalt and plastic modifiers, adhesives, industrial rubber products, automotive engines and other autoparts
  
Butadiene and styrene
Polystyrene
  
Production of plastics for disposable packaging, home appliances, cassettes, compact discs, light fixtures, school supplies and office equipment
  
Styrene monomer
Carbon black
  
Production of tires, ink, hoses, belts and other products using rubber
  
Carbon black feedstock and natural gas
MMA
  
Acrylic sheets’ raw material
  
Acetocianhydrine Methanol
Specialty lattices
  
Production of carpeting, chewing gum, rubber, paper and tissues
  
Butadiene and styrene monomer
Phosphates
  
Detergents, water treatment and soft drink production
  
Phosphoric acid and soda ash
Natural pigments
  
Coloring of poultry, egg yolks, and shrimp skin
  
Paprika meal, Marigold meal, Oleoresin
Acrylic sheets
  
Manufacturing of signs, displays, advertisements and safety devices.
  
MMA
Particle boards and laminates
  
Manufacturing of furniture, office and home products, kitchen countertops and tabletops, and floors
  
Wood shavings, Melanin, Urea
Adhesives and glues
  
School, home and office supplies, shoes manufacturing, furniture manufacturing and carpentry
  
Cloroprene, vinyl acetate
Waterproofing sealants and additives
  
Manufacturing of construction-related products
  
Monomer acrylic resins
 
The synthetic rubber business is the largest business of the Chemical Sector. In 2001, the synthetic rubber business contributed 25.8% of the Chemical Sector’s net sales. We are the only manufacturer of synthetic rubber in Mexico. We produce both solution rubber and emulsion rubber, as well as elastomers, thermoplastics and specialty rubbers. We are a leader in the manufacture of asphalt modifying rubbers, which we sell to highway paving companies in the United States and more recently also in Europe. Our synthetic rubber products are exported to over 40 countries, principally the United States, Canada and countries in Europe, South America
 

28


Table of Contents
and the Far East. In 2001, exports accounted for approximately 80% of our synthetic rubber sales.
 
In November 1998, Girsa and Uniroyal Chemical Company, a subsidiary of Crompton and Knowles Corporation, formed a joint venture, Paratec, S.A. de C.V., to produce and market Uniroyal’s Paracril® nitrile rubber products, which are highly resistant to heat and used in automotive engines and other autoparts. The joint venture was 50% owned by Girsa and 50% owned by Uniroyal. The joint venture relocated Uniroyal’s Paracryl® production facilities to a newly-built 40,000 metric tons per year, state-of-the-art production plant in Altamira, Mexico. This joint venture was concluded in December 2001.
 
In July 1999, Girsa and Repsol Química, a subsidiary of Spain’s Repsol, S.A., formed a joint venture to produce and market solution synthetic rubbers used in the manufacturing of products such as asphalt, adhesives and footwear. This joint venture created significant synergies due to our Chemical Sector’s and Repsol Química’s complementary products and geographic markets, and these synergies have significantly boosted the competitiveness of this business. The joint venture is 50% owned by Girsa Inmobiliaria, S.A. de C.V. (a wholly owned subsidiary of Desc) and 50% owned by Repsol Química and operates under the name Dynasol Elastómeros. Repsol Química contributed to the joint venture its styrene-butadiene solution rubber plant in Santander, Spain with a capacity of 110,000 metric tons per year, its strong presence in the European market, particularly in the thermoplastic rubber segment, and a hydrogenated thermoplastics solution rubber plant in Santander, Spain, which had recently begun operations. Girsa Inmobiliaria contributed to the joint venture its production facility in Altamira, Mexico which produces styrene butadiene and thermoplastic solution rubbers and has a capacity of 90,000 metric tons per year, as well as its strong presence in the NAFTA region, particularly in the diblock copolymer specialties. We believe Dynasol Elastómeros is one of the three largest global producers of special solution styrene-butadiene rubbers and the second largest global producer of hydrogenated thermoplastic rubbers.
 
Our polystyrene business produces crystal polystyrene (GPPS) and impact polystyrene (HIPS), which are used in the disposable packaging and packing industries, lighting fixtures, school supplies, office equipment, and home appliances, including audio and video equipment and refrigerators. In 2001, our polystyrene business contributed 15% of the Chemical Sector’s net sales. Most of our polystyrene sales are to the domestic market, where we estimate that our market share in 2001 was approximately 50%. We attribute our dominance in the domestic polystyrene market to our ability to customize products, the quality of our service and our timely delivery.
 
We are the only manufacturer of carbon black in Mexico. Carbon black is principally used by the tire industry and we produce it utilizing technology licensed from Cabot Corporation, a world leader in carbon black research, development and production. Cabot owns a 40% interest in our carbon black business. We believe that our share of the domestic carbon black market in 2001 exceeded 95% and attribute our dominance to our technology, our large installed plant capacity, our focus on those carbon black varieties which have the highest demand, our continuous development of carbon black varieties with specific competitive advantages for their application, and our low-production costs which enable us to price our products competitively. Approximately 20% of our carbon black sales in 2001 were exports, primarily to the United States, Germany, Spain and Latin America.

29


Table of Contents
 
We are the only domestic manufacturer of methyl methacrylate (“MMA”) in Mexico, which is used in the manufacture of acrylic sheets, aniline, and fertilizers. In 2001, approximately 76% of our MMA sales were to the domestic market. We believe that due to our competitive prices, reliability, customer service and support, we have been able to establish long-term relationships and supply contracts with many of our international customers and suppliers.
 
Phosphates.    Our phosphates business produces chemicals for use in the manufacturing of household detergents, in soft drinks and for water treatment. In 2001, our phosphates business contributed 17.5% of the Chemicals Sector’s net sales. We are the largest manufacturer of phosphates in Mexico, and rank third in rated capacity of industrial sodium phosphates worldwide.
 
Natural pigments.    We produce natural yellow and red food pigments, and believe that we are one of the largest producers of these pigments in Mexico. Yellow pigments are used primarily to color poultry through poultry feed, and red pigments are used to color poultry, egg yolks and shrimp skins. Approximately 70% of our sales of these products in 2001 were exports to 11 countries. Our customers include Bayer and Perdue. The raw materials used to produce these products primarily are imported. Our manufacturing technology permits us to work closely with our customers to tailor our products to meet the specific needs of each customer.
 
Acrylic sheet.    We are the leading manufacturer of acrylic sheets in Mexico. These products are used in the manufacture of signs, displays, advertisements and safety devices. Approximately 60% of our sales of these products in 2001 were to the United States, Canada, Europe, Central and South America. Our manufacturing technology allows us to develop differentiated products targeted at greater value-added markets in the different countries where our products are sold.
 
Particle board and laminates.    We manufacture particle board and laminates using formaldehyde, urea, resins and natural wood shavings. We sell these products to manufacturers in the furniture and construction industries. Ninety-five percent of our sales of these products in 2001 were to the domestic market, with the balance being exported principally to North, Central and South America.
 
Adhesives and glues (Resistol).    We produce a line of adhesives and glues, which we sell under the brand name “Resistol” to retail merchandisers and industrial users throughout Mexico. In addition to household glues, our products include polyvinyl acetate (white glue), contact and acrylic adhesives, sealants and hot melts (specialized adhesives). We sell these products to a variety of industries including shoe manufacturers, the wood and furniture industries, artisans and the automotive industry. We distribute these products to more than 45,000 points of sale throughout Mexico, such as supermarkets, hardware stores and retail outlets as well as to industrial purchasers. The market for these products is highly fragmented. In 1998, we acquired Simon, S.A. de C.V., now Industrias Resistol, S.A. de C.V., which is the Mexican leader in polyurethane adhesives, to strengthen our market share in the shoe industry.
 
Waterproofing sealants and additives (Fester, Acritón and Resikón).    We produce waterproofing additives and sealants under the brand names Fester, Acritón and Resikón, as well as cement additives and construction coatings, under the Fester brand name, which is a widely recognized brand name in Mexico. We sell these products to manufacturers in the construction industry and to manufacturers of products for household use. We distribute these products through approximately 2,000 distributors located throughout Mexico, many of which carry Fester

30


Table of Contents
products exclusively. All of the distributors sell construction-related products and provide homeowners and others with maintenance and repair services using Fester products.
 
Properties/plants.    The table below presents the location of the facilities at which our chemical products are manufactured and their respective rates of utilization:
 
Products

  
Location

    
Utilization

 
Synthetic rubber
Emulsion Rubber
Solution Rubber
Nitrile Rubber
  
Altamira, Tamaulipas
Altamira, Tamaulipas
Altamira, Tamaulipas
    
77
97
67
%
%
%
Polystyrene
  
Coatzacoalcos, Veracruz
Xicohtzingo, Tlaxcala
    
82
70
%
%
Carbon black
  
Altamira, Tamaulipas
    
72
%
Methyl methacrylate
  
Cosoleacaque, Veracruz
    
100
%
Specialty lattices
  
Lechería, Estado de México
    
88
%
Phosphates/phosphorus derivatives
  
Coatzacoalcos, Veracruz
Tultitlán, Estado de México
Lechería, Estado de México
    
98
78
40
%
%
%
Orthophospate Natural pigments and additives
  
Lechería, Estado de México and Querétaro, Querétaro
    
45
%
Yellow pigments
  
Querétaro, Querétaro
    
41
%
Red pigments
  
Querétaro, Querétaro
    
29
%
Acrylic sheet
  
Ocoyoacac, Estado de México San Luis Potosí, San Luis Potosí
    
93
77
%
%
Laminates/particle board
  
Lerma, Estado de Mexico
Zitácuaro, Michoacán
    
60
94
%
%
Adhesives/waterproofing sealants
  
Salamanca, Guanajuato and Mexico City (2 sites)
    
52
%

31


Table of Contents
 
Food
 
Our food operations principally involve the production and sale of pork and shelf-stable branded products. For the years ended December 31, 1999, 2000 and 2001, our food segment contributed 12.1%, 1.8% and 4.5%, respectively, to our consolidated operating income, and 23.6%, 15.3% and 17.2%, respectively, to our consolidated net sales.
 
Our strategy for our Food Sector business has been to gradually shift its product mix away from commodity products to branded products, which have more stable margins. To that end, we acquired Corfuerte, S.A. de C.V. (“Corfuerte”) in September 1997, Authentic Specialty Foods Inc. (“ASF”) in June 1998, and a 60% interest in Grupo Nair, a Mexican producer of canned tuna and other seafood products (“Nair”) in December 1998. In December 1999, we, divested our poultry operations (which historically had been the largest component of our Food Sector) and our animal feed operations. In 2001, we discontinued our shrimp business, which is part of our on-going strategy to divest or discontinue our non-core assets. Less than 2.0% of our revenues for the year ended December 31, 2001 came from this discontinued business.
 
We are developing our branded food products operations in partnership with J.P. Morgan Capital Corporation, which purchased an 18.6% interest in each of Corfuerte and Authentic Acquisition Corporation, the direct parent of ASF, for an aggregate purchase price of $50 million in 1998. We intend to use Corfuerte as our vehicle for the expansion of our branded food products business in Mexico and Authentic Acquisition Corporation for the expansion of this business in the United States. As of the second half of 2000, we restructured the management of our Food Sector to address that sector’s relatively poor results and appointed the management team of our Chemical Sector to manage our branded food business and appointed Desc’s corporate management team to manage our commodity food business, which consists of pork.
 
The following table presents the net sales generated by each product line in our food segment for the years ended December 31, 1999, 2000 and 2001 and the percentage of this segment’s 2001 net sales that is represented by each product line:
 
    
Net Sales

  
% of net
sales

 
    
1999

  
2000

  
2001

  
2001

 
    
(Pesos in thousands)
 
Poultry(1)
  
Ps. 1,643,773
  
Ps. 0
  
Ps. 0
  
0.0
%
Shelf-stable branded products
  
2,254,875
  
1,886,148
  
1,994,794
  
56.3
 
Pork
  
1,709,182
  
1,763,921
  
1,551,371
  
43.7
 
Animal Feed(1)
  
566,535
  
0
  
0
  
0.0
 
Shrimp(2)
  
62,117
  
83,215
  
0
  
0.0
 
    
  
  
  

Total
  
Ps. 6,236,482
  
Ps. 3,733,284
  
Ps. 3,546,165
  
100.0
%
    
  
  
  


(1)
 
We divested these businesses in December 1999.
(2)
 
We discontinued the shrimp business in 2001.

32


Table of Contents
 
Products
 
Pork.    Our pork business is conducted through our wholly-owned subsidiary Agrokén, S.A. de C.V. and is concentrated principally in the southeastern region of Mexico as well as in the central region, which includes Mexico City. As a result of our acquisition of Agroindustrias Yucatán’s (“AgroYuc”) production facilities in 1999, we have increased our number of sows in production from 12,000 to approximately 50,000 in 2001. We have two slaughterhouses and a processing plant for hogs in Mexico, and a slaughterhouse in Cancun, Quintana Roo. To satisfy increased domestic demand and to supply growing exports of pork to Japan, we have increased the cutting capacity of our processing plant in recent years. Our sales strategy seeks to reduce the intermediary channels between producers like us and consumers by establishing distribution centers where consumers may buy different pork products directly from us. We currently operate 30 distribution centers and plan to open 6 additional centers in 2002. Our pork products are marketed under the “Keken” brand name.
 
Shelf-stable branded products.    Our branded food product operations are conducted in Mexico through Corfuerte and in the United States through Authentic Acquisition Corporation. With our “Del Fuerte” brand, we are a domestic leader in the production of tomato sauce and related products and canned vegetables. We also have a large share of the domestic corn oil and gelatin with our “La Gloria” brand of products. We participate in the canned jalapeño peppers market and in the salsa market with our “La Victoria” brand, in the coffee market with our “Blasón” and “Latino” brands, and in the canned tuna market with our “Nair” brand. We also have exclusive distribution rights in Mexico for “Reynolds” aluminum foil and “Smuckers” jams, which have been embraced by the domestic market and continue to increase in market share.
 
In the United States, we manufacture and/or distribute a wide variety of high quality, authentic Mexican food products such as salsas, taco sauces, other Mexican sauces, and items such as jalapeño peppers under labels that include La Victoria and Embasa. Our products are targeted principally at the U.S. Hispanic market, and our brands have strong market positions in the southwestern and western regions of the United States, particularly in Texas and California.
 
Market overview; competition
 
Pork.    The pork industry in Mexico is highly fragmented, but smaller, inefficient growers in Mexico are being replaced by larger, higher quality, more efficient, integrated companies, principally located in the states of Sonora, Sinaloa and Yucatán. We have developed a fully integrated business with high quality genetics and advanced farming techniques, composed of breeding farms and facilities for raising, slaughtering, cutting and processing hogs. We have a greater than 50% market share in the Southeastern region of Mexico and have continued to gain market share in the important central region, which includes Mexico City. In August 1999, we acquired the production facilities of AgroYuc, our partner in the pork business, and contributed these production facilities to Grupo Porcícola Mexicano, our joint venture with AgroYuc, raising our participation in this joint venture to 63%. AgroYuc owns the remaining 37% of this joint venture. As a result of these transactions, we became the leader in the marketing of pork in Mexico. Since 1998, we also have exported pork to Japan.
 
Shelf-stable branded products.    The shelf-stable branded food industry in Mexico is highly competitive. Corfuerte has significant market shares in Mexico with respect to tomato sauce and related products, canned vegetables and corn oil. Its principal competitors are Del Monte, Herdez, La Costeña and Clemente Jacques. The principal competitors of Nair’s products

33


Table of Contents
 
are Herdez, Dolores, Tuny, Calmex and Ybarra. In the United States, our products compete principally with Mexican food products that are distributed in the southwestern and western regions of the United States and are targeted principally to the Hispanic market, particularly in California.
 
Properties/plants
 
Below is a list of the principal production facilities of our food segment and their respective rates of utilization:
 
Activity

 
Location

  
Utilization

Pork production / slaughterhouse
 
Yucatán, Guanajuato and Quintana Roo
  
100%
Canning
 
Sinaloa, Tlaxcala, Oaxaca and California (USA)
  
50%
 
In addition, Corfuerte has nine distribution centers in Mexico.
 
Real Estate
 
Through Desc (as the surviving company after the merger between Desc and Dine), we acquire and develop land for commercial (office buildings), residential and tourism/resort uses. We have over 20 years of experience in this sector and believe that we are the largest diversified real estate developer in Mexico. Desc owns large land reserves for residential development in the Mexico City metropolitan area as well as properties for tourism development along the Pacific coast of Mexico. We focus on the upper income segments of the real estate market, developing high quality projects that are unique in their respective market segments. Dine was the developer during the late 1960s, 1970s and early 1980s of “Bosques de las Lomas,” a five million square meter upper-income residential and commercial development in Mexico City and of “La Estadía,” a high-income residential suburb of Mexico City. Our more recent projects include the Centro Comercial Santa Fe in Mexico City, Mexico’s largest regional shopping mall, Arcos Bosques Corporativo, Mexico City’s largest office complex, Punta Mita, an upscale tourist resort that includes a new hotel and championship golf course developed in partnership with Four Seasons Hotels, and La Punta Bosques and Bosques de Santa Fe, both of which are high-income residential projects in Mexico City.
 
For the years ended December 31, 1999, 2000 and 2001, our real estate business contributed 9.3%, 6.8% and 8.7%, respectively, of our consolidated operating income and 3.5%, 4.2% and 3.9%, respectively, of our consolidated net sales. As part of our strategy for this sector, we continue to assess the profitability of each of our real estate projects. As a result of these assessments, in December 2000 we sold our land holdings in Xaac, which consisted of 515,000 square meters of beachfront property in the state of Quintana Roo, to a Spanish hotel group for $7.3 million in cash, in February 2001 we sold our stake in the Four Seasons Punta Mita Hotel to Strategic Hotel Capital LLC for an aggregate consideration of $52 million (including the assumption by the buyer of $11 million of net debt), and in September 2001 we sold our stake in Centro Comercial Santa Fe for an aggregate amount of $70 million.

34


Table of Contents
 
The following is a list of the major properties we are developing, which are discussed in greater detail below:
 
Name and Location

    
Land area
(square meters)

    
Ownership
by Dine(%)

  
Other Partners

Commercial development projects (office buildings)(1)
                  
Arcos Bosques Corporativo, México, D.F.
    
72,570
    
100
  
None
Residential development projects
                  
La Punta Bosques, México, D.F.
    
293,000
    
100
  
None
Bosques de Santa Fe, México, D.F.
    
1,100,000
    
73
  
Several individuals
Tourist/resort development projects
                  
Punta Ixtapa, Guerrero
    
390,000
    
100
  
None
Punta Mita, Nayarit
(Phase I)
(2)
    
1,030,000
    
85
  
Four Seasons Hotels
Other properties
                  
Bosques de la Estadía, Estado de Mexico(3)
    
6,269,086
    
63
  
Fernando Senderos Mestre, Víctor de la Lama Cortina and members of their families
Los Cabos, Baja California Sur(4)
    
38,521
    
15
  
Grupo Casa, S.A. de C.V.
Punta Gorda, Baja California Sur
    
4,000,000
    
25
  
Grupo Casa, S.A. de C.V.
Tepeji del Río, Hidalgo
    
3,850,000
    
59
  
Several individuals
Punta Mita, Nayarit (other than Phase I)
    
5,740,000
    
100
  
None

(1)
 
In addition to the commercial development projects listed above, Desc owns a 45% interest in 89,000 square meters adjacent to the Santa Fe shopping mall that are for sale.
(2)
 
Punta Mita Phase I consisted of a world class luxury hotel, an 18-hole championship golf course and clubhouse and a timeshare resort development. Four Seasons Hotels participated in each of these components with an ownership interest of 30.77% in the hotel, 12.31% in the golf course, and 30.77% in the timeshare resort. In February 2001, Desc (formerly Dine) and the Four Seasons Hotels sold their participation in the hotel. Based on the relative sizes of the two components of this development still owned by Desc and the Four Seasons Hotels, the total participation of Four Seasons Hotels in Phase I is approximately 16%.
(3)
 
Desc owns 77.3% of Club Ecuestre Chiluca, S. de R.L., a Mexican company that owns 3,750,000 square meters of undeveloped land and 106,514 square meters of partially developed land on this site. Club Ecuestre Chiluca, S. de R.L. also owns 51% of another company which owns 2,412,572 square meters of adjacent undeveloped land.
(4)
 
Desc owns 100% of the land and has entered into a joint venture agreement with Grupo Casa, S.A. de C.V. (“Grupo Casa”) pursuant to which Desc contributed the land, Grupo Casa developed it, and Desc is entitled to 15% of both the time-share units developed and the net income of the hotel built on the site.

35


Table of Contents
 
We invested approximately Ps.631,389 in 1999, Ps.791,770 in 2000 and Ps.702,307 in 2001 to develop our real estate properties for commercial, residential and resort use.
 
Strategy for the Real Estate Sector
 
We intend to continue to sell our existing inventory of developed properties, so long as conditions in the real estate market in Mexico remain favorable. We also intend to continue to seek partnerships through which to develop our land reserves in order to reduce our risk and increase the margins and market share of our Real Estate Sector. We also continue to evaluate the profitability of each of our remaining real estate projects and may decide to divest additional properties in the future.
 
We believe that our real estate products, aimed at the high-end market, generally offer superior quality, amenities and value. In evaluating all of our opportunities for new real estate projects, we generally pursue projects that we expect to yield an internal rate of return of at least 30%, although we might not actually achieve that target.
 
Our land acquisitions fall into two categories: strategic purchases, where land is acquired and retained for future development, and current development purchases, where land is purchased in connection with a planned development. All of our projects are organized into a predetermined number of phases designed to reduce our risk and exposure to market conditions and shifts in the economy. When market indicators project a downturn in the industry, a project can be stopped in a logical and cost-efficient manner at the end of a phase of construction and delayed until market conditions improve, and when these indicators predict high growth at an accelerated pace, two or more phases can be constructed simultaneously. We generally subcontract the responsibilities of designing and building projects, including, but not limited to, hiring independent project managers, architects, construction companies and project supervisors.
 
Commercial developments
 
Arcos Bosques Corporativo.    This project consists of a five-phase development of office space located in Bosques de las Lomas near the Mexico City-Toluca highway. Each phase includes the construction of a separate building. We completed the construction of the East building (Phase 1) in July 1993 and of the East Tower (Phase 2) in June 1996. We relocated our headquarters to the East Tower in 1997 and purchased 15,000 square meters of this development (approximately 25% of the available space in the East Tower) for this purpose. All of the space in the East Tower has been sold. We began the construction of the North building (Phase 3) in 1997 to meet existing demand for office space which recovered in 1997, and plan to complete it in 4 stages. We completed and sold all of the available space in stage 1 of the North building in 1998 and began constructing stage 2 in November 1999 pursuant to a 50/50 partnership with Ingenieros Civiles Asociados (“ICA”) which is Mexico’s largest construction company. Stage 2 consisted of approximately 18,000 square meters of office space, which were finished and completely sold by the end of 2001. Pursuant to our partnership agreement with ICA, Dine contributed the land and permits, valued in the aggregate at approximately $7.5 million, and ICA agreed to contribute an equal amount in construction labor and services. The total cost for Stage 2, including the contributions already made by the partners, was approximately $18 million. Phases 4 and 5 of Arcos Bosques Corporativo consist of the construction of the West building and the West Tower, respectively. The timetable for these phases has not been established. The total investment budget allocated to all five phases of Arcos Bosques Corporativo is $340 million, of which approximately $180 million already has been invested.

36


Table of Contents
 
Residential developments
 
Bosques de las Lomas—La Punta.    We completed construction of the infrastructure for a 293,000 square meter high-income residential community in Bosques de las Lomas. Sales of undeveloped lots in this project commenced in September 1993 and approximately 94% of the properties had been sold by the end of 2001. We own 100% of the project and are the sole developer and manager. The total investment was approximately $40 million, including the cost of constructing a bridge that connects the development to Bosques de las Lomas.
 
A new phase of La Punta, La Punta Península, is expected to result in the construction of four twelve-story residential buildings, each containing 25 condominiums. We entered into an agreement in principle with Terrum, a Mexican real estate company, under which we contributed the land for the Península project and Terrum agreed to construct and sell the units. Our participation in the next three phases will be limited to selling the land to Terrum.
 
Bosques de Santa Fe.    This 1,100,000 square meter development, located two miles south from the Santa Fe shopping mall, is currently being developed in partnership with private investors. The current plans call for the development of a high-income residential community with a nine-hole golf course. We own 73% of this land. We began building the infrastructure for this project in 1998 and commenced selling lots in June 1998. As of December 31, 2001, we had sold approximately 60% of the lots available. During the second quarter of 2001, Dine increased its stake in Bosques de Santa Fe from 50% to 73% with an investment of $30 million.
 
Tourist/resort developments
 
Punta Ixtapa.    This development is a resort encompassing approximately 390,000 square meters located on the western end of the hotel zone of Ixtapa. As currently planned, the total project will consist of a residential area containing lots for private construction, finished homes, villas and condominiums, a recreation center and two beach clubs. This project is intended to be developed in five phases over an eight-year period. The first phase, consisting of the construction of finished homes and villas on a site of approximately 63,000 square meters, has been fully sold and construction is completed. The second and third phases, consisting of the development and sale of undeveloped residential lots on a site of approximately 153,000 square meters, initiated in June 1993, and approximately 80% of the lots were sold as of December 31, 2001. The remaining land is available for two additional phases of development for which firm plans have not yet been formulated. The total cost of the development is currently projected at $85 million, of which $65 million has been allocated for the first three phases.
 
Punta Mita.    We commenced in early 1997 the development of a 7.1 million square meter resort project located on beach front property in Costa Banderas, Nayarit, which is near Puerto Vallarta on the Pacific coast of Mexico. This project is intended to be developed in seven phases over a 15-year period. The first phase was developed in partnership with Four Seasons Hotels and includes a world class luxury hotel consisting of 100 guest rooms, together with restaurants, bars, banquet, meeting and other public rooms, an 18-hole championship golf course and clubhouse, a tennis and sports complex, a fitness club, a spa facility, timeshare units, and residential lots. We invested $100 million in the first phase of this project. We completed the construction of the golf course in 1998, under the supervision of Jack Nicklaus and completed the construction of the hotel in 1999. The hotel and golf course opened for business on September 1, 1999. The hotel was expanded to 140 rooms in 2000. We sold our participation in the hotel to Strategic Hotel Capital LLC in February 2001, as the hotel had already achieved our objective of anchoring the project.

37


Table of Contents
 
We received consideration of $52 million in the sale (including the assumption by the buyer of $11 million of net debt) of which we used $26.5 million to reduce consolidated debt. The hotel is operated by Four Seasons Hotels Ltd. pursuant to a long-term contract.
 
Other properties
 
Bosques de La Estadía.    We own 77.3% of Club Ecuestre Chiluca, S. de R.L., an entity which holds 3,750,000 square meters of undeveloped land and an additional 106,514 square meters of partially developed land located on the northern border of Mexico City. Fernando Senderos Mestre and members of his family are the owners of the remaining 22.7% of Club Ecuestre. An additional 2,412,572 square meters of adjacent undeveloped land is held by an entity that is 51%-owned by Club Ecuestre. During 1994, a private construction company completed a toll–road providing access directly to this area. We believe this land is suitable for the development of condominiums. We have postponed development of this land at this time.
 
Tepeji del Río.    We have a 59% interest in approximately 3,850,000 square meters of land located approximately fifty miles north of Mexico City. We believe this land is suitable for the development of a weekend resort targeted to Mexico City residents but have postponed development of this land at this time.
 
Competition
 
We believe that Desc, through its real estate business subsidiaries, is one of the largest real estate developers in the commercial, retail and residential real estate markets in Mexico City. We compete with many smaller Mexican real estate developers and at least two large real estate developers.
 
NAFTA
 
The North American Free Trade Agreement (“NAFTA”) became effective on January 1, 1994. Under NAFTA, Mexico, the United States and Canada agreed to phase out tariffs and other trade barriers on each other’s products, as well as to liberalize or eliminate many barriers to investment. The lowering of U.S. and Canadian trade barriers has facilitated access to those markets while the lowering of Mexican barriers to U.S. and Canadian products, and in some cases investments, also has increased the competition in the Mexican market. While most changes required by NAFTA had to be implemented during the first six years of operation of the agreement, tariff and non-tariff restrictions on the most sensitive products will continue to be phased down until 2003, or in the case of a few products, 2008.
 
In the automotive industry, NAFTA required Mexico to reduce its tariff on most parts by 50% in 1994, and the remainder is being phased out over ten years, ending in 2003. The United States has phased out its tariffs on autoparts exported from Mexico as of January 1, 1998. NAFTA also obligates Mexico to gradually phase out the trade balancing and domestic value-added requirements imposed on original equipment manufacturers (OEMs), eliminating those requirements by 2004. While those requirements in part have protected and, to a greatly diminished extent, continue to protect Mexican parts producers, the phasing out of artificial restrictions is facilitating the integration of the North American industry, with beneficial effects for efficient Mexican parts producers such as Desc.

38


Table of Contents
 
In the chemicals industry, NAFTA requires Mexico to phase out its tariffs to reduce barriers to foreign investment in Mexico, and imposes requirements that prohibit Pemex from discriminating against U.S. or Canadian persons in the supply of raw materials over which Pemex has a monopoly. Most of these changes with respect to Pemex already have been implemented by the Mexican government, and therefore NAFTA is unlikely to have a significant further effect on the businesses conducted by our Chemical Sector.
 
In the food industry, NAFTA requires Mexico gradually to phase out tariffs on imported feed products used by us. Since the enactment of NAFTA special regulations enacted by the Mexican government have permitted livestock growers to import feed products duty-free when domestic feed consumption is projected to exceed domestic feed production. NAFTA’s requirements help assure that the more liberal import policy likely will be continued.
 
In the food industry, NAFTA also implements procedures for certification of conformity with health and sanitary requirements to facilitate the export of Mexican pork and other agricultural products to the United States. The regulatory clearing procedures for importing pork products from Mexico’s Yucatan Peninsula and the Northwest region into the United States have been put in place and these areas have been certified as disease-free areas by the U.S. Department of Agriculture. The state of Sonora also exports pork products to the United States.
 
The Mexican, U.S. and Canadian governments have had a generally good record of compliance with NAFTA requirements to date regarding matters affecting the interests of Desc, and all three governments have expressed their continued support for the Agreement and its implementation. Nevertheless, we cannot assure you that this compliance will continue. This compliance is only one factor affecting the competitive conditions in which we operate.
 
Environmental Regulation
 
Both Mexican federal and state laws and regulations relating to the protection of the environment apply to our operations. The fundamental environmental law in the Mexican federal system is the Ley General del Equilibrio Ecológico y la Protección al Ambiente (the Mexican General Law of Ecological Balance and Environmental Protection or the “Ecological Law”). The Mexican federal agency in charge of overseeing compliance with, and enforcing the federal environmental laws is Secretaría del Medio Ambiente y Recursos Naturales (the Ministry of Environmental Protection and Natural Resources or the “Semarnat”). As part of its enforcement powers, the Semarnat is empowered to bring administrative proceedings against companies that violate environmental laws, impose economic sanctions and close temporarily or permanently non-complying facilities. Under the Ecological Law, the Mexican government has implemented an aggressive program to protect the environment by promulgating rules concerning water, land, air and noise pollution, and hazardous substances. Additionally, the Mexican government has enacted regulations concerning the importation and exportation of hazardous materials and hazardous waste. We believe that all of our facilities are in substan­tial compliance with government regulations relating to the protection of the environment.
 
In addition, our subsidiary Nhumo, which manufactures carbon black, became the first carbon black business in the world to receive ISO-14001 certification in 1997, our subsidiaries TREMEC, which manufactures light transmissions, and TF Victor, which manufactures gaskets and seals, received this certification in 2000, our subsidiaries Cardanes, which manufactures propeller shafts, and Pistones Moresa, which manufactures pistons, also received this certification in 2001. ISO-14001 is an international environmental management standard first adopted in 1996

39


Table of Contents
by the International Organization for Standardization that requires commitment to continuous environmental improvement and compliance with all applicable environmental laws.
 
Patents and Trademarks
 
We have a number of Mexican, U.S. and foreign patents, registered trademarks, trade names and trade secrets and applications for, or licenses in respect of, the same that relate to various businesses. We believe that certain of these intellectual property rights are of material importance to the businesses to which they relate. We also believe that the material patents, trademarks, trade names and trade secrets of its operating subsidiaries and divisions are adequately protected.
 
Seasonality
 
Our business is subject to seasonal effects and we have generally experienced the highest level of business for our Food Sector in the third quarter and the fourth quarter, for our Chemical Sector in the second quarter and the third quarter and for our autoparts in the second quarter and the fourth quarter. Given the nature our real estate business, it is difficult to identify a pattern with respect to the sales of this sector.
 
Organizational Structure
 
Desc is a holding company and its operations are carried out by its direct and indirect wholly owned subsidiaries. Set forth below is a list of our principal subsidiaries as of December 31, 2001, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held:
 
Name of Entity

    
Country of Incorporation or Residence

    
Proportion of Ownership
Interest or Proportion of
Voting Power Held

 
Unik, S.A. de C.V.
    
Mexico
    
99.9
%
División Dine, S.A. de C.V.(1)
    
Mexico
    
99.9
%
Agrokén, S.A. de C.V
    
Mexico
    
99.9
%
Corfuerte, S.A. de C.V.
    
Mexico
    
77.2
%
Authentic Acquisition Corporation, Inc.
    
Delaware, U.S.A.
    
81.3
%

(1)
 
In the second quarter of 2002, Dine merged into Desc, with Desc surviving the merger.
 
As of December 31, 2001, Unik and Dine constituted significant subsidiaries. Collectively, Unik, Agrokén, Corfuerte and Authentic Acquisition Corporation control or own majority interests in more than 100 companies, including our principal subsidiaries such as Industrias Negromex, S.A. de C.V., Paratec, S.A. de C.V., Industrias Resistol, S.A. de C.V., Quimir, S.A. de C.V., Resirene, S.A. de C.V., Rexcel, S.A. de C.V., Nhumo, S.A. de C.V. and Dynasol Elastómeros, S.A. de C.V.

40


Table of Contents
 
Property, Plants and Equipment
 
Our corporate headquarters and executive offices, which we own, are located in Mexico City, Mexico and measure approximately 7,200 square meters. We believe that all our current properties and facilities are adequate for our present needs.
 
For a description of our properties and plants, please reference each of the business segment descriptions set forth above under the heading “—Business Overview.”
 
Item 5.    Operating and Financial Review and Prospects
 
You should read the following discussion in conjunction with the Financial Statements included elsewhere in this annual report. The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S. GAAP, in particular by requiring Mexican companies to recognize effects of inflation. Notes 17 and 18 to the Financial Statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Desc and reconciliation to U.S. GAAP of our majority net income and majority shareholders’ equity. Net income information included in this section consists of “majority net income,” as referred to in the Financial Statements, and therefore is net of minority interests attributable to third party equity interests in some of our subsidiaries, unless the context otherwise requires.
 
Mexico experienced high inflation in some of the periods covered by the Financial Statements. The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 15.7% in 1997, 18.6% in 1998, 12.3% in 1999, 9.0% in 2000 and 4.4% in 2001. Mexican GAAP requires that the Financial Statements recognize the effects of inflation. Financial statements are adjusted by applying NCPI factors. As a result, financial statements prepared under Mexican GAAP are stated in constant terms, that is, with adjustment for inflation, rather than in nominal terms. Therefore, all data for all periods in the Financial Statements, and the financial information derived from the Financial Statements and presented in this section, unless otherwise indicated, have been restated in constant Pesos as of December 31, 2001. Increases or decreases shown as percentages reflect variations in constant Pesos. Peso amounts are in thousands of constant Pesos, unless otherwise noted.
 
Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with Mexican GAAP. Mexican GAAP differs in certain significant respects from US GAAP, as explained in Notes 17 and 18 to the consolidated financial statements (see Item 18, Financial Statements). The preparation of these financial statements requires that we make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different estimates, assumptions, judgments or conditions. Our significant accounting policies are described in Note 4 to our Financial Statements. On an on-going basis, we evaluate our estimates, assumptions and judgments, and we believe our most critical

41


Table of Contents
accounting policies that implicate the application of estimations, assumptions and/or judgments are:
 
Revenue Recognition
 
The SEC’s Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition” requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee and the collectibility of those fees.
 
The companies in the Autoparts, Chemical and Food Sectors recognize revenues when products are shipped to unaffiliated customers. Our Real Estate Sector recognizes revenues and costs related to sales of developed lots and tracts when the sales contracts are formalized and sufficient down payment has been received. Revenue and the related costs from construction projects are recognized on a percentage-of-completion basis, with revisions to estimates reflected in the period in which changes become known.
 
Valuation of accounts receivable
 
Estimates are used in determining our allowance for bad debts and are based on our historical collection experience, current trends, credit policy and a percentage of our accounts receivable by aging category. In determining these percentages, we look at the historical write-offs of our receivables. We also look at current trends in the credit quality of our customer base as well as changes in the credit policies.
 
Land held for development and real estate projects
 
Undeveloped land, which represents territorial reserves held for future development, and real estate projects in progress are recorded at acquisition and construction costs and restated at their value in U.S. dollars translated at the exchange rate in effect as of year end. This method is consistent with the practices followed in the real estate market in Mexico. The restated values are still very conservative when compared with the current replacement cost of such properties.
 
Impairments of assets
 
We recognize impairment losses on assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.
 
Accounting for income taxes
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process

42


Table of Contents
involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
 
Labor liabilities
 
Our employee liabilities include pension plan and seniority premium obligations. The determination of our obligation and expense for pension and other post-retirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 12 to the consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation costs. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense.
 
Contingencies
 
We account for contingencies in accordance with Bulletin C-12 “Contingencies and Commitments” and SFAS No. 5, “Accounting for Contingencies”. Such accounting principles require that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, our results of operations may be overstated or understated.
 
Results of Operations for Years Ended December 31, 1999, 2000 and 2001
 
The following table provides information derived from our Financial Statements:
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
    
(In thousands, except percentages)
 
Net sales
  
Ps.    26,445,249
 
  
Ps.    24,471,455
 
  
Ps.    20,639,099
 
Cost of sales
  
19,059,886
 
  
18,213,161
 
  
15,393,175
 
Gross margin
  
27.9
%
  
25.6
%
  
25.4
%
Operating expense
  
Ps.      3,903,366
 
  
Ps.      3,895,314
 
  
Ps.      3,577,368
 

43


Table of Contents
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
    
(In thousands, except percentages)
 
Operating income
  
3,481,997
 
  
2,362,980
 
  
1,668,556
 
Operating margin
  
13.2
%
  
9.7
%
  
8.1
%
Comprehensive financial result
  
Ps.        466,191
 
  
Ps.      (720,339
)
  
Ps.      (306,445
)
Impairment of fixed assets
  
(230,457
)
  
(158,721)
 
  
(92,092)
 
Other income (expenses), net
  
(251,865
)
  
(446,953
)
  
(508,983
)
Provisions for income taxes and employee profit sharing
  
929,027
 
  
578,412
 
  
147,654
 
Equity in associated companies and unconsolidated subsidiaries
  
48,530
 
  
(10,756
)
  
(114,086
)
Profit on the sale of subsidiary
  
160,516
 
  
0
 
  
0
 
Net majority income
  
2,020,284
 
  
287,000
 
  
41,354
 
Depreciation and amortization(1)
  
1,189,258
 
  
1,235,906
 
  
1,20,7830
 
Capital expenditures(2)
  
3,361,678
 
  
2,621,403
 
  
1,418,997
 
Exports ($ in millions)
  
$  933.1
 
  
$  1,037.7
 
  
$  979.8
 

(1)
 
Excludes depreciation of an idle plant.
(2)
 
Includes investments in real estate projects.
 
The following table presents financial data from our consolidated statements of income expressed as a percentage of net sales:
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
Net sales
  
100.0
%
  
100.0
%
  
100.0
%
Cost of sales
  
72.1
 
  
74.4
 
  
74.6
 
Gross margin
  
27.9
 
  
25.6
 
  
25.4
 
Operating expenses
  
14.8
 
  
15.9
 
  
17.3
 
Operating margin
  
13.2
 
  
9.7
 
  
8.1
 
Comprehensive financial result
  
1.8
 
  
(2.9
)
  
(1.5
)
Equity in associated companies and unconsolidated subsidiaries
  
0.2
 
  
(0.0
)
  
(0.1
)
Other expenses, net
  
(1.0
)
  
(1.8
)
  
(2.5
)
Majority income
  
7.6
 
  
1.2
 
  
0.2
 
 
Our business operations have been adversely affected by the continued weakness of the U.S. economy. To address this challenge, we have adopted various measures that are designed to reduce our cash outlay. These measures include reducing our net debt and financing expenses, divesting various underperforming assets, decreasing capital expenditures and keeping salary increases below the rate of inflation.
 
We can make no assurance that these measures will be sufficient to prevent our business from continuing to be adversely affected by the U.S. economy.

44


Table of Contents
 
2001 and 2000 compared.    Consolidated net sales for 2001 decreased 15.7% to Ps.20,639,099 from Ps.24,471,455 in 2000. This decrease was due to a 17.7% decline in sales in the Autoparts Sector, which reflects a 10.2% decline in production by the auto industry in the NAFTA market. In addition, the Chemical Sector’s sales decreased 16.9% due to lower sales volumes resulting from the global economic slowdown, as well as a decline in the prices of chemical products. Sales in the Food Sector declined by 5.0% due to lower sales and reduced prices in the pork business. Sales in our Real Estate Sector fell by 22.3% due to lower sales in all our real estate projects. Exports sales were $979.8 million during 2001, which represents a 5.6% decrease from 2000. This decline in exports was due to the U.S. economic slowdown. Export sales in our Autoparts and Chemical Sectors decreased 7.1% and 9.8%, respectively, in comparison to 2000. However, export sales in our Food Sector increased by 16.0% due to the higher sales at ASF. Cost of sales decreased 15.5% from Ps.18,213,161 in 2000 to Ps.15,393,175 in 2001, due to the cost-reduction measures implemented during the year. Our gross margin was 25.4% in 2001, which is 0.2% below our gross margin for 2000. Operating expenses decreased 8.2% from Ps.3,895,314 in 2000 to Ps.3,577,368 in 2001, due to cost-reduction measures. As a result, operating income decreased 29.4% to Ps.1,668,556 in 2001 from Ps.2,362,980 in 2000. Operating margin decreased from 9.7% in 2000 to 8.1% in 2001, due to the economic slowdown, the appreciation of the Peso during the year, the increase in the prices of raw materials during the first months of the year in the Chemical Sector and an increase in salaries paid to employees. Net majority income showed a real annual decline of 85.6% from Ps.287,000 in 2000 to Ps.41,354 in 2001. This decrease was mainly due to the other charges related to our restructuring, which includes the shut down of certain fixed assets and severance expenses.
 
2000 and 1999 compared.    Consolidated net sales for 2000 decreased 7.5% to Ps.24,471,455 compared to Ps.26,445,249 in 1999. This decrease was mainly due to a 40.1% reduction in the sales of our Food Sector in 2000, which resulted from the divestiture of our poultry business in December 1999, and to the appreciation of the Peso relative to the Dollar during the course of 2000 which reduced the Peso value of our 2000 Dollar-denominated sales. Historically, the poultry business had been the largest component of our Food Sector.    Our Autoparts Sector’s sales increased slightly in 2000 by 0.7% despite the slowdown in the U.S. economy in the fourth quarter of 2000. Our Chemical Sector’s sales rose 4.2%, reflecting price increases for most products, while our Real Estate Sector recorded an increase of 13.6% in sales due to our Punta Mita and Bosques de Santa Fe projects. Exports reached $1,037.7 million during 2000, an increase of 11.2% when compared to the $933.1 million recorded in 1999, due to the significant increase in exports of autoparts and chemicals, which increased 7.6% and 27.6% in 2000, respectively. Cost of sales decreased 4.4% to Ps.18,213,161 during 2000, from Ps.19,059,886 in 1999. The decrease in cost of sales was lower than the decrease in sales due to higher raw material prices in our Chemical Sector and the significant rise in natural gas prices. As a result, gross margin was 25.6%, 2.3% below the gross margin for 1999. Operating expenses decreased 0.2% to Ps.3,895,314 in 2000, compared to Ps.3,903,366 in 1999 mainly as a result of the savings resulting from the sale of the poultry business, which partly offset operating expense increases of 11.1% and 50.1% respectively, in our Autoparts and Real Estate Sectors in 2000 as well as salary increases above inflation. Our operating margin decreased from 13.2% in 1999 to 9.7% in 2000 as a result of these factors. Net majority income decreased 85.8% from Ps.2,020,284 in 1999 to Ps.287,000 in 2000. This decrease was mainly due to lower operating income, higher foreign exchange losses, and extraordinary charges principally related to the restructuring of the Food Sector.

45


Table of Contents
 
Autoparts
 
The following table presents selected operating data for our autoparts segment:
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
    
(In thousands, except percentages)
 
Net sales
  
Ps.    11,332,462
 
  
Ps.    11,417,172
 
  
Ps.    9,397,929
 
Cost of sales
  
8,291,818
 
  
8,377,735
 
  
7,115,771
 
Gross margin
  
26.8
%
  
26.6
%
  
24.3
%
Operating expenses
  
Ps.      1,232,346
 
  
Ps.      1,369,268
 
  
Ps.    1,249,784
 
Operating income
  
1,808,298
 
  
1,670,169
 
  
1,032,374
 
Operating margin
  
16.0
%
  
14.6
%
  
11.0
%
Depreciation and amortization(1)
  
Ps.          586,283
 
  
Ps.          599,297
 
  
Ps.       678,760
 
Capital expenditures
  
906,916
 
  
1,145,618
 
  
305,662
 

(1)
 
Excludes depreciation of an idle plant.
 
2001 and 2000 compared.    During 2001, the Autoparts Sector’s net sales decreased by 17.7%, from Ps.11,417,172 in 2000 to Ps.9,397,929 in 2001. This decline in sales was due to the lower demand of automobiles in the NAFTA market as a result of the economic slowdown in the U.S. and Mexico and the strengthening of the Peso versus the Dollar. Production in the U.S. and Mexican automotive industries declined 10.2% and 4.4%, respectively, when compared to 2000. During 2001, exports sales were $638.1 million, which represents an annual decrease of 7.1% compared to $686.6 million in export sales during 2000. Cost of sales decreased 15.1%, from Ps.8,377,735 in 2000 to Ps. 7,115,771 in 2001 due to lower sales. Operating expenses decreased 13.7% from Ps.1,369,269 in 2000 to Ps.1,249,784 in 2001, which in part reflects lower sales expenses. As a result, the operating income was Ps.1,032,374 in 2001 compared to Ps.1,670,169 in 2000. Operating margin decreased to 11.0% in 2001 compared to 14.6% in 2000.
 
2000 and 1999 compared.    The Autoparts Sector’s net sales for 2000 increased 0.7% to Ps.11,417,172 from Ps.11,332,462 in 1999. While we were able to sustain our sales growth in the domestic market and increase our exports by 7.6% in 2000, to $686.6 million from $638.1 million in 1999, the appreciation of the Peso relative to the Dollar reduced the Peso value of our 2000 Dollar-denominated sales resulting in only a 0.7% net sales increase. During 2000, exports represented 61.8% of the sales of this sector, while in 1999 they represented 63.8%. The decrease in the percentage of our sales that is represented by exports was mainly due to the growth in the production of automobiles in the domestic market, which reached record levels. Costs of sales increased 1.0% to Ps.8,377,735 in 2000. Operating expenses increased 11.1% in 2000 to Ps.1,369,268 from Ps.1,232,346 in 1999, reflecting salary increases in 2000 which were above the rate of inflation. As a result, operating income decreased 7.6% in 2000 to Ps.1,670,169 from Ps.1,808,298 in 1999. Operating margin for 2000 was 14.6% compared to 16% in 1999.
 
Chemicals
 
Beginning in 2000, we combined our diversified products segment, which includes adhesives, glues, waterproofing, additives and sealants, with our petrochemicals segment. These businesses are now reported together as our chemicals segment. Prior years results have been

46


Table of Contents
restated to reflect this change. The following table presents selected operating data for our chemicals segment:
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
    
(In thousands, except percentages)
 
Net sales
  
Ps.    7,930,339
 
  
Ps.    8,263,335
 
  
Ps.    6,868,608
 
Cost of goods sold
  
5,673,248
 
  
6,449,183
 
  
5,158,216
 
Gross margin
  
28.5
%
  
22.0
%
  
24.9
%
Operating expenses
  
Ps.    1,280,945
 
  
Ps.    1,269,808
 
  
Ps.    1,233,435
 
Operating income
  
976,146
 
  
544,344
 
  
476,957
 
Operating margin
  
12.3
%
  
6.6
%
  
6.9
%
Depreciation and amortization(1)
  
Ps.        325,156
 
  
Ps.        313,335
 
  
Ps.        301,191
 
Capital expenditures
  
994,293
 
  
350,797
 
  
239,876
 

(1)
 
Excludes depreciation of an idle plant.
 
2001 and 2000 compared.    During 2001, net sales decreased 16.9%, from Ps. 8,263,335 in 2000 to Ps. 6,868,608 in 2001. This decline was due to the depressed global economic conditions, the global oversupply of chemical products and increased price competition. In the domestic market, the shutdown of three tire manufacturing facilities, one of which occurred in 2000 and the other two in 2001 (one of which subsequently reopened in May 2002), caused reductions in the domestic industrial demand level. During 2001, cost of sales decreased 20.0% to Ps.5,158,216, compared to Ps.6,449,183 in 2000, and operating expenses decreased 2.9% to Ps.1,233,435, compared to Ps.1,269,808 in 2000. The decrease in costs of sales and operating expenses was due to cost-reduction measures and the greater utilization of installed capacity. Due to the decrease in sales operating income declined 12.4%, from Ps. 544,344 in 2000 to Ps. 476,957 in 2001. The operating margin increased to 6.9% in 2001 compared with 6.6% in 2000, due to the efficiencies achieved through our cost-reduction measures.
 
2000 and 1999 compared.    During 2000, net sales increased 4.2% to Ps.8,263,335 from Ps.7,930,339 in 1999. The increase in sales was mainly due to higher international prices for synthetic rubber, carbon black and phenol, and an increase in sales volume of polystyrene, acrylics, synthetic rubber and decorative laminates in 2000. Cost of sales increased 13.7% in 2000 to Ps.6,449,183 from Ps.5,673,248 in 1999, reflecting significant price increases in 2000 for some of our raw materials such as butadiene, styrene and cumene (some of which increased up to 100%) and significantly higher natural gas prices. We implemented various initiatives to offset the negative environment in the chemicals cycle, including aggressive cost reduction and productivity programs in all of our chemicals businesses. These included programs aimed at increasing the efficiency and volume of our synthetic rubber and polystyrene production processes and the optimization of our installed capacity. As a result of these initiatives, operating expenses decreased 0.9% to Ps.1,269,808 during 2000, compared to Ps.1,280,945 in 1999. The previously mentioned factors and our inability to pass the increases in the cost of raw materials and natural gas to our customers, caused our operating income to decrease 44.2% from Ps.976,146 in 1999 to Ps.544,344 in 2000, and our operating margin to decrease to 6.6% in 2000 compared to 12.3% in 1999.

47


Table of Contents
 
Food
 
The following table presents selected operating data for our food segment:
 
    
Year ended December 31,

 
    
1999

    
2000

    
2001

 
Net sales
  
Ps.  6,236,482
 
  
Ps. 3,733,284
 
  
Ps. 3,546,165
 
Cost of sales
  
4,717,985
 
  
2,832,318
 
  
2,691,122
 
Gross margin
  
24.3
%
  
24.1
%
  
24.1
%
Operating expenses
  
Ps.  1,095,502
 
  
Ps.    859,602
 
  
Ps.    780,595
 
Operating income
  
422,995
 
  
41,364
 
  
74,448
 
Operating margin
  
6.8
%
  
1.1
%
  
2.1
%
Depreciation and amortization
  
Ps.     206,554
 
  
Ps.    220,380
 
  
Ps.    165,867
 
Capital expenditures
  
805,966
 
  
331,288
 
  
168,725
 

 
2001 and 2000 compared.    During 2001, net sales declined by 5.0%, from Ps.3,733,284 in 2000 to Ps.3,546,165, due to lower sales in our pork business, which is related to low pork prices, and the discontinuance of our shrimp business in 2001. Cost of sales decreased 5.0% to Ps.2,691,122, compared to Ps.2,832,318 in 2000, and operating expenses decreased 9.2% from Ps.859,602 in 2000 to Ps.780,595 in 2001, due to our cost-reduction measures. Operating income increased 80.0%, from Ps.41,364 in 2000 to Ps.74,448 in 2001, due to the restructuring of our branded food business, the implementation of a new distribution strategy and significant cost reductions. As a result, operating margin increased from 1.1% in 2000 to 2.1% in 2001.
 
2000 and 1999 compared.    During 2000, net sales decreased 40.1% to Ps.3,733,284 from Ps.6,236,482 in 1999. This decrease was mainly due to the divestiture of the poultry business in December 1999 and to lower sales of branded food products in 2000. Cost of sales decreased 40.0% to Ps.2,832,318 in 2000 compared to Ps.4,717,985 in 1999, and operating expenses decreased 21.5% from Ps.1,095,502 in 1999 to Ps.859,602 in 2000 due to the divestiture of our poultry business. Operating income contracted 90.2% due to the sale of the poultry business and the extraordinary charges related to the restructuring in the branded products businesses, which achieved an operating income of Ps.422,995 in 1999 compared to Ps.41,364 in 2000. As a result of the aforementioned events, operating margin decreased from 6.8% in 1999 to 1.1% in 2000.
 
Real Estate
 
The following table presents selected operating data for our real estate segment:
 
    
Year ended December 31,

    
1999

  
2000

  
2001

    
(In thousands, except percentages)
Net sales
              
Residential
  
Ps. 694,452
  
Ps.    292,755
  
Ps.  310,145
Tourism/resort
  
88,819
  
438,688
  
267,261
Commercial
  
131,776
  
308,069
  
229,816
Total
  
Ps. 915,047
  
Ps. 1,039,512
  
Ps.  807,222

48


Table of Contents
 
    
Year ended December 31,

    
1999

    
2000

    
2001

    
(In thousands, except percentages)
Net sales
                  
Cost of sales(1)
  
376,835
    
553,924
    
428,066
Gross margin
  
58.8%
    
46.7%
    
47.0%
Operating expenses
  
Ps. 215,780
    
Ps. 323,789
    
Ps. 234,076
Operating income
  
322,432
    
161,799
    
145,080
Operating margin
  
35.2%
    
15.6%
    
18.0%
Depreciation and amortization
  
Ps.   44,356
    
Ps.   69,197
    
Ps.   35,589
Capital expenditures(2)
  
217,078
    
93,717
    
2,506
Investments in real estate projects(3)
  
414,310
    
698,053
    
699,801

(1)
 
Includes recognized cost of land, subcontracted construction costs, permit costs, architects’ and engineering fees and related costs. These costs are recognized proportionately as revenues are received for the particular project.
(2)
 
Includes expenditures made during the relevant period related to the Santa Fe shopping mall, in which we hold a 50.1% interest, including acquisitions of land, construction costs, permits, and architects’ and engineering fees. Does not include expenditures for other projects in our Real Estate Sector which are being developed for sale.
(3)
 
Includes expenditures made during the relevant period for acquisitions of land, construction costs, permits, architects’ and engineering fees and related items, except for expenditures related to the Santa Fe shopping mall.
 
2001 and 2000 compared.  During 2001, the net sales of this sector declined by 22.3%, from Ps. 1,039,512 in 2000 to Ps. 807,222 in 2001. This decline was due to the slowdown of the U.S. and Mexican economies. The projects with the highest contributions to sales were Bosques de Santa Fe, Punta Mita and Arcos Bosques. Bosques de Santa Fe contributed 28.6% of the total sales in the Real Estate Sector due to its strong sales of single-family lots. Arcos Bosques contributed 19.6% of the total sales in the Real Estate Sector due to its sale of that part of the North Building identified with the letter “B”. Punta Mita lot sales were affected by the slowdown of the U.S. economy, contributing 18.4% of the total sales in the Real Estate Sector. The cost of sales declined by 22.7% to Ps.428,066 in 2001 compared to Ps.553,924 in 2000, and operating expenses declined by 27.7%, from Ps. 323,789 in 2000 to Ps. 234,076 in 2001, due to a lower sales volume and our cost-reduction programs. Consequently, gross margin rose to 47.0% in 2001 compared to 46.7% in 2000. Operating income declined 10.3% to Ps.145,080 in 2001 from Ps.161,799 in 2000 due to the decline in sales. The operating margin in 2001 was 18.0% compared to 15.6% in 2000.
 
2000 and 1999 compared.  Net sales increased 13.6% from Ps.915,047 in 1999 to Ps.1,039,512 in 2000. The projects that contributed most to this increase were Bosques de Santa Fe, Punta Mita and Arcos Bosques Corporativo. Cost of sales increased 47.0% to Ps.553,924 in 2000 compared to Ps.376,835 in 1999. Costs increased at a higher rate than sales because there were more projects with lower margins in 2000, such as Arcos Bosques Corporativo and the operation of the Four Seasons Hotel in Punta Mita, resulting in a lower gross margin for the sector of 46.7% in 2000 compared to 58.8% in 1999. Operating expenses increased 50.1% from Ps.215,780 in 1999 to Ps.323,789 in 2000, which was due in large part to the operation of the Four Seasons Hotel in Punta Mita. As a percentage of sales, operating expenses represented 31.1% of sales in 2000 and 23.6% of sales during 1999. As a result of the foregoing, operating income decreased 49.8%, from Ps.322,432 in 1999 to Ps.161,799 in 2000, and operating margin decreased to 15.6% in 2000 from 35.2% in 1999.

49


Table of Contents
 
Comprehensive financial result
 
Comprehensive financial result includes: (1) interest expense paid by us on financing, (2) interest earned by us on temporary investments, (3) the variations in our UDI-denominated debt which result from the inflation adjustment mechanism of these instruments, (4) foreign exchange gains or losses on our foreign currency–denominated monetary assets or liabilities, and (5) monetary earnings or losses due to the effects of inflation on our net monetary liability or asset position. To the extent that our monetary liabilities exceed our monetary assets during inflationary periods, we will generate a monetary position gain.
 
The following table presents the components of our comprehensive financial result for each of the periods indicated:
 
    
Year ended December 31,

 
    
1999

      
2000

      
2001

 
    
(In thousands, except percentages)
 
Interest expense
  
Ps. (1,302,609
)
    
Ps. (1,200,738
)
    
Ps. (982,583
)
Interest income
  
  357,263
 
    
147,936
 
    
116,746
 
UDI variation
  
(17,627
)
    
(112,779
)
    
(99,441
)
Exchange, gain (loss), net
  
410,543
 
    
(323,875
)
    
310,909
 
Gain on monetary position
  
1,018,621
 
    
769,117
 
    
347,924
 
Comprehensive financial result
  
Ps.     466,191
 
    
Ps.    (720,339
)
    
Ps. (306,445
)
 
2001 and 2000 compared.  In 2001, the net comprehensive financial result reflected an expense of Ps.306,445 compared to an expense of Ps.720,339 in 2000. The reduced expense was due mainly to: (1) a decline of 18.2% in interest expense, from Ps.(1,200,738) in 2000 to Ps.(982,583) in 2001, due to a decrease in our outstanding debt and lower interest rates; (2) a 21.1% decrease in interest earned, from Ps.147,936 in 2000 to Ps.116,746 in 2001; (3) an appreciation of the peso exchange rate during 2001, which resulted in an exchange gain of Ps.310,909 in 2001 compared to an exchange loss of Ps.323,875 in 2000; (4) a loss of Ps.99,441 from the two medium-term notes denominated in UDIS and (5) a 54.8% decline in the gains on monetary position, from Ps.769,117 in 2000 to Ps.347,924 in 2001, due to the lower inflation in 2001 compared to 2000.
 
2000 and 1999 compared.  During 2000, the net comprehensive financial result reflected an expense of Ps.720,339, compared to income of Ps.466,191 in 1999. This is attributable principally to: (1) the depreciation of the Peso against the Dollar during 2000, which resulted in an exchange loss of Ps.323,875 compared to an exchange gain of Ps.410,543 in 1999; (2) a 58.6% decrease in interest income during the 2000 to Ps.147,936 from Ps.357,263 in 1999 due to lower interest rates in 2000; (3) UDI variation expense of Ps.112,779 resulting from two issuances of UDI-denominated medium-term notes in 2000 and the inflation adjustment made to such notes and to the UDI-denominated medium-term notes issued in 1999 (UDIs are Peso-denominated, inflation-adjusted units); and (4) a 24.5% decline in monetary gains in 2000, from Ps.1,018,621 in 1999 to Ps.769,117 due to lower inflation during 2000. These factors more than offset a 7.8% decrease in interest paid in 2000 resulting from lower interest rates.

50


Table of Contents
 
Equity in associated companies and unconsolidated subsidiaries
 
The Company reported a loss from equity in associated companies and unconsolidated subsidiaries of Ps. 114,086 in 2001 compared to a loss of Ps. 10,756 in 2000. The losses recorded in 2001 compared to 2000 were a result of the discontinuance of the shrimp business.
 
Other expenses and extraordinary items
 
In 2001, net other expenses and extraordinary items amounted to Ps.791,066, of which Ps.387,012 was a non-cash expense (which includes, among others, restructuring expenses, amortization of goodwill and impairment of assets) compared to Ps.247,057 in 2000. In 2001, these other expenses and extraordinary items were principally related to our corporate restructuring and consisted of amortization of goodwill, expenses incurred prior to the commencement of operations and amortization of patents, which collectively were equal to Ps.179,710, indemnity payments equal to Ps.171,128, corporate restructuring reserves and impairment of assets expenses equal to Ps.371,503 and other charges equal to Ps.68,725.
 
Income taxes and employee profit sharing
 
As a result of amendments to the Mexican income tax law which became effective on January 1, 1999, the nominal corporate income tax rate was increased from 34% to 35%. The nominal corporate tax rate, however, may not be less than 1.8% of the average value of a company’s assets, subject to some adjustments, whether or not the company had taxable income for the year. From 1999 through 2001, companies were permitted to defer a portion of their income tax liability on their net taxable income until dividends were paid from that income. For 1999, companies initially were required to pay income tax at a 32% rate, with the remaining 3% income tax liability payable on a proportional basis upon the distribution of dividends. For 1999, 2000 and 2001, the income tax liability due initially was 30% and the remaining 5% income tax could be deferred. Effective January 1, 2002, a new Mexican income tax became effective. For 2002, the income tax liability due is 35% and no part of this percentage may be deferred. With some exceptions, the amendments to the Mexican income tax laws also limit the extent to which we may reduce our consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries, to 60% of our equity interest in the relevant subsidiaries.
 
In addition, aside from wages and agreed–upon fringe benefits, we and each of our subsidiaries are required by law to provide to our workers a share of our profits equal to 10% of taxable profit of the relevant company, calculated before any adjustments for inflation or amortization of fiscal losses of previous years.
 
Revised Bulletin D-4, “Accounting for Income and Asset Taxes and Employee Profit Sharing,” became effective on January 1, 2000 for all Mexican companies. Prior to the effective date of this Bulletin, companies reporting under Mexican GAAP did not record the deferred tax effect of recurring temporary differences in the timing of the recognition of income and expenses for financial statement and income tax purposes. These differences, together with other non-recurring and permanent differences between income and expenses for accounting and tax purposes, resulted in an effective income tax rate that was lower than the statutory rate. New Bulletin D-4 requires that the comprehensive deferred effects (assets or liabilities) applicable to the cumulative temporary differences between assets and liabilities for financial statement and tax purposes be recorded. Deferred employee profit sharing will be calculated only for the temporary

51


Table of Contents
differences of the year whose reversal period can be determined. Our combined effective income tax rate for corporate income taxes and employee profit sharing was 26.8% in 1999, 55.8% in 2000 and 19.4% in 2001, as compared to the combined statutory rates of 45% in 1999, 2000 and in 2001.
 
As mentioned in Note 4 to the Financial Statements, beginning in January 2000, Desc adopted the provisions of Bulletin D-4 “Accounting for Income and Asset Taxes and Employee Profit Sharing”. The effect of the adoption was to recognize an initial long-term liability for deferred income taxes in the amount of Ps.1,717,353 affecting shareholders’ equity under “Cumulative effect of initial recognition of deferred income taxes” and Ps.712,329 affecting minority interest. The provision for income taxes for the year 2000 increased by Ps.104,046.
 
U.S. GAAP Reconciliation
 
In 2001, we had a net loss under U.S. GAAP of Ps.121,850 compared to net income under Mexican GAAP of Ps.41,354. In 2000, we had net income under U.S. GAAP of Ps.517,156 compared to net income under Mexican GAAP of Ps.287,000. In 1999, we had net income under U.S. GAAP of Ps.1,808,297 compared to net income under Mexican GAAP of Ps.2,020,284. These differences are attributable mainly to the recognition of deferred taxes and employee profit sharing, net of their monetary gain and the effect of the minority interest. The other major reasons for these differences relate to the recognition of the benefits of tax consolidation, preoperating expenses, as well as the minority interest and inflation effect of the U.S. GAAP adjustments.
 
For a further description of these and other adjustments under U.S. GAAP, see Notes 17 and 18 to the Financial Statements. Also, in Note 17 to the Financial Statement there is a discussion of recently issued accounting standards and their estimated impact on Desc’s financial position and results of operations.
 
Economic Conditions in Mexico
 
Economic conditions in Mexico improved in 1996 and during the first half of 1997. However, beginning in the second half of 1997, economic crises in Asia, Russia, and Brazil caused a setback in the economic recovery of Mexico and other emerging markets. These crises resulted in very volatile global financial conditions, large outflows of capital from emerging market countries such as Mexico, and volatile exchange rates for emerging markets currencies such as the Peso. As a result, Mexico experienced higher interest rates, slower economic growth and higher inflation during the second half of 1997 and during all of 1998. Mexican interest rates, which had declined from an average of 31.2% per annum for the 28-day Cetes (Mexican treasury bills) in 1996 to an average of 19.7% per annum in 1997, increased in 1998 to an average of 24.7% per annum. GDP growth declined from 6.76% in 1997, to 4.83% in 1998. Inflation, which had declined from 27.7% in 1996 to 15.7% in 1997 increased to 18.6% in 1998.
 
During 1999 and 2000, economic conditions in Mexico improved. Mexican interest rates averaged 21.3% and 15.24% per annum in 1999 and 2000, respectively, for the 28-day Cetes and inflation decreased to 12.3% in 1999 and to 9.0% in 2000. GDP grew by 3.7% in 1999, and by 6.9% in 2000. During 1999, the Mexican currency also strengthened compared to the Dollar, from Ps.10.17 per Dollar in January 1999 to Ps.9.50 per Dollar in December 1999 and maintained its strength during 2000 ending at 9.62 per Dollar in December 2000. Foreign investment also soared from approximately $10 billion in 1998 to $22 billion in 1999 to $11

52


Table of Contents
billion in 2000 to $25 billion in 2001. During the first quarter of 2002, S&P upgraded Mexico to an investment grade status, from a rating of “BBB-” to “BB+”. However, the current slowdown of the U.S. economy has adversely affected our business.
 
During 2001, Mexico experienced an economic slowdown registering a negative GDP of 0.3% compared to the positive 6.9% reached in 2000, and the gross international reserves grew by $11.1 billion, reaching $44.8 billion at December 31, 2001. The inflation rate continued a downward trend on a yearly basis, reaching 4.4%, while average interest rates on the 28-day Cetes also decreased to 11.3% per annum, and on December 31, 2001, the 28-day Cetes rate was 6.3% per annum.            
 
The slowdown in the Mexican economy has been fueled by a decline in industrial production and domestic demand. Oil revenues declined 36% in 2001, after having declined 4% on average in the first three quarters of 2001. The Mexican government acted several times in 2001 to tighten fiscal policy to prevent a larger deficit from developing into a major growth constraint. To deal with a Ps.33.8 billion shortfall of actual public sector income from budgeted levels, total governmental expenditures were decreased by Ps.31.7 billion. Consistent with the upward revised forecast of U.S. real gross domestic product, the full-year 2002 real gross domestic product forecast for Mexico has been also increased.
 
Fiscal Reform and Budget
 
The debate on fiscal reform in Mexico ended with the approval of a fiscal package that is expected to increase annual Mexican government revenues by approximately Ps.73 billion or 1.2% of the Mexican gross domestic product. Two-thirds of the gain is to come from ending the wage subsidy, the reinvested corporate earnings benefit (replaced by a 35% tax), and the preferred tax regimes for agriculture, fishing, and transportation. The maximum marginal income tax rate on individuals will decline from 40% to 35%. This is equal to the corporate rate and both are to drop another 1% point per annum through 2005. A further Ps.19 billion will come from a 10% excise tax on cellphones, pagers, and cable TV and satellite services; a 20% excise tax on soft drinks made with corn sweeteners, which has been temporarily suspended; a new tax regime for beverages (tiered by alcohol content); and a 5% rise (from 15% to 20%) in the VAT rate on luxury goods and services. The remainder will come from new public sector fees.
 
The Mexican government intends to maintain fiscal discipline as highlighted in the 0.65% targeted deficit in GDP for 2002, which is the same as the 2001 proposal, and which will be financed entirely domestically.
 
Political Events in Mexico
 
In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition PAN won the presidency, and he assumed office on December 1, 2000. His victory ended more than 70 years of presidential rule by the PRI. Neither the PRI nor the PAN succeeded in securing a majority in the Mexican Congress or Senate.
 
In Chiapas, the social unrest has continued and from time to time there have been outbreaks of violence that have resulted in deaths in Chiapas and other southern regions of Mexico. The new administration has inherited the conflict and has started a new negotiation process to solve it.

53


Table of Contents
 
If the kind of political instability experienced at Chiapas were to expand or any other political instability were to develop, the market price of securities of Mexican issuers, including our shares, ADSs and debt securities, could be adversely affected.
 
Liquidity and Capital Resources
 
Liquidity
 
During 1999, 2000 and 2001, we generated EBITDA of Ps.4,671,255, Ps.3,598,886 and Ps.2,876,386, respectively. We generated cash flow mainly to finance capital expenditures and to service and repay debt. As of December 31, 2001, we had cash and marketable securities totaling Ps.133,311 on a non–consolidated basis, and Ps.1,371,014 on a consolidated basis. We believe that our working capital is sufficient for Desc’s and its subsidiaries’ present requirements.
 
Under Mexican GAAP, we present our consolidated statement of changes in financial position in accordance with Bulletin B–12, which identifies the generation and application of resources representing differences between beginning and ending financial statement balances in constant Pesos. The changes shown in the Financial Statements do not represent cash flow activities. See note 17 to the Financial Statements for more information about these changes.
 
At the corporate level, Desc has no substantial operations of its own and, consequently, we depend on dividends and other payments from our subsidiaries and income tax refunds for virtually all of our cash flow.
 
Desc has credit lines with different financial institutions. These credit lines enable us to meet all our current obligations on a timely basis, and, thereby, mitigate any liquidity risk. Desc recently refinanced its outstanding debt, the proceeds of which were used to reduce our use of short-term credit lines. Most of our credit lines do not charge us a fee for unused amounts.
 
Dividends from subsidiaries
 
It is our general policy that each of our principal subsidiaries pay to Desc (and other shareholders of the subsidiary) dividends equal to at least 50% of the subsidiary’s annual consolidated net income legally available for distribution. This percentage may be significantly lower in some cases, such as when the subsidiary proposes to make large capital expenditures or when its profits decline. As a general policy, Desc has paid approximately 35% of its legally available net income to shareholders, although it did not pay cash dividends in 1996 or 1999 as a result of restrictions under the terms of indebtedness that has since been repaid.
 
During 2001, our subsidiaries paid dividends of approximately Ps.473,213, representing in total approximately 60% of the subsidiaries’ 2000 net income. Approximately Ps.107,363 of these dividends were paid to Desc and the balance were paid to minority interests. During 2000, our subsidiaries paid dividends of approximately Ps.432,452, representing in total approximately 23% of the subsidiaries’ 1999 net income. Approximately Ps.385,823 of these total dividends were paid to Desc and the balance were paid to minority interests. During 1999, our subsidiaries did not pay dividends.

54


Table of Contents
 
Income tax refunds
 
In Mexico, each corporation is required to pay an asset tax (substantially equivalent to an alternative minimum income tax) for each year in an amount not less than 1.8% of the average value of its assets (subject to some adjustments), whether or not the corporation had taxable income for the year. Under Mexican income tax law, each year, each of our consolidated subsidiaries has been required to pay to Desc the amount of tax it would have paid to the Mexican government in respect of its annual taxable income and assets had the subsidiary filed a separate return. These payments were made pro rata based on our proportionate equity interest in the subsidiary making the payment. We were required to collect these tax payments and pay to the Mexican government the amount of tax due on behalf of Desc and its subsidiaries calculated on a consolidated basis. We generally made payments in respect of each year early in the following year, after completion of our year–end audit. Because we were entitled to apply this requirement on the basis of our consolidated taxable income, we generally were able to reduce our consolidated tax liability below the aggregate amount of tax payments we receive from our subsidiaries, depending on how many subsidiaries made payment based on the minimum tax and the extent of consolidated taxable income compared to consolidated taxable assets. Any amount by which these tax payments to Desc exceeded our consolidated tax liability for any year was retained by Desc and therefore provided a source of cash at the parent company level. We refer to these excess payments as “refunds.” These refunds and the Mexican tax system are addressed in notes 4 and 14 to the Financial Statements.
 
As a result of amendments to Mexican income tax law which became effective on January 1, 1999, each subsidiary made 40% of its income tax payments directly to the Mexican government. The income tax law also limits the extent to which we may reduce our consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries including Desc, to 60% of our equity interest in the relevant subsidiaries, thus reducing the amount of refunds available to us.
 
From 1999 to 2001, the Mexican income tax rate was 35%, with the obligation to pay this tax each year at a rate of 30%, with the remainder payable upon distribution of earnings. Beginning in 2002, the option to defer a portion of the income tax payment until dividends were distributed is eliminated. The maximum income tax rate will be 35% in 2002, 34% in 2003, 33% in 2004 and 32% beginning in 2005.
 
Uses of funds
 
At the Desc level, we utilize cash primarily to pay taxes, service debt and pay dividends. During 2001, we received Ps.107,789 in dividends from our subsidiaries, which we used to pay dividends to our shareholders totaling Ps.407,825 and to service debt. During 2000, we received Ps.385,863 in dividends from our subsidiaries, which we used to pay dividends to our shareholders totaling Ps.427,896. During 1999, our subsidiaries did not pay dividends. The dividend policies of the entity proposing to pay the dividend may change at the discretion of its shareholders. In addition, general limitations under Mexican corporate law apply to the amount of dividends payable by each of Desc and our direct and indirect subsidiaries.
 

55


Table of Contents
 
Financing activity
 
In the past, our principal subsidiaries generally did not rely on Desc or each other for financing, except when substantial capital expenditures were to be made and in other limited circumstances. Since the last quarter of 2001, Desc has been the source of financing for our subsidiaries through intercompany loans. We anticipate that Desc alone will make future debt offerings in the capital markets. The proceeds of any future offerings of this kind, to the extent required by a subsidiary, would be provided to the subsidiary either by means of a capital contribution or an intercompany loan, as determined by Desc at the time.
 
As of December 31, 2001, our consolidated Dollar–denominated liabilities were $1.0 billion and our net consolidated Dollar–denominated liabilities after deducting Dollar–denominated assets, which consist principally of cash, were $702.6 million. The scheduled maturities of our outstanding debt at June 13, 2001, are summarized as follows:
 
    
Payments Due By Period

    
(In millions of Dollars)

    
Total

  
Within
1 Year

  
2 – 3
Years

  
4 – 5
Years

  
After
5 Years

Long-Term Bank Loans and Notes Payable(1)
  
1,095
  
176.6
  
222.7
  
399.5
  
296.2
Capital Lease Obligations
  
7.0
  
1.0
  
2.0
  
1.0
  
3.0
    
  
  
  
  
Total Long-Term Debt
  
1,102
  
177.6
  
224.7
  
400.5
  
299.2
    
  
  
  
  

(1)
 
Under our bank facilities, the maturity on our outstanding debt could be accelerated if we do not maintain certain covenants.
 
See Note 4 to the Financial Statements for more information about our credit facilities. As explained above, in order to meet our cash requirements, we intend to use internally generated funds and to borrow under our existing and future credit facilities or under short-term borrowing facilities. We believe that cash generated from these sources will be adequate to meet our cash requirements over the next 12 months.
 
On October 9, 1997, Dine placed long-term notes guaranteed by Desc in international markets, bearing interest at 8.75% and maturing on October 9, 2007. As a result of Dine’s merger into Desc, Desc has assumed all of Dine’s obligations under the indenture for such notes. As of December 31, 2001, the carrying amount of the notes was $94.23 million and their fair value was $96.8 million.
 
In October 1999, Desc issued approximately Ps. 850 million of UDI-denominated Medium Term Notes due 2006. These notes were our first issuance under a Ps. 3 billion program structured by the Chase Manhattan Bank Mexico and authorized by the CNBV. UDIs are Unidades de Inversión or investment units, which are denominated in Pesos and adjusted periodically for inflation by Banco de México, the Mexican Central Bank. These notes bear interest at a net rate of 9% and were rated “MAA” by Duff and Phelps. We used the proceeds of this issuance to refinance short-term debt.
 

56


Table of Contents
 
In January 2000, Girsa entered into a ten-year, $105 million loan agreement with the International Finance Corporation. As a result of the merger between Girsa and Desc, Girsa’s obligations under this loan agreement were assumed by certain of our Chemical Sector subsidiaries with a guarantee by Desc of those obligations. The proceeds from this loan were used to fund the establishment of a joint venture in the synthetic rubber business, increase capacity at various facilities, implement quality, technology and process improvements in various businesses, and implement various cost reduction programs as well as maintenance and environmental investments. As of December 31, 2001, we had borrowed all $105 million under this facility.
 
In April 2000, Corfuerte entered into a five-year, $32 million Term Loan Agreement with a group of banks. Corfuerte used the proceeds from this loan to refinance short-term debt. As of December 31, 2001, Corfuerte had borrowed all $32 million available to it under this facility. This loan was paid in the second quarter of 2002 with proceeds from one of our new syndicated loans (as described below).
 
On July 12, 2000, Desc issued approximately Ps.1 billion in UDI-denominated Medium Term Notes with a maturity period of seven years. These notes bear interest at a net rate of 8.20% and were rated “MAA” by Duff and Phelps. This placement was done under the Ps.3 billion program authorized by the CNBV, from which Ps.850 million (or 324 million in UDIS) was placed during October 1999.
 
In November 2000, Desc entered into a three-year $150 million Credit Agreement with a group of banks. We used the proceeds from this loan to refinance short-term debt of Desc. As of December 31, 2001, we had borrowed all $150 million under this facility. This loan was paid in the second quarter of 2002 with proceeds from one of our new syndicated loans (as described below).
 
In November 2000, Girsa entered into a four-year, $50 million revolving credit. As a result of the merger between Desc and Girsa, Desc has assumed Girsa’s obligations under this revolving credit line. Interest on this loan is payable monthly. The proceeds from this loan were used to repay short-term debt and fund capital expenditures.
 
In May and June of 2002, we entered into two credit agreements with two syndicates of banks. One credit agreement with a syndicate of Mexican banks, for which BBVA-Bancomer, S.A. acts as the administrative agent, is for an amount of Ps.1,300 million (or $130 million) with a maturity of five years and an average life of 3.3 years. The second credit agreement with a syndicate of international banks, for which Citibank, N.A. acts as the administrative agent, is for an amount of $275 million with a maturity of five years and an average life of 3.5 years. Each of the credit facilities contain various affirmative and negative covenants, including restrictions on the payment of dividends by Desc, on the purchase, redemption or acquisition of Desc’s capital stock by Desc and any subsidiary, financial covenants and restrictions on the ability of Desc to enter into agreements that restrict the payment of dividends by Desc’s subsidiaries to Desc. Both credit agreements were funded by the end of the second quarter of 2002 and the proceeds from these loans were used to refinance our debt.
 
As of December 31, 2001, Desc and its subsidiaries had outstanding short-term liabilities of approximately $332 million, most of which was borrowed under unsecured revolving credit facilities provided by several Mexican and U.S. commercial banks. These facilities are predominantly Dollar-denominated and are payable within 30 to 364 days with interest rates
 

57


Table of Contents
which fluctuated during 2001 between 2.65% and 6.50% in dollars and 9.00% and 11.00% in pesos. As of December 31, 2001, our subsidiaries had approximately $1,090 million of available credit under these and other facilities, in addition to the $600 million outstanding on that date. Since none of these facilities is committed, borrowings under them require the lenders’ consent.
 
Investment Activity
 
In February 2001, Desc sold its stake in the Four Seasons Resort in Punta Mita, Nayarit to Strategic Hotel Capital LLC for $52 million. During July 2001, Desc sold its heavy duty and medium duty truck clutch business, of Transmisiones TSP, S.A. de C.V. (TTSP), to the Eaton Corporation. In September 2001, Desc completed the sale of its 51% stake in the Santa Fe Shopping Center for $70 million. During October 2001, DESC reached an agreement to swap 60% of its valve business for 40% of TW’s piston business (pistons, pins and tappers). This transaction ended the partnership between TRW and UNIK, as TRW assumed 100% of the valve business and Unik retained 100% of the pistons, pins and tappers business and the Moresa brand. During the second quarter of 2001, Dine increased its stake in Bosques de Santa Fe from 50% to 73% with an investment of $30 million.
 
Off-Balance Sheet Financing Arrangements
 
Desc has no off-balance sheet financing arrangements.
 
Item 6.    Directors, Senior Management and Employees
 
Directors
 
Our board of directors is responsible for the management of our business. Our bylaws provide that the board of directors will be composed of no less than 5 and no more than 20 directors as determined by our shareholders at each annual shareholders’ meeting. Our bylaws also provide that our shareholders will elect the alternate directors, if any. At our November 29, 2001 shareholders’ meeting, our shareholders adopted amendments to our bylaws which were mainly required by the Mexican Securities Law (Ley del Mercado de Valores) and included, among other things, provisions dealing with the composition of our board of directors. Our bylaws, as amended, require that not less than 25% of our directors be persons that qualify as independent directors (as defined by the Mexican Securities Law).
 
The holders of the Series A shares have the right to elect one more than half of the board of directors. Shareholders or groups of shareholders holding shares, including Series C shares, of any one class which represent at least 10% of our total equity capitalization have a right to elect one director of the relevant series for each 10% held. The holders of the Series B shares have the right to elect the remaining members of the board of directors. Each director is elected to serve a one-year term and remains in office until the person elected to replace him takes office. At our April 25, 2002 shareholders’ meeting, our shareholders set the size of our board of directors at 12 members. The holders of Series C shares as a group represent more than 10% of our total equity capitalization and elected one Series C director at such meeting.
 
The following table lists the principal occupation, type of director and period of service on the board of each of our directors elected at our last general shareholders’ meeting, which was held on April 25, 2002. Except as indicated below, none of the directors holds any offices or positions in Desc. The members of our board of directors serve for one-year terms.
 

58


Table of Contents
 
Name of Directors

  
Principal Occupation And Positions With Desc

    
First Elected

Series A Directors:
           
Fernando Senderos Mestre(1)
  
Chairman of the Board and Chief Executive Officer of Desc
    
1973
Eneko de Belausteguigoitia Arocena
  
Entrepreneur
    
1973
Carlos Gómez y Gómez
  
Chairman of the Board of Grupo Financiero Santander Serfin, S.A. de C.V.
    
1973
Carlos González Zabalegui
  
Chief Executive Officer of Controladora Comercial Mexicana, S.A. de C.V.
    
1996
Luis Téllez Kuenzler
  
Executive Vice President of Desc
    
2001
Ernesto Vega Velasco
  
Secretary of the Board
    
1973
Emilio Mendoza Saeb
  
Director of Desc
    
2002
Series B Directors:
           
Alberto Bailleres González
  
Chief Executive Officer of Grupo Bal
    
1973
Rubén Aguilar Monteverde
  
Indepedent Director
    
1978
Federico Fernández Senderos
  
Chief Executive Officer of Grupo Eulen México
    
1993
Valentín Díez Morodo
  
Vice President of Grupo Modelo, S.A. de C.V.
    
1999
Series C Director:
           
Prudencio López Martínez
  
Chairman of the Board of Sanvica, S.A. de C.V.
    
1973
(1)
 
Fernando Senderos Mestre is the uncle of Federico Fernández Senderos and the brother–in–law of Carlos Gómez y Gómez.
 
Committees of the Board of Directors
 
The committees of our board of directors consist of the Evaluation and Compensation Committee, the Audit Committee, the Finance and Planning Committee and the Executive Committee. Each of these committees is to be composed of no less than 3 and no more than 7 directors, as determined at each annual general shareholders’ meeting, in addition to Desc’s statutory auditor, who must attend (but not vote at) meetings of the board and of each of its committees. See “—Statutory Auditor” below for more information about the Statutory Auditor’s responsibilities. At the April 25, 2002 meeting, our shareholders set the size of the Finance and Planning Committee and of the Audit Committee at 4 members each and the size of

59


Table of Contents
each of the Evaluation and Compensation Committee and the Executive Committee at 3 members.
 
The duties of the Evaluation and Compensation Committee include recommending criteria to our Board for the selection and evaluation of the performance of our executive officers in accordance with general guidelines established by the Board, and analyzing the structure and amount of the compensation of our executive officers proposed by our CEO and making a recommendation to our Board. The current members of the Evaluation and Compensation Committee are Messrs. Ernesto Vega Velasco, Carlos González Zabalegui and Valentín Díez Morodo.
 
The duties of the Audit Committee include recommending to our Board candidates to serve as our external auditors, the terms under which such candidates will serve and the scope of their audit; assisting our Board in its supervision of our external auditors’ compliance with the terms of their engagement; acting as communication channels between our Board and our external auditors; ensuring the independence and objectivity of our external auditors; reviewing our auditors’ reports and letters and reporting the results of their review to the full Board; and, when required by our bylaws, reviewing the terms of transactions that are not in the ordinary course of business of Desc. The Audit Committee must submit an annual report at each annual shareholders’ meeting with respect to its activities over the prior year. The current members of the Audit Committee are Messrs. Prudencio López Martínez, Rubén Aguilar Monteverde, Eneko de Belausteguigoitia Arocena and Ernesto Vega Velasco.
 
The duties of the Finance and Planning Committee include evaluating and, if applicable, recommending for approval to our Board the investment and financing policies proposed by our Chief Executive Officer; evaluating and recommending general guidelines for our strategic planning; opining as to the premises underlying our annual budget; overseeing the implementation of our budget and strategic plan; and identifying the financial risks to which our company is subject and evaluating our policies to manage those risks. The current members of the Finance and Planning Committee are Messrs. Fernando Senderos Mestre, Eneko de Belausteguigoitia Arocena, Carlos Gómez y Gómez and Federico Fernández Senderos.
 
At the April 25, 2002 shareholders’ meeting, Messrs. Fernando Senderos Mestre, Federico Fernandez Senderos and Luis Téllez Kuenzler were elected as members of our Executive Committee. The duties of the Executive Committee include supervising the performance of our subsidiaries; appointing their top tier officers and determining their compensation with the advise of the Evaluation and Compensation Committee, establishing the premises and guidelines for the growth and development of our company and its subsidiaries and deciding on their investments and financing, with the advise of the Finance and Planning Committee.
 
The board of directors has six regular meetings scheduled per year and each of the committees has two regular meetings scheduled per year.
 

60


Table of Contents
 
Executive Officers
 
The following table presents information concerning our current senior management:
 
Name

  
Position

  
Years
with
Desc

Fernando Senderos Mestre
  
Chairman of the Board and Chief Executive Officer
  
30
Luis Téllez Kuenzler
  
Executive Vice President
  
1
Mario Suro Rodríguez
  
Vice President (Autoparts Sector)
  
28
Enrique Ochoa Vega
  
Vice President (Chemicals and Branded Food Products Sector)
  
11
Andrés Baños Samblancat
  
Vice President (Real Estate Sector)
  
18
Arturo D’Acosta Ruiz
  
Chief Financial Officer
  
20
Jorge Luis Almada Wright
  
Corporate Director of Strategic Planning
  
3
Alberto Morett López
  
Corporate Director of Administration and Human Resources
  
9
Pedro Piedras Ros
  
Corporate Director of Control (Chemicals and Real Estate Sector)
  
22
Agustín Ríos Matence
  
Corporate Director of Control (Autoparts and Food Sector)
  
25
Ramón F. Estrada Rivero
  
General Counsel
  
12
Abel Archundia Pineda
  
Chief Information Officer
  
Less than 1 year
 
The following table presents information concerning the current chief executive officers of our principal sectors:
 
Name

  
Subsidiary (Business)

  
Years
with
Desc

Mario Suro Rodríguez
  
Autoparts Sector
  
28
Enrique Ochoa Vega
  
Chemicals and Branded Food Products
  
11
Andrés Baños Samblancat
  
Real Estate Sector
  
18
 
Examiner
 
In addition to electing our directors, our shareholders generally elect an examiner and an alternate at their annual ordinary meeting. Under Mexican law, the duties of the examiner include, among other things, examining the operations, books, records and any other documents of Desc and presenting at the annual ordinary shareholders’ meeting a report on the accuracy, sufficiency and reasonableness of the information presented by the board of directors at that meeting. Under our bylaws, the examiner is also authorized to call ordinary or extraordinary general shareholders’ meetings. Under our bylaws, any shareholder or group of shareholders that represents 10% of our shares has the right to designate an examiner and an alternate. This right
 

61


Table of Contents
was not exercised at the April 25, 2002 shareholders’ meeting. Our examiner is José Manuel Canal Hernando, and his alternate is Daniel del Barrio Burgos.
 
Compensation of Directors and Officers
 
For the year ended December 31, 2001, the aggregate compensation of all directors and officers of Desc, S.A. de C.V. as a group that was paid or accrued by us in that year for services in all capacities was approximately Ps.74,235. This group includes 11 directors, one examiner, one alternate examiner and 13 officers, 2 of whom were also directors. During the year ended December 31, 2001, we contributed approximately Ps.13,454 (in nominal Pesos) to a pension fund that covers the employees and the 15 executive officers of Desc, S.A. de C.V. Aside from this contribution, we did not set aside or accrue any other funds for pension, retirement or similar benefits for directors and executive officers as a group. Following the completion of each fiscal year, Desc in its sole discretion, awards cash bonuses in varying amounts to its executive employees. In past years, most of these employees are entitled, if they so elected when the plan was adopted, to use their cash bonuses to purchase Desc shares from a trust to which we loaned funds in 1992 to enable it to purchase shares of our stock in the open market, at an amount equal to the trust’s average cost basis in those shares. For 2001, the trust’s option to purchase shares for these employees, and thus the ability of the employees to purchase shares from the trust, was canceled but the fund remains in place.
 
Share Ownership by Our Executive Officers and Directors
 
Share ownership of Fernando Senderos Mestre and certain members of his immediate family and Eneko de Belausteguigoitia Arocena is set forth in “Major Shareholders” under Item 7. None of our other directors, alternate directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock.
 
Employees; Labor Relations
 
We employed approximately 19,344 people as of December 31, 2001, 22,320 people as of December 31, 2000 and 20,878 people as of December 31, 1999.
 
Each of our subsidiaries has entered into short–term union, collective bargaining or similar agreements for each plant and/or facility it operates. These contracts generally have two–year terms and provide for an annual salary review as well as a review of other contract terms and conditions prior to renewal, which is a standard arrangement for collective bargaining agreements for most Mexican companies. We believe that our relations with our employees are satisfactory.
 
Item 7.    Major Shareholders and Related Party Transactions
 
The following table presents information with respect to the ownership of Desc’s Series A, B and C shares, as of April 25, 2002, the date of our last shareholders’ meeting, by each shareholder known to us to own beneficially more than 5% of our outstanding Series A, B or C shares and by all of our officers and directors as a group:
 

62


Table of Contents
 
    
Number of Shares Owned

 
Name

  
Series A

    
Series B

    
Series C

 
Fernando Senderos Mestre(1)(2)
  
321,986,985
 
  
1,770,000
 
  
4,968,600
 
Lucía Senderos de Gómez(1)(3)
  
0
 
  
134,812,955
 
  
9,318,680
 
Eneko de Belausteguigoitia Arocena
  
86,567,920
(4)
  
8,666,555
 
  
380,005
 
Officers and directors as a group (21 persons)(2) (5)
  
428,560,893
 
  
17,873,055
 
  
8,475,872
 
    
Percentage Owned

 
Name

  
Series A

    
Series B

    
Series C

 
Fernando Senderos Mestre(1)(2)
  
54.81
%
  
0.35
%
  
1.80
%
Lucía Senderos de Gómez(1)(3)
  
0.00
 
  
26.63
 
  
3.38
 
Eneko de Belausteguigoitia Arocena
  
14.74
 
  
1.71
 
  
0.14
 
Officers and directors as a group (21 persons)(2) (5)
  
72.95
 
  
3.53
 
  
3.08
 

(1)
 
Lucía Senderos de Gómez and Fernando Senderos Mestre are siblings. Lucía Senderos de Gómez is the wife of Carlos Gómez y Gómez, a director of Desc.
(2)
 
Includes shares owned by SEN, S.A. de C.V., a corporation wholly–owned by Fernando Senderos Mestre. Does not include the 32,917,520 Series A shares, 2,708,215 Series B shares and 20,931,235 Series C shares owned by our pension funds, for which Fernando Senderos Mestre and other officers and directors serve as trustees or members of the investment committee, or shares owned by Lucía Senderos de Gómez. Does not include approximately 7,101,608 Series A shares, 4,645,300 Series B shares and 2,708,782 Series C shares currently owned by the trust referred to under Item 6. “Compensation of Directors and Officers”, as to which Fernando Senderos Mestre has voting control. Does not include 27,766,560 Series A shares, 64,387,105 Series B shares and 61,268,905 Series C shares owned by Manuel Senderos Irigoyen, the father of Fernando Senderos.
(3)
 
Does not include 2,345,030 Series A shares, 564,000 Series B shares and 78,505 Series C shares owned by Carlos Gómez y Gómez, the husband of Lucía Senderos de Gómez.
(4)
 
Includes 421,750 shares owned by companies controlled by Eneko de Belausteguigoitia Arocena.
(5)
 
Includes shares owned by Fernando Senderos Mestre and Eneko de Belausteguigoitia Arocena.
 
As a result of the shares owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre exercises voting control (see the table above and Item 6. “Directors, Senior Management and Employers—Compensation of Directors and Officers” for information about these additional shares), the Senderos family has the power to elect a majority of our board of directors, to control our general management and to determine the outcome of substantially all matters requiring shareholder approval.
 
Related Party Transactions
 
From time to time, we may enter into transactions with parties that have relationships with our officers or directors or entities in which we have an ownership interest. Such transactions are reviewed by the board of directors and are subject to the prior approval of members of our board of directors who do not have a personal interest in the applicable transaction. We disclose all material transactions that, in our judgment, constitute related party transactions.

63


Table of Contents
 
The following table sets forth information regarding loans extended by Desc to members of our board of directors and our senior management as of June 2002:
 
Name of Loan
Recipient

 
Largest Aggregate Amount of Indebtedness Outstanding During Period

 
Indebtedness
Currently
Outstanding
(In Dollars)

 
Nature of Loan

 
Interest Rate

Jorge Luis Almada Wright
 
$150,000
 
$150,000
 
Home Mortgage Loan
 
LIBOR plus 6%
Ramon F. Estrada Rivero
 
$163,000
 
$61,635
 
Home Mortgage Loan
 
LIBOR plus 5%
Arturo D’Acosta Ruiz
 
$200,000
 
$45,000
 
Home Mortgage Loan
 
LIBOR plus 5%
Abel Archundia Pineda
 
$215,000
 
$210,000
 
Home Mortgage Loan
 
Mexican Equilibrium Interbank Interest Rate plus 5%
Andres Baños Samblancat
 
$1,677,700
 
$1,677,700
 
Commercial Property Loan
 
LIBOR plus 6%
 
Desc and its subsidiaries sold a real estate lot and office space in our Arcos Bosques building, having an aggregate sales price of $5,240,000, to three companies affiliated with Andres Baños Samblancat, a member of our senior management.
 
Item 8.    Financial Information
 
Consolidated Financial Statements
 
See pages F-1 through F-51, which is incorporated herein by reference.
 
Litigation
 
We are involved in legal proceedings not described in this annual report that are incidental to the normal conduct of our business. We do not believe that liabilities relating to these proceedings will have a material adverse effect on our financial condition or results of operations. See also discussion in this Item 8 “—Significant Changes”.
 
Dividend Policy
 
For a discussion of our dividend policy, see Item. 10 “Additional Information—Dividends and Distributions” and “—Dividends and Paying Agent.”
 

64


Table of Contents
 
Significant Changes
 
On March 12, 2002, we announced that Fenoquimia, S.A. de C.V., a wholly owned subsidiary of Desc which produces and markets acetone and methylmethacrylate, filed for a “Concurso Mercantil” in Mexico, which is similar to “Chapter 11” protection under U.S. bankruptcy laws. The filing for a “Concurso Mercantil” was precipitated by the ongoing decline in the global petrochemical business cycle and the deterioration of export margins. Fenoquimia’s 2001 sales and EBITDA represent less than 2% and 0.5%, respectively, of Desc’s consolidated amounts. Desc does not expect any material adverse effect, either financial or strategic, on its operations as a result of Fenoquimia’s filing for a “Concurso Mercantil”.
 
At our general annual ordinary and extraordinary shareholders’ meeting held on April 25, 2002, our shareholders approved the merger of Dine (which was the holding company for our Real Estate Sector) with Desc, with Desc surviving the merger. The merger became effective on May 14, 2002.
 
We are in the process of implementing several initiatives aimed at maximizing administrative efficiency and responsiveness among Desc and all of its businesses. We have commenced centralizing various operations within Desc in order to capitalize on synergies and streamline the administrative process. We also plan on consolidating certain businesses, sharing efficient and cost-effective practices among our businesses and consolidating production technologies within the Autoparts and Chemical Sectors. We are also establishing a centralized information technology group, which will provide an improved service to our businesses. We expect to establish a flexible and efficient administrative structure and thereby reduce administrative costs across all of our businesses. This will result in a reduction in personnel in 2002. We also plan on establishing a central compensation structure across all businesses that is based on productivity. In addition, during the beginning of 2002, we consolidated our various legal departments into one group in order to streamline workflow, improve efficiencies and exercise more control over our legal department.
 
Item 9.    The Offer and Listing
 
Trading Prices of our Shares and ADS
 
All three series of our stock are listed on the Mexican Stock Exchange and our ADSs are listed in the New York Stock Exchange under the symbol “DES”.
 
As of April 25, 2002, approximately 33,273,240 of the Series C shares were held in the form of ADSs. It is not practicable for us to determine the number of Series C shares beneficially owned by U.S. persons.
 
The following table sets forth for the periods indicated the high and low sales prices of the Series C shares on the Mexican Stock Exchange in nominal Pesos and the high and low sales prices of the ADSs on the New York Stock Exchange in Dollars. These prices are not representative of the prices for the Series A and Series B shares for these periods:

65


Table of Contents
 
    
Mexican Stock Exchange Pesos Per Series C Share

    
New York Stock Exchange
Dollars Per ADS

Prior Five Years(1):

  
High

    
Low

    
High

    
Low

1997
  
Ps. 16.62
    
Ps. 8.54
    
$
43.25
    
$
21.75
1998
  
15.08
    
5.50
    
 
37.68
    
 
8.87
1999
  
13.60
    
6.80
    
 
29.12
    
 
14.06
2000
  
8.10
    
3.20
    
 
17.00
    
 
6.31
2001
  
5.20
    
3.20
    
 
11.20
    
 
6.25
2000:

                         
First Quarter
  
Ps. 8.10
    
Ps. 5.90
    
$
17.00
    
$
12.50
Second Quarter
  
7.00
    
5.30
    
 
15.25
    
 
11.00
Third Quarter
  
6.62
    
4.99
    
 
14.37
    
 
10.25
Fourth Quarter
  
4.78
    
3.20
    
 
10.31
    
 
6.31
2001:

                         
First Quarter
  
Ps. 4.26
    
Ps. 3.40
    
$
8.78
    
$
6.25
Second Quarter
  
4.00
    
3.40
    
 
8.42
    
 
7.16
Third Quarter
  
5.20
    
3.30
    
 
11.20
    
 
7.47
Fourth Quarter
  
4.40
    
3.20
    
 
9.50
    
 
6.90
Most Recent Six Months:

                         
December 2001
  
Ps. 4.40
    
Ps. 3.40
    
$
9.50
    
$
7.35
January 2002
  
4.95
    
4.40
    
 
11.00
    
 
9.25
February 2002
  
4.88
    
4.51
    
 
11.00
    
 
9.20
March 2002
  
5.18
    
4.16
    
 
11.28
    
 
8.93
April 2002
  
5.80
    
4.89
    
 
12.44
    
 
10.80
May 2002
  
6.30
    
5.94
    
 
12.81
    
 
12.15

(1)
 
We have adjusted the sales prices of the Series C shares for the periods presented to retroactively reflect the 5 for 1 stock split effected on September 8, 1998.
 
As of June 27, 2002, the closing sales price of the Series C shares on the Mexican Stock Exchange was Ps.5.45 and the closing sales price of the ADSs on the New York Stock Exchange was $9.70.
 
Our 8¾% Guaranteed Notes due 2007 (which notes were issued by Dine and assumed by Desc as a result of the merger between Desc and Dine) were listed on the Luxembourg Stock Exchange on June 21, 1999. They are not listed on any other stock exchange. It is not practicable for us to determine the amount of these notes beneficially owned by U.S. persons.
 
Trading on the Mexican Stock Exchange
 
The Mexican Stock Exchange was founded in 1894 and has operated continuously since 1907. The Mexican Stock Exchange is located in Mexico City and it is Mexico’s only stock exchange. The Mexican Stock Exchange is organized as a corporation and its shares are owned by authorized brokerage firms. These firms exclusively are authorized to trade on the floor of the Mexican Stock Exchange.
 

66


Table of Contents
 
Electronic trading on the Mexican Stock Exchange takes place between the hours of 8:30 a.m. and 3:00 p.m., Mexico City time, on each weekday other than public holidays. Since January 11, 1999, all trading of equity securities listed on the Mexican Stock Exchange has been made through the Electronic Negotiation System, an automated, computer-linked system commonly known as BMV SENTRA Capitales.
 
The Mexican Stock Exchange publishes a daily official price list that includes information on each listed security. Trading may be suspended in the event of disclosure of material non-public information, if the Mexican Stock Exchange considers that the suspension is necessary for the public to be fully informed. The Mexican Stock Exchange may also suspend trading of a particular security as a result of significant price fluctuations during a given trading day (fluctuations exceeding a given price level by more than 15%) or as a result of unusual movements in the price of a security during a period of no more than five consecutive trading days. The Mexican Stock Exchange may also suspend trading generally as a result of unexpected events or force majeure, or if unusual market fluctuations arise.
 
Settlement takes place two trading days after a share transaction is effected on the Mexican Stock Exchange. Deferred settlements, even if by mutual agreement, are not permitted without the approval of the CNBV. Most securities traded on the Mexican Stock Exchange, including our shares, are on deposit with S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores, a privately owned central securities depositary that acts as a clearing house, depositary, custodian, settlement, transfer and registration institution for Mexican Stock Exchange transactions, eliminating the need for physical delivery of securities.
 
As of December 31, 2001, approximately 127 Mexican companies were listed on the Mexican Stock Exchange, excluding mutual funds. During the second half of 2001, the ten most actively traded equity issues represented approximately 62.1% of the total volume of the shares traded on the Mexican Stock Exchange, not including public offerings. Although there is substantial participation by the public in the trading of securities on the Mexican Stock Exchange, a major part of such activity reflects transactions of institutional investors. There is no formal over-the-counter market for securities in Mexico.
 
The Mexican Stock Exchange is Latin America’s third largest exchange in terms of market capitalization, but it remains relatively small and illiquid compared to major world stock markets and is subject to significant volatility. As of December 31, 2001, the total market value of all shares, excluding mutual funds, listed on the Mexican Stock Exchange was $126,620 million.
 
Item 10.    Additional Information
 
Share Capital
 
Our capital stock consists of 3 classes of common stock: Series A common stock, Series B common stock and Series C common stock. The holders of the Series A shares have the right to elect one more than half of the members of our board of directors and, subject to the right of shareholders or groups of shareholders holding shares of any one class which represent at least 10% of our total equity capitalization to designate one director of the relevant series for each 10% held, the holders of the Series B shares have the right to elect the remaining members of our board of directors. The holders of Series C shares and American Depositary Shares (each representing 20 Series C shares) have limited voting rights that entitle them to vote only upon the
 

67


Table of Contents
matters designated in our bylaws. These matters are the extension of our duration, our dissolution, our transformation from one type of corporation into another, the change of our nationality, the change of our designated corporate purposes, our merger into another corporation if Desc is not the surviving corporation, and the cancellation of the registration of our shares on the Mexican Stock Exchange.
 
At our November 29, 2001 shareholders’ meeting, it was resolved to cancel the following treasury shares: 48,785,000 Series A shares, 60,088,140 Series B shares and 43,411,155 Series C shares. As of April 25, 2002, our outstanding capital stock consisted of 1,369,079,376 shares, comprised of 587,479,900 Series A shares, 506,257,866 Series B shares and 275,341,610 Series C shares. Under our bylaws, the Series A shares and the Series B shares may be held only by Mexican investors. The Series C shares may be held by Mexican and non–Mexican investors.
 
Bylaws
 
Set forth below is a brief summary of certain principal provisions of our bylaws and certain provisions of Mexican law. This description does not purport to be complete and is qualified in its entirety by reference to our bylaws, which have been filed as an exhibit to this annual report, and the applicable provisions of Mexican law. For a description of the provisions of our bylaws relating to our board of directors, Executive Committee and examiner, see Item 6.
 
Organization and Register; Purposes
 
Desc is a corporation (sociedad anónima de capital variable) organized under the laws of Mexico on August 28, 1973. Desc is registered in the Public Registry of Commerce of Mexico City under the number 8089.
 
Pursuant to Article Three of our bylaws, Desc’s general purpose includes promoting and encouraging industrial and tourist development, participating as a shareholder or partner in any type of Mexican company and acquiring all types of real estate and rendering all services necessary for the attainment of its purposes.
 
Share Capital
 
Our bylaws require that the Series A shares represent at all times at least 51% of the outstanding capital stock (not including the Series C shares) and that the Series B shares may not exceed 49% of such capital (not including the Series C shares). The Series C shares may in no event exceed 25% of our entire capital stock (including the Series C shares).
 
Voting Rights
 
Each Series A share and Series B share entitles the holder to one vote at any general meeting of our shareholders. The holders of the Series A shares have the right to elect one more than half of the board of directors. Shareholders or groups of shareholders holding shares, including the Series C shares, of any one class which represent at least 10% of our total equity capitalization have a right to elect one director of the relevant series for each 10% held. The holders of the Series B shares have the right to elect the remaining members of the board of directors. Except as described above, the holders of the Series C shares are entitled to vote only upon certain matters designated in our bylaws, namely:
 

68


Table of Contents
 
 
 
the extension of the term of duration of Desc;
 
 
 
the dissolution of Desc;
 
 
 
the transformation of Desc from one type of corporation into another;
 
 
 
the change of Desc’s designated corporate purposes;
 
 
 
the change of nationality of Desc;
 
 
 
the merger of Desc into another corporation in which Desc does not survive the merger; and
 
 
 
cancellation of the registration of any series of our shares on the Mexican Stock Exchange.
 
Under Mexican law, the holders of shares of any series are also entitled to vote as a class at a special meeting on any action that would prejudice the rights of holders of such series, and a holder of such series would be entitled to judicial relief against any such action taken without such a vote. The determination whether an action requires a class vote on these grounds would initially be made by our board of directors or other party calling for shareholder action. Any determination that an action does not require a vote at a special meeting would be subject to judicial challenge by an affected shareholder, and the need for a vote at a special meeting would ultimately be determined by a court. There are no other procedures for determining whether a proposed shareholder action requires a class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.
 
Shareholders’ Meetings
 
Under Mexican law and our bylaws, we may hold three types of shareholders’ meetings: ordinary, extraordinary and special. Ordinary shareholders’ meetings are those called to discuss any issue specified in Article 181 of the Ley General de Sociedades Mercantiles (the “Mexican Companies Law”) and other issues not reserved for extraordinary shareholders’ meetings. An ordinary shareholders’ meeting must be held at least annually during the four months following the end of each fiscal year to consider certain matters specified in Article 181, including, among other things, the approval of the report prepared by the board of directors on Desc’s financial statements for the preceding fiscal year, the appointment of members of our board of directors and examiners and the determination of compensation for members of our board of directors and examiners.
 
Extraordinary shareholders’ meetings are those called to consider the matters specified in Article 182 of the Mexican Companies Law, including:
 
 
 
extension of the company’s duration or voluntary dissolution;
 
 
 
an increase or decrease in the company’s minimum fixed capital;
 
 
 
change in corporate purpose or nationality;

69


Table of Contents
 
 
 
any transformation, merger or spin-off involving the company;
 
 
 
any stock redemption or issuance of preferred stock or bonds;
 
 
 
the cancellation of the listing of the company’s shares with the National Registry of Securities and Intermediaries;
 
 
 
amendments to the company’s bylaws; and
 
 
 
other matters for which applicable Mexican law or the bylaws specifically require an extraordinary meeting.
 
Special shareholders’ meetings are those called and held by shareholders of the same series or class to consider any matter particularly affecting the relevant series or class of shares.
 
Under Mexican law, holders of 20% of our outstanding capital stock may have any shareholder action set aside by filing a complaint with a Mexican court of competent jurisdiction within 15 days after the close of the meeting at which the action was taken, which shows that the challenged action violates Mexican law or our bylaws. Relief under these provisions is only available to holders (1) who were entitled to vote on the challenged shareholder action and (2) whose shares were not represented when the action was taken or, if represented, voted against such action.
 
Shareholders’ meetings are required to be held in our corporate domicile, which is Mexico City. Calls for shareholders’ meetings must be made by our board of directors, the examiners or any Mexican court of competent jurisdiction. The board of directors or the examiners may be required to call a meeting of shareholders by the holders of 10% of our outstanding capital stock.
 
Notice of meetings must be published in the Diario Oficial de la Federación or in a newspaper of major circulation in Mexico City at least 15 days prior to the meeting. Unless the approval of financial statements is to be discussed at the meeting, such notice period may be reduced to 5 days if the board of directors deems such reduction appropriate based on the urgency of the matters to be discussed at the meeting. Each call must set forth the place, date and time of the meeting and the matters to be addressed. Calls must be signed by whomever makes them.
 
In order to attend and vote at a shareholders’ meeting, a shareholder must request and obtain an admission card by depositing its share certificates (or evidence of deposit thereof in a Mexican bank) with the Secretary of Desc at least one day prior to the meeting. The shareholders may be represented at shareholders’ meetings by proxies named through a notarized power of attorney, a proxy letter or a power of attorney conferred in the form prepared by Desc for a specific meeting.
 
Quorum
 
A quorum on a first call for an ordinary shareholders’ meeting is at least 50% of the outstanding shares entitled to vote thereat. In order for a resolution of the ordinary shareholders’ meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote of the majority of the shares represented and entitled to vote at such meeting is required.

70


Table of Contents
 
The quorum on a first call for an extraordinary shareholders’ meeting is at least 75% of the outstanding shares entitled to vote at such meeting. An extraordinary shareholders’ meeting may be validly held pursuant to a second call with a quorum of at least 50% of the outstanding shares entitled to vote at such meeting. In order for a resolution of the extraordinary general meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote of 50% of the outstanding shares entitled to vote at such meeting is required.
 
Withdrawal Rights
 
The outstanding variable portion of our capital stock may be fully or partially withdrawn by the shareholders. The minimum fixed portion of our capital stock specified in our bylaws cannot be withdrawn. A holder of shares representing our variable capital stock that wishes to effect a total or partial withdrawal of its shares must notify us in an authenticated written notice to that effect. If notice of withdrawal is received prior to the last quarter of the fiscal year, the withdrawal becomes effective at the end of the fiscal year in which the notice is given. Otherwise, the withdrawal becomes effective at the end of the following fiscal year.
 
The redemption of the shareholders’ shares would be made at the lower of: (i) 95% of the average share price quoted on the Mexican Stock Exchange during the 30 business days prior to the date on which the withdrawal becomes effective or (ii) the book value per share in accordance with our most recent financial statements approved at the annual ordinary shareholders’ meeting, by reference to the date on which the withdrawal becomes effective.
 
Since our inception, no shareholder has ever exercised its right to withdraw.
 
Dividends and Distributions
 
At our annual ordinary general shareholders’ meeting, our board of directors must submit to the holders of the Series A shares and the Series B shares our financial statements for the preceding fiscal year. Five percent of our net earnings must be allocated to a legal reserve fund until such fund reaches an amount equal to 20% of Desc’s capital stock. Our legal reserve fund currently satisfies this requirement. Additional amounts may be allocated to extraordinary, special or additional reserve funds as the shareholders may from time to time determine. The remaining balance, if any, of net earnings may be distributed as dividends or allocated for the redemption of shares. Any redemption must be approved in advance at an extraordinary shareholders’ meeting.
 
Dividends are paid to the registered holder of the relevant share or the duly authorized representative of such holder upon delivery of the applicable coupon. With respect to share certificates deposited with Indeval, payment of dividends is made through Indeval in accordance with customary payment procedures. Partially paid shares participate in any distribution to the extent that such shares have been paid at the time of the distribution. Our ability to pay dividends is subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits reflected in its year–end financial statements (approved by its shareholders), only if such payment is approved by its shareholders, and then only after the creation of a required legal reserve and the set off or satisfaction of losses, if any, incurred in previous fiscal years. See Item 4. “Risk Factors Relating to Our Operations—Dependence on dividends from subsidiaries” and “Risks Relating to Our Controlling Shareholder and Capital Structure—Certain members of the Senderos family effectively control our management and their interests may differ from those of other securityholders.

71


Table of Contents
 
Liquidation Rights
 
Upon a dissolution of Desc, one or more liquidators must be appointed by an extraordinary shareholders’ meeting to wind up its affairs. All fully paid and outstanding shares of capital stock, regardless of class, will be entitled to participate equally in any distribution upon liquidation. Partially paid shares participate in a liquidation distribution in the same manner as they would in a dividend distribution.
 
Changes in Share Capital
 
An increase of capital stock may be effected through the issuance of new shares for payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items of shareholders’ equity. No increase of capital stock may be effected until all previously issued shares have been fully paid. A reduction of capital stock may be effected to absorb losses, to redeem shares or to release shareholders from payments not made. A reduction of capital stock to absorb losses may be effected by reducing the value of all outstanding shares. A reduction of capital stock to redeem shares may be effected by reimbursing holders of shares pro rata or through a drawing before a public broker. Shareholders may also approve the redemption of fully paid shares with retained earnings, which would be effected by a repurchase of shares on the Mexican Stock Exchange (in the case of shares listed thereon).
 
Our capital stock may be increased or decreased only by resolution of an extraordinary general shareholders’ meeting and, if such increase or decrease affects the fixed portion of our capital, an amendment to our bylaws. Any holders of the Series A shares or the Series B shares would be entitled to vote on an increase or decrease in capital stock, including one affecting the Series C shares.
 
No shareholder resolution is required for decreases in capital stock based on the exercise of a shareholder’s right to withdraw variable shares or Desc’s purchase of its shares or for increases based on a resale by Desc of shares it previously purchased.
 
Preemptive Rights
 
In the event of a capital increase through the issuance of new shares for payment in cash or in kind, a holder of existing shares generally has a preferential right to subscribe for a sufficient number of new shares to maintain the holder’s proportionate holdings of shares; however, such right is unavailable to holders of the Series C shares in respect of capital increases represented by either the Series A shares or the Series B shares or both the Series A shares and the Series B shares.
 
Except in limited circumstances, preemptive rights must be exercised within the period and under the conditions established for such purpose by the shareholders’ meeting approving the increase and under our bylaws, and in no case may such period be less than 15 business days following the publication of notice of the capital increase in the Diario Oficial de la Federación, provided that if all shareholders are present or represented at such meeting such publication shall not be required. Otherwise, such rights will lapse. Under Mexican law, preemptive rights may not be waived in advance by a shareholder and cannot be represented by an instrument that is negotiable separately from the corresponding share. Holders of ADSs may exercise preemptive rights only through the Depositary.

72


Table of Contents
 
Registration and Transfer of the Shares
 
All of Desc’s series of shares are evidenced by share certificates in registered form, and registered dividend coupons may be attached to the certificates. Share certificates held by shareholders may have dividend coupons attached. If Desc and Indeval agree, share certificates deposited with Indeval will have no dividend coupons attached. Dividend coupons may only be presented for payment by the registered holder of the related share or its duly appointed agent. Shareholders of Desc may either hold their shares directly, in the form of physical certificates, or indirectly through institutions that have accounts with Indeval. Accounts may be maintained at Indeval by brokers, banks, other financial institutions or other entities approved by the CNBV (“Indeval Participants”). Desc maintains a share registry, and only those persons listed in such registry and those holding certificates issued by Indeval and any relevant Indeval Participant indicating ownership will be recognized as shareholders by Desc.
 
Other Provisions
 
Liabilities of the members of the board of directors
 
Under Mexican law, an action for civil liabilities against members of our board of directors may be initiated by a shareholders’ resolution. The director against whom such action is brought will cease to be a member of the board immediately upon the shareholders’ adoption of a resolution demanding responsibility for such civil liabilities. Additionally, shareholders representing not less than 15% of our outstanding shares may directly take such action against members of our board of directors, if (1) such shareholders have not voted against taking such action at the relevant shareholders’ meeting and (2) the claim in question covers damage alleged to have been caused to Desc and not merely to the individual plaintiffs. Any recovery of damages with respect to the action will be for our benefit and not for the shareholders bringing such action.
 
Purchase by Desc of its shares
 
According to Mexican law, we may repurchase any of our shares on the Mexican Stock Exchange at any time at the then prevailing market price. If we repurchase our shares and hold onto them (i.e., the shares are not cancelled or placed in our treasury), we must record such repurchase as a charge to our net worth. If the repurchased shares are placed in our treasury, we must record such repurchase as a charge to our shareholders’ equity and no shareholder approval is required. The general ordinary shareholders’ meeting must expressly approve for each fiscal year the maximum amount of funds that may be used for stock repurchases, with the sole limitation that such designated amount may not exceed our net profits, including retained profits. Any of our shares that we own and are not cancelled or placed in our treasury may not be represented at any shareholders’ meeting. We may publicly sell any of these repurchased shares, whether owned directly by us or held as treasury shares.
 
Repurchases in the event of delisting
 
In the event that the registration of our shares in the Securities Section of the National Registry for Securities and Intermediaries is canceled, whether upon our request or pursuant to a resolution adopted by the CNBV, our bylaws and CNBV regulations require that our controlling shareholders make a public offer to purchase the shares owned by minority holders. The purchase price to be paid by the controlling shareholders will be equal to the higher of (i) the average quotation price of the shares for the 30 trading days prior to the date of the offer or (ii)

73


Table of Contents
the book value of the shares, as reflected in the last quarterly report filed with the CNBV and the Mexican Stock Exchange prior to the date of the offer. If after that repurchase offer our controlling shareholders fail to acquire 100% of our capital stock, the cancellation of the registration of our shares will not become effective until our controlling shareholders have created a trust with the funds required to purchase the remaining shares at the same offering price, with the trust remaining in effect for at least 2 years.
 
Appraisal rights
 
Whenever a shareholders’ meeting approves a change of our corporate purpose, a change of our nationality, a restructuring from one type of corporate form to another or a spin-off (escisión), any shareholder who has voted against such change or restructuring has the right to withdraw from Desc and receive an amount broadly equal to the book value of Desc’s shares (in accordance with Desc’s latest balance sheet approved by an ordinary general meeting), provided the dissenting shareholder exercises its right to withdraw during the 15-day period following the meeting at which such change or restructuring was approved.
 
Shareholder’s conflicts of interest
 
Pursuant to Article 196 of the Mexican General Law of Commercial Companies, any shareholder that has a direct or indirect conflict of interest with respect to a transaction must abstain from discussing and voting with respect to such transaction at the relevant shareholders’ meeting. A shareholder that votes on a transaction in which its interest conflicts with that of Desc may be liable for damages if the relevant transaction would not have been approved without such shareholder’s vote.
 
Director’s conflicts of interest
 
Pursuant to Article 14 Bis 5 of the Ley del Mercado de Valores (the “Securities Market Law”), any director, the examiner that attends the Audit Committee meetings or any member of such committee, that has a direct or indirect conflict of interest with respect to a transaction that is presented to the board of directors or to the Audit Committee must disclose such conflict to the board of directors or committee and abstain from discussing and voting with respect to such transaction.
 
Rights of shareholders
 
The protections afforded to minority shareholders under Mexican law are different from those in the United States and many other jurisdictions. The substantive law concerning fiduciary duties of directors has not been the subject of extensive judicial interpretation in Mexico, unlike many states in the United States where duties of care and loyalty elaborated by judicial decisions help to shape the rights of minority shareholders. Mexican civil procedure does not contemplate class actions or shareholder derivative actions, which permit shareholders in U.S. courts to bring actions on behalf of other shareholders or to enforce rights of the corporation itself. Shareholders cannot challenge corporate action taken at a shareholders’ meeting unless they meet certain procedural requirements, as described above under “Shareholders’ Meetings.” As a result of these factors, in practice it may be more difficult for our minority shareholders to enforce rights against us or our directors or controlling shareholders than it would be for shareholders of a U.S. company. In 2001, the Mexican government increased minority shareholders’ rights by amending the Securities Market Law and enacting other regulations to reduce the ownership

74


Table of Contents
percentages necessary to exercise minority rights and permit minority shareholders to sell their shares in the event of a change of control in Desc.
 
Enforceability of civil liabilities
 
Desc is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and their assets are located in Mexico. As a result, it may be difficult for investors to effect service of process within the United States on such persons. It may also be difficult to enforce against them, either inside or outside the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts judgments obtained against them in courts in jurisdictions outside the United States, in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
 
Exclusive jurisdiction
 
Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws shall be brought only in the courts of Mexico City, Federal District.
 
Duration
 
Our existence under our bylaws is 99 years from the date of our incorporation.
 
Material Contracts
 
We are not a party to any material contract other than those entered into in the ordinary course of business.
 
Exchange Controls and Foreign Investment Restrictions
 
Exchange Controls
 
Mexico abolished its exchange control system on November 11, 1991. From November 11, 1991 to October 20, 1992, Banco de México permitted the rate of exchange between the Peso and the Dollar to fluctuate according to supply and demand within a moving band. In December 1994, the Mexican government, in response to exchange rate pressures, increased by 15% the upper limit of the Peso—Dollar exchange rate band, and two days later allowed the Peso to fluctuate freely against the Dollar. By December 31, 1994, the Peso—Dollar exchange rate, which had been Ps.3.466 to U.S.$1.00 on December 19, 1994, was Ps.5.000 to U.S.$1.00. At December 31, 1996, the Peso—Dollar exchange rate was Ps.7.88 to U.S.$1.00.
 
Fluctuations in the exchange rate between the Peso and the Dollar affect the Dollar equivalent of the Peso price of securities traded on the Mexican Stock Exchange, including our shares and, as a result, are likely to affect the market price of our securities. Fluctuations in the exchange rate can also affect our operating results depending on the terms of our contractual arrangements and the effect of the fluctuation on the specific industries in which we operate.

75


Table of Contents
 
Except for the period from September through December 1982, during the Mexican liquidity crisis, Banco de México consistently has made foreign currency available to Mexican private sector entities. However, in the event of renewed shortages of foreign currency, we cannot assure you that Banco de México would continue to make foreign currency available or that foreign currency we need to service foreign currency obligations could be purchased in the open market without substantial additional cost.
 
Pursuant to the provisions of NAFTA, Mexico remains free to impose foreign exchange controls on investments made in Mexico, including those made by U.S. and Canadian investors.
 
Restrictions on Foreign Investment.
 
Foreign investment in the capital stock of Mexican companies is regulated by the 1993 Ley de Inversión Extranjera (the “Foreign Investment Law”) and the 1998 regulations promulgated under the Foreign Investment Law (the “Foreign Investment Regulations”). The Foreign Investment Law defines foreign investment as (i) the participation of foreign investors in the capital stock of Mexican corporations, or investments made in the capital stock of Mexican corporations by a Mexican corporation in which foreign capital has a majority participation, and (ii) the participation of foreign investors in those activities that are regulated by the Foreign Investment Law. Foreign investors are defined as individuals or entities that are not Mexican nationals. The Comisión Nacional de Inversiones Extranjeras (the “Foreign Investment Commission”), the Dirección General de Inversiones Extranjeras (the “Foreign Investments Bureau”) and the Registro Nacional de Inversiones Extranjeras (the “National Registry of Foreign Investments”) of the Ministry of Economy are responsible for the administration of the Foreign Investment Law and the Foreign Investment Regulations. In order to comply with foreign investment restrictions, Mexican companies typically limit particular classes of their stock to ownership by Mexican individuals and Mexican corporations in which foreign investment has a minority participation.
 
As a general rule, the Foreign Investment Law allows foreign investment in up to 100% of the capital stock of Mexican companies except for those engaged in restricted industries. With respect to restricted industries, the Foreign Investment Law not only limits or forbids share ownership but also requires that Mexican shareholders retain the power to determine the administrative control and the management of those corporations. Restricted industries currently include retail trade in gasoline and distribution of liquid petroleum gas, radio broadcasting, credit unions, development banks, land transportation of passengers, tourists and freight in Mexico other than messenger and package delivery services, and the rendering of specified professional and technical services. Desc and its subsidiaries currently do not engage in any restricted industry, except that Desc owns a limited purpose financing entity where foreign investment is allowed up to 49%, but since Desc is a Mexican investor, our ownership satisfies the requirements of the Foreign Investment Law. However, our bylaws restrict our Series A and Series B shares to Mexican ownership. A holder that directly acquires Series A or B shares in violation of the restrictions on foreign investment contained in our bylaws will not have any of the rights of a shareholder with respect to those shares, the acquisition will be null and void, and the corresponding shares will be cancelled.
 
Due to the limited voting rights of our C shares, they are not taken into account under the Foreign Investment Law or our bylaws in determining compliance with restrictions on foreign ownership. Accordingly, unlike the Series A and B shares, the C shares are not restricted to Mexican ownership

76


Table of Contents
 
Taxation
 
Tax Treaty between the United States and Mexico
 
The United States and Mexico have signed and ratified a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Protocols thereto. We refer to this Convention as the “Tax Treaty”. The Tax Treaty is currently in effect and we summarize below the provisions of the Tax Treaty that may affect holders of ADSs, Series C shares and our 8 3/4% Guaranteed Notes due 2007 (which notes were issued by Dine and assumed by Desc as a result of the merger between Desc and Dine) who are residents of the United States (as defined in the Tax Treaty).
 
Mexico has also executed treaties to avoid double taxation with other countries as well as agreements providing for the exchange of information with respect to tax matters, some of which presently are in force. The following summary does not take into account the effect of any such treaties. Readers should consult their tax advisors as to their entitlement to the benefits afforded by the Tax Treaty or such other treaties.
 
Mexican Federal Income Tax Considerations for Holders of ADSs and Series C Shares
 
The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and administrative rules issued by the Ministry of Finance and Public Credit and the Tax Treaty of the purchase, ownership and disposition of ADSs or Series C shares by a holder that is not a resident of Mexico, as in effect as of the date hereof. We caution that these laws and regulations are subject to change or differing interpretations, which changes or differing interpretations could apply retroactively. This summary does not address the tax laws of any state or municipality in Mexico. Readers are cautioned that this is not a complete analysis or listing of all potential tax effects that may be relevant to a decision to purchase, hold or dispose of ADSs or Series C shares.
 
For purposes of Mexican taxation, an individual is a resident of Mexico if he has established his home in Mexico, unless he has resided in another country for more than 183 days, whether consecutive or not, during a calendar year and can demonstrate that he has become a resident of that other country for tax purposes. Individuals of Mexican birth are deemed to be Mexican residents for tax purposes, unless proof is submitted to the contrary. A legal entity established under Mexican law or having its principal offices or management in Mexico is deemed a resident of Mexico. A person having a permanent establishment in Mexico will be regarded as a resident of Mexico and will be required to pay taxes in Mexico in accordance with applicable law in respect of all Mexican–source income.
 
Taxation of dividends
 
Dividends paid either in cash or in any other form to Mexican individuals and to all non-Mexican shareholders, whether individuals or entities, with respect to the ADSs or the Series C shares represented by ADSs, are not subject to a Mexican withholding tax.
 
We will not be subject to any tax in connection with a dividend payment if the amount maintained in our previously taxed net earnings account (cuenta de utilidad fiscal neta or “CUFIN”) exceeds the dividend payment to be made. However, if the dividend payment is in an amount greater than our CUFIN balance (which may occur in a year when net profits exceed the

77


Table of Contents
balance in such accounts), then we will be required to pay up to a 35% income tax in 2002, 34% in 2003, 33% in 2004 and 32% beginning in 2005 on an amount equal to the product of (i) the portion of the amount which exceeds such balance times 1.5385 in 2002, 1.5152 in 2003, 1.4925 in 2004 and 1.4706 in 2005.
 
Taxation of capital gains
 
Gains on the sale or other disposition of ADSs by holders who are not residents of Mexico will not be subject to Mexican tax. Deposits of Series C shares in exchange for ADSs and withdrawals of Series C shares in exchange for ADSs will not give rise to Mexican taxes.
 
Gains on the sale of Series C shares by holders who are not residents of Mexico will not be subject to any Mexican tax if the transaction is carried out through the Mexican Stock Exchange. The proceeds from the sale or other disposition of Series C shares by an entity that is not a resident of Mexico through the Mexican Stock Exchange will be subject to a 5% withholding if the Series C shares, as is the case, are on the list of publicly-traded shares published by the Ministry of Finance and Public Credit through general rules. However, under general rules issued by the Ministry of Finance and Public Credit on May 30, 2002 and in effect until February 28, 2003, nonresident entities are given the right not to pay said tax while said general rules are in effect.
 
Under current law, the sale or disposition of Series C shares other than through the Mexican Stock Exchange by holders who are not residents of Mexico is generally subject to a Mexican tax at a rate of 25% of the gross sales price. However, if the holder is a resident of a country which is not considered to be a low tax rate country (by reference to a list of low rate countries published by the Mexican Ministry of Finance and Public Credit), the holder may elect to designate a resident of Mexico as its representative for Mexican tax purposes, in which case taxes would be payable at a maximum rate of 35% on the gain on such disposition. The maximum rate will be gradually reduced by one percent per year until 2005. In 2005 and thereafter, the maximum rate will be 32%. The United States is not considered to be low tax rate country. The Tax Treaty exempts United States residents from Mexican capital gains taxes on dispositions of stock (whether or not those dispositions are carried out through the Mexican Stock Exchange), provided that (i) during the 12–month period before the disposition, the U.S. resident did not hold, directly or indirectly, an equity interest of 25% or more in the Mexican company, (ii) less than 50% of the assets of the Mexican company consist of immovable property situated in Mexico or (iii) the gain is not attributable to a permanent establishment in Mexico of the U.S. resident.
 
Other Mexican taxes
 
There are no Mexican inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs or Series C shares, although gratuitous transfers of Series C shares may in some circumstances cause a Mexican federal tax to be imposed on the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of ADSs or Series C shares.
 
Mexican Federal Income Tax Considerations for Holders of the Notes
 
The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and administrative rules issued by the Ministry of Finance and Public
 

78


Table of Contents
Credit and the Tax Treaty of the purchase, ownership and disposition by a Foreign Holder of Desc’s 8¾% Guaranteed Notes due 2007 (the “Notes”). The Notes were issued by Dine with the full and unconditional guarantee of Desc. As a result of Dine’s merger into Desc, Desc has assumed all of Dine’s obligations under the indenture. A “Foreign Holder” is a holder who (1) is not a resident of Mexico for tax purposes and (2) will not hold Notes or a beneficial interest in Notes in connection with the conduct of a trade or business through a permanent establishment in Mexico. This summary does not address the tax laws of any state or municipality in Mexico. Readers are cautioned that this is not a complete analysis or listing of all potential tax effects that may be relevant to a decision to purchase, hold or dispose of Notes.
 
The statements of Mexican federal income tax laws that we make below are based on the federal laws of Mexico, the regulations and administrative rules issued by the Ministry of Finance and Public Credit, as in effect as of the date hereof. We caution that these laws and regulations and the Tax Treaty are subject to change or differing interpretations, which changes or differing interpretations could apply retroactively.
 
Taxation of payments of interest and principal
 
Under the Mexican Income Tax Law, payments of interest made by Desc to a Foreign Holder in respect of the Notes will be subject to Mexican withholding taxes assessed at a rate of 4.9% if (i) as is the case, the Notes have been placed through banks or brokers in a country with which Mexico has executed a treaty to avoid double taxation and such treaty is in force, (ii) as is the case, the Notes have been registered with the Special Section of the National Registry for Securities and Intermediaries (the “Special Section”) and (iii) the issuer provides the information required under general rules issued by the Ministry of Finance and Public Credit (the “Reduced Rate Regulation”), which is described below. The issuer currently intends to provide this information. Otherwise, payments of interest made by Desc to Foreign Holders in respect of Notes will be subject to Mexican withholding taxes imposed at a rate of 10%.
 
The information requirements under the Reduced Rate Regulation, are generally described below:
 
 
 
Desc, as is the case, has timely filed with the Ministry of Finance and Public Credit information relating to the registration of the Notes in the Special Section and to the issuance of the Notes; and
 
 
 
Desc timely files each quarter of the calendar year with the Mexican Ministry of Finance and Public Credit information representing that no “party related” to Desc, directly or indirectly, is the effective beneficiary of 5% or more of the aggregate amount of the interest payment, and Desc maintains records evidencing compliance with this requirement.
 
Under the Mexican Income Tax Law and Reduced Rate Regulation any of the following would be a “party related” to Desc: (1) shareholders of Desc that own, directly or indirectly, individually or collectively with related persons (within the meaning of the Mexican Income Tax law and the Reduced Rate Regulation) more than 10% of Desc’s voting stock or (2) corporations if more than 20% of their stock is owned directly or indirectly, individually or collectively by related persons of Desc.
 

79


Table of Contents
 
Apart from the Reduced Rate Regulation, other special rates of Mexican withholding income tax may apply. In particular, under the Tax Treaty, the Mexican withholding tax is reduced to 4.9% (the “Treaty Rate”) for some holders that are residents of the United States within the meaning of the Tax Treaty provided they satisfy the circumstances contemplated in the Tax Treaty. However, during 2002, the Tax Treaty is not expected, generally, to have any material effect on the Mexican tax consequences to holders of Notes because, as described above, with respect to a United States holder, Desc will be entitled to withhold taxes in connection with interest payments under the Notes at the Reduced Rate so long as the Reduced Rate Regulation requirements described above are met. Holders of the Notes should consult their tax advisors as to the possible application of the Treaty Rate.
 
Interest paid on Notes held by a non–Mexican pension or retirement fund will be exempt from Mexican withholding tax if the fund (1) has been duly incorporated as a fund pursuant to the laws of its country of origin, (2) is the effective beneficiary of the interest paid, (3) is registered with the Ministry of Finance and Public Credit for that purpose, and (4) is exempt from income taxation in its country of origin and the relevant interest income is exempt from taxes in that country.
 
Desc has agreed, subject to the exceptions and limitations contained in the indenture under which the Notes were issued, to pay additional amounts in respect of the Mexican withholding taxes mentioned above to the holders of the Notes as will result in receipt by such holders of such amounts as would have been received by such holders had no such withholding or deduction been required.
 
Under the Mexican Income Tax Law, a Foreign Holder will not be subject to any Mexican income taxes in respect of payments of principal made by Desc in connection with the Notes.
 
Taxation of capital gains
 
Under the Income Tax Law it is not clear if a tax will apply to gains resulting from a Foreign Holder’s sale or other disposition of Notes. We believe, but have not verified, that such tax applies only to the gains resulting from a Foreign Holder’s sale or other disposition of debt securities placed among the investment public at large in Mexico.
 
Transfer and other taxes
 
There are no Mexican stamp, registration, or similar taxes payable by a Foreign Holder in connection with the purchase ownership or disposition of the Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift, inheritance or similar tax with respect to the Notes, although gratuitous transfers of the Notes may in some circumstances cause a Mexican income tax to be imposed on the recipient.
 
United States Federal Income Tax Considerations – ADSs or Series C Shares
 
General
 
Subject to the limitations described below, the following discussion describes the material United States federal income tax consequences to a U.S. Holder (as defined below) that is a beneficial owner of the ADSs or Series C shares (the “Shares”) and that holds them as capital

80


Table of Contents
assets. For United States federal income tax purposes, a U.S. Holder (as defined below) of ADSs will be treated as the owner of the Shares that those ADSs represent. Accordingly, this discussion generally treats ownership of ADSs as equivalent to owning Shares and the United States federal income tax consequences discussed below apply equally to owners of both Shares and ADSs. For purposes of this summary, a “U.S. Holder” is a beneficial owner of Shares who or that is for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal tax purposes) created or organized in the United States or under the laws of the United States or of any state or the District of Columbia, (iii) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
 
This summary is for general information purposes only. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase Shares. As this is a general summary, prospective owners of Shares are advised to consult their own tax advisers with respect to the U.S. federal, state and local tax consequences, as well as to non-U.S. tax consequences, of the acquisition, ownership and disposition of Shares applicable to their particular tax situations.
 
This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), current and proposed U.S. Treasury regulations promulgated thereunder, and administrative and judicial decisions, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of United States federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or the United States federal income tax consequences to holders that are subject to special treatment, including:
 
 
 
broker-dealers, including dealers in securities or currencies;
 
 
 
insurance companies;
 
 
 
taxpayers that have elected mark-to-market accounting;
 
 
 
tax-exempt organizations;
 
 
 
financial institutions or “financial services entities”;
 
 
 
taxpayers who hold Shares as part of a straddle, “hedge” or “conversion transaction” with other investments;
 
 
 
holders owning directly, indirectly or by attribution at least 10% of our voting power or 10% of the value of our stock;
 
 
 
taxpayers whose functional currency is not the U.S. dollar;
 
 
 
certain expatriates or former long-term residents of the United States; and

81


Table of Contents
 
 
taxpayers who acquire Shares as compensation.
 
This discussion does not address any aspect of United States federal gift or estate tax, or state, local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who hold Shares through a partnership or other pass-through entity. Certain material aspects of United States federal income tax relevant to a beneficial owner other than a U.S. Holder (a “Non-U.S. Holder”) also are discussed below. Each investor is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of Shares.
 
Taxation of Dividends Paid on Shares
 
In the event that we do pay a dividend, and subject to the discussion of the passive foreign investment company, or “PFIC,” rules below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on the Shares on the date the distribution is received (which, in the case of ADSs, will be the date of receipt by the Depositary) to the extent the distribution is paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in the Shares and, to the extent in excess of such basis, will be treated as a gain from the sale or exchange of the Shares. Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the date the distribution is received (which, in the case of ADSs, will be the date of receipt by the Depositary), regardless of whether the payment is in fact converted into U.S. dollars on such date. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
 
Distributions of our current or accumulated earnings and profits will be foreign source passive income for United States foreign tax credit purposes and will not qualify for the dividends received deduction otherwise available to corporations. U.S. Holders will not be entitled to a deduction or credit for any taxes paid by us on a distribution. See “Mexican Federal Income Tax Considerations for Holders of ADSs and Series C Shares – Taxation of dividends.”
 
Taxation of the Sale or Exchange of Shares
 
Subject to the discussion of the PFIC rules below, upon the sale or exchange of Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in the Shares, which is usually the U.S. dollar cost of such shares, and the amount realized on such sale or exchange. Capital gain from the sale or exchange of the Shares held more than one year is long-term capital gain. Gain or loss recognized by a U.S. Holder on a sale or exchange of Shares generally will be treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of a capital loss recognized on the sale or exchange of Shares is subject to limitations.
 
If the Shares are publicly traded, a disposition of Shares will be considered to occur on the “trade date,” regardless of the U.S. Holder’s method of accounting. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the

82


Table of Contents
sale as of the date that the sale settles. However, a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and, therefore, may realize foreign currency gain or loss, unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale for purposes of calculating such foreign currency gain or loss. In addition, a U.S. Holder that receives foreign currency upon the sale or exchange of the Shares and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.
 
U.S. Holders generally will not be entitled to claim a foreign tax credit for any Mexican tax incurred on a sale of the Shares against U.S. tax imposed on any gain from the sale. See “Mexican Federal Income Tax Considerations for Holders of ADSs and Series C Shares – Taxation of capital gains.”
 
Passive Foreign Investment Company Considerations
 
We will be a passive foreign investment company, or PFIC, for United States federal income tax purposes, if 75% or more of our gross income in a taxable year, including the pro-rata share of the gross income of any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value, is passive income. Alternatively, we will be considered to be a PFIC if 50% or more of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including the pro-rata share of the assets of any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income.
 
If we are a PFIC, a U.S. Holder may be subject to adverse United States federal income tax consequences upon receipt of distributions by us or upon realizing a gain on the disposition of our Shares, including taxation of such amounts as ordinary income and the imposition of an interest charge on the resulting tax liability as if such ordinary income accrued over the U.S. Holder’s holding period for the PFIC shares. We believe that we were not a PFIC for 2001 and believe we will not be a PFIC for 2002. However, there can be no assurances that we will not become a PFIC. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules.
 
Tax Consequences for Non-U.S. Holders of Shares
 
Except as described in “U.S. Information Reporting and Backup Withholding” below, a Non-U.S. Holder who is a beneficial owner of Shares will not be subject to United States federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, such Shares, unless:
 
 
 
such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States;

83


Table of Contents
 
 
 
the Non-U.S. Holder is an individual who holds the Shares as capital assets and is present in the United States for 183 days or more in the taxable year of the disposition and does not qualify for an exemption; or
 
 
 
the Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to U.S. expatriates.
 
U.S. Information Reporting and Backup Withholding
 
U.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on Shares. In addition, U.S. Holders are subject to U.S. backup withholding (currently at a rate of 30%) on dividends paid in the United States on Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders are subject to information reporting and backup withholding (currently at a rate 30%) on proceeds paid from the sale, exchange, redemption or other disposition of Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
 
Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or proceeds upon the sale, exchange, redemption or other disposition of, Shares, provided that such Non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
 
Backup withholding is not an additional tax. The amount of any backup withholding will be allowed as a credit against such U.S. Holder’s or Non-U.S. Holder’s United States federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the U.S. Internal Revenue Service.
 
United States Federal Income Tax Considerations – The Notes
 
The following discussion is based upon the provisions of the Code, the applicable U.S. Treasury regulations promulgated or proposed thereunder, judicial authority and current administrative rulings and practice. Legislative, judicial or administrative changes or interpretations may be forthcoming that may be retroactive and that could alter or modify the continued validity of the statements and conclusions set forth below. Except with respect to the discussions set forth below under “? Non-U.S. Holders” and “? Information Reporting and Backup Withholding,” this discussion is limited to the United States federal income tax considerations applicable to a beneficial owner of a Note who or which is (i) a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust (for purposes of this section relating to the Notes, a “U.S. Holder”). Certain aspects of United States federal income taxation relevant to a beneficial owner of a Note other than a U.S. Holder (for purposes of this section relating to the Notes, a “Non-U.S. Holder”) are also discussed below. This discussion does not address all aspects of United States federal income taxation that might be relevant to particular holders in light of their personal investment circumstances or status, nor does it discuss the consequences to holders subject to special treatment under the United States federal income tax laws, including:

84


Table of Contents
 
 
 
broker-dealers, including dealers in securities or currencies;
 
 
 
insurance companies;
 
 
 
taxpayers that have elected mark-to-market accounting;
 
 
 
tax-exempt organizations;
 
 
 
financial institutions or “financial services entities”;
 
 
 
taxpayers who hold Notes as part of a straddle, “hedge” or “conversion transaction” with other investments;
 
 
 
certain expatriates or former long-term residents of the United States; and
 
 
 
taxpayers whose functional currency is not the U.S. dollar.
 
The discussion does not address any special rules that may apply if the Holder receives principal in installment payments or if a Note is called before the maturity date. This discussion does not address any aspect of United States federal gift or estate tax, or state, local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who hold Notes through a partnership or other pass-through entity. Holders are urged to consult their own tax advisors regarding the U.S. federal, state, local, foreign and other tax considerations of the acquisition, ownership and disposition of the Notes.
 
Except as otherwise indicated below, this discussion is generally limited to the tax consequences to beneficial owners of the Notes that are initial holders of the Notes that hold the Notes as capital assets (within the meaning of Section 1221 of the Code) and that purchased the Notes at the “issue price.” For this purpose, the “issue price” of a Note is the first price at which a substantial amount of the Notes were sold to the public for money (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers).
 
Each investor is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of Notes.
 
Recent Merger between Desc and Dine
 
As a result of Dine’s merger into Desc, Desc has assumed all of Dine’s obligations under the indenture for the Notes. Such merger should not constitute a taxable event for United States federal income tax purposes (under the applicable U.S. Treasury regulations) for a holder of a Note, so that the U.S. Holder’s holding period and adjusted tax basis for a Note should not be affected and the U.S. Holder would continue to take into account income in respect of a Note in the same manner as before the merger.

85


Table of Contents
 
Stated Interest on Notes
 
Stated interest on a Note will be taxable to a U.S. Holder as ordinary income either at the time it accrues or is received in accordance with the U.S. Holder’s method of accounting for United States federal income tax purposes.
 
Additional Amounts
 
Assuming that the contingency that we will pay Additional Amounts (the amount of interest provided in the Notes to prevent any net reduction for withholding taxes determined using the withholding tax rate applicable to the U.S. Holder) is remote or incidental (within the meaning of applicable U.S. Treasury regulations), a U.S. Holder will treat the gross amount of any Additional Amounts as ordinary interest income at the time such amount is received or accrued in accordance with such U.S. Holder’s method of accounting for United States federal income tax purposes. Consequently, the amount a U.S. Holder will include in gross income with respect to a Note could exceed the amount of cash received by the U.S. Holder should Additional Amounts be due under the Notes.
 
Withholding Taxes
 
Any foreign withholding taxes paid at the rate applicable to a U.S. Holder will be treated as foreign taxes eligible for credit against such U.S. Holder’s United States federal income tax liability, at the election of the U.S. Holder, subject to generally applicable limitations and conditions (including that the U.S. Holder claim any applicable treaty benefits). Alternatively, such taxes are eligible for deduction in computing such U.S. Holder’s taxable income. Stated interest and Additional Amounts will constitute foreign source income for foreign tax credit purposes. Such income will generally constitute “high withholding tax interest” for U.S. foreign tax credit purposes, unless the rate applicable to the U.S. Holder is below 5%, in which case such income generally will constitute “passive income”. The calculation of foreign tax credits involves the application of complex rules that depend on a U.S. Holder’s particular circumstances. Accordingly, investors are urged to consult their tax advisors regarding their ability to claim a credit for any foreign withholding taxes paid with respect to the Notes.
 
Sale, Exchange or Redemption
 
Unless a non-recognition provision applies, the sale, exchange, redemption (including pursuant to an offer by us) or other disposition of a Note will be a taxable event for United States federal income tax purposes. In that event, a U.S. Holder will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of any property received upon that sale, exchange, redemption or other taxable disposition (other than amounts attributable to accrued interest) and (ii) the U.S. Holder’s adjusted tax basis in the Note. A U.S. Holder’s tax basis in a Note generally will equal the U.S. dollar cost of the Note to the U.S. Holder.
 
Gain or loss recognized by a U.S. Holder of a Note should be capital gain or loss and will be long-term capital gain or loss if the Note has been held by the U.S. Holder for more than one year at the time of sale, exchange, redemption or other disposition.
 
Any gain realized by a U.S. Holder on the sale, exchange or redemption of a Note generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Any loss realized upon such a sale, exchange, redemption or other disposition of a Note generally will be
 

86


Table of Contents
 
treated as a U.S. source loss except to the extent such loss is attributable to accrued but unpaid interest.
 
Non-U.S. Holders
 
Subject to the discussion below under “?Information Reporting and Backup Withholding,” a Non-U.S. Holder of a Note generally will not be subject to United States federal income or withholding tax on payments, including stated interest and Additional Amounts in respect of a Note, and gain realized on the sale, exchange, redemption or other disposition of a Note unless (i) that income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States (or in the case of a treaty resident, attributable to a permanent establishment in the United States) or (ii) in the case of a gain, the Non-U.S. Holder of a Note is a nonresident alien individual who holds a Note as a capital asset and is present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption or other disposition and certain other conditions are satisfied.
 
Information Reporting and Backup Withholding
 
Payments of interest and principal on a Note and the proceeds from the sale of a Note paid to a U.S. Holder (other than a corporation or other exempt recipient) will be reported to the U.S. Internal Revenue Service. A U.S. Holder may be subject to U.S. backup withholding (currently at the rate of 30%) with respect amounts paid on a Note and the proceeds from the sale of a Note unless such U.S. Holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules.
 
Interest on a Note paid outside the United States to a Non-U.S. Holder through a U.S. person or a U.S. related person (as defined below) is subject to information reporting and possible backup withholding unless certain documentation and other requirements are satisfied. The payment of principal on a Note and the proceeds from the disposition of a Note by a Non-U.S. Holder to or through the U.S. office of any broker, U.S. or foreign, or the non-U.S. office of a U.S. person or a U.S. related person, will be subject to information reporting and possible backup withholding unless (i) the owner certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption and (ii) the broker does not have actual knowledge that the holder is a U.S. Holder or that the conditions of any other exemption are not, in fact, satisfied. A “U.S. related person” is a person with certain enumerated U.S. relationships.
 
Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules will be creditable against the Holder’s United States federal income tax liability, subject to satisfaction of certain procedural requirements. Holders of Notes should consult their tax advisors to determine whether they qualify for exemption from U.S. withholding and the procedure for obtaining an exemption, if applicable.
 
Dividends
 
All three series of shares are entitled to the same dividend and distribution rights, and therefore any dividends must be declared and paid in equal amounts with respect to all outstanding shares. We did not pay dividends in 1999 and paid cash dividends in 2000 and 2001. The table below presents the cash and stock dividends paid on each share, as well as the number
 

87


Table of Contents
 
of shares entitled to these dividends during the periods indicated. Dividend per share amounts have not been adjusted for inflation, and reflect share amounts outstanding immediately prior to the distribution of the dividend. Peso figures have been translated into Dollars at the Noon Buying Rate on the first date that the dividend was available for payment:
 
Period

  
Number of shares entitled to dividends

    
Dividends per share(1)

1999
  
1,492,363,425
    
0.00
2000
  
1,444,774,155
    
0.27
2001(2)
  
1,368,998,270
    
0.29

(1)
 
Dividends reflected in the table are in nominal Pesos.
(2)
 
Paid on July 20, 2001, October 19, 2001, January 31, 2002 and April 18, 2002.
 
In accordance with Mexican Law and our bylaws, at least 5% of our net income, as reflected in the financial statements approved by our shareholders, must be allocated to a legal reserve until this reserve equals 20% of our paid–in capital. We increased this reserve in April 1998 to reflect the increase in paid-in-capital caused by the stock dividend declared in 1997. After this allocation, the remainder of our net profits is available for distributions as dividends subject to shareholders’ approval and the terms of any applicable law or indebtedness that restricts dividends.
 
The declaration, amount and payment of dividends are determined by majority vote of the holders of the Series A shares and the Series B shares, generally, but not necessarily, on the recommendation of our board of directors, and will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the board of directors and the holders of the Series A and the Series B shares. As a general policy, approximately 35% of the legally available net income of Desc has been paid annually to our shareholders. However in 1996 and 1999, we were not permitted to pay cash dividends under the terms of indebtedness that has since been repaid. Under our current credit facilities, we are subject to covenants that may significantly limit our ability to pay dividends in future years.
 
We cannot assure you that we will be able to pay dividends in the future or that any future dividends will be comparable to historical dividends.
 
Owners of ADSs are entitled to receive any dividends payable in respect of the Series C shares underlying the ADSs. The Depositary generally will convert cash dividends received by it in respect of Series C shares evidenced by ADSs from Pesos into Dollars and, after deduction or upon payment of expenses of the Depositary, pays these dividends to the holders of ADSs in Dollars.
 
Documents on File
 
We file reports, including annual reports on Form F-20, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the
 

88


Table of Contents
 
Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the internet at the SEC’s website at http://www.sec.gov.
 
Item 11.    Quantitative and Qualitative Disclosures About Market Risk
 
Our business activities require that we hold or issue financial instruments, principally debt obligations, that expose us to market risk caused by movements in currency exchange rates and interest rates. To hedge these risks, we sometimes utilize derivative instruments. All financial instruments held by us are for purposes other than trading.
 
Interest Rate Risk.
 
Our exposure to market risk associated with changes in interest rates relates primarily to debt obligations. Our policy is to manage our interest rate risk through a combination of fixed and floating rate debt issues. With respect to floating rate debt, we sometimes use interest rate swap contracts to reduce our interest rate exposure. Most of our debt is denominated in Dollars.
 
The table below provides information as of December 31, 2001 about our financial instruments that are sensitive to changes in interest rates. For these debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair value of long-term debt is based on the quoted market prices for the same or similar issues, as well as on the present value of future cash flows. The rates used to discount the future cash flows of debt instruments are the London inter-bank offered rate or “LIBOR” and the Mexican CETES rates that match the remaining life of the instrument.
 
    
Expected Maturity Date

  
Thereafter

  
2001
Total

  
2001
Fair Value

  
2000
Total(5)

  
2000
Fair Value

    
2002

  
2003

  
2004

  
2005

              
    
(Pesos in Millions)
Fixed Rate Debt(1)
                                            
Dollar-denominated
  
Ps.1,253
  
Ps.131
  
Ps.90
  
Ps.88
  
Ps.354
  
Ps.1,916
  
Ps.2,232
  
Ps.1,471
  
Ps.1,597
Weighted average interest rate
  
5.30%
  
6.75%
  
6.50%
  
6.36%
  
2.99%
                   
Peso-denominated
                      
Ps.2,079
  
Ps.2,079
  
Ps.2,399
  
Ps.2,075
  
Ps.1,235
Weighted average interest rate
                      
8.57%
                   
Floating Rate Debt(2)
                                            
Dollar-denominated
  
Ps.3,568
  
Ps.1,054
  
Ps.884
  
Ps.94
  
Ps.257
  
Ps.5,857
  
Ps.5,971
  
Ps.8,741
  
Ps.9,362
Weighted average interest rate(3)
  
3.53%
  
5.66%
  
7.73%
  
9.81%
  
10.24%
                   
Peso–denominated
  
Ps.226
  
Ps.4
  
Ps.4
  
Ps.4
  
Ps.5
  
Ps.243
  
Ps.245
  
Ps.462
  
Ps.458
Weighted average interest rate(4)
  
10.525%
  
12.24%
  
12.44%
  
10.87%
  
10.23%
                   
                             
       
    
                             
Ps.10,095
       
Ps.12,749
    
                             
       
    
Interest Rate Derivatives(5)
                                            
Variable to fixed swaps
  
Ps.(6.2)
  
Ps.(0.7)
                      
Ps.(6.9)
       
Ps.300.6
Average pay rate
  
7.0%
  
7.3%
                                  
Average receive rate
  
3.09%
  
3.90%
                                  

(1)
 
Fixed interest rates are weighted averages as contracted by Desc.
(2)
 
Floating interest rates are based on market rates as of December 31, 2001 plus the weighted average spread for Desc and its subsidiaries.
(3)
 
Market rates for Dollar-denominated debt are based on the LIBOR curve.
(4)
 
Market rates for Peso-denominated debt are based on the CETES.
(5)
 
Fair value refers to accrued net interest expenses/income as of December 31, 2000.
 
A hypothetical, instantaneous and unfavorable change of 100 basis points in the average interest rate applicable to floating rate liabilities held at December 31, 2001 would increase our
 

89


Table of Contents
 
interest expense in 2002 by approximately Ps.60,303 or 19.37%, over a 12-month period of 2002, assuming no additional debt is incurred during such period.
 
Item 12.    Description of Securities Other than Equity Securities
 
Not applicable.

90


Table of Contents
 
PART II
 
Item 13.    Defaults, Dividend Arrearages and Delinquencies
 
Not applicable.
 
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds
 
Not applicable.
 
Item 15.    [RESERVED]
 
Item 16.    [RESERVED]

91


Table of Contents
 
PART III
 
Item 17.    Financial Statements
 
Not applicable.
 
Item 18.    Financial Statements
 
    
Page

Independent auditors’ report
  
F–1-F–2
Consolidated balance sheets as of December 31, 2000 and 2001
  
F–3
Consolidated statements of income for the years ended December 31, 1999, 2000 and 2001
  
F–4-F–5
Consolidated statements of shareholders’ equity for the years ended December 31, 1999, 2000 and 2001
  
F–6
Consolidated statements of changes in financial position for the years ended December 31, 1999, 2000 and 2001
  
F–7
Notes to consolidated financial statements
  
F–8-F–39
Reports of other independent public accountants
  
F–40-F–51
 
Item 19.    Exhibits
 
1.1.    English translation of Registrant’s Bylaws, as amended on April 25, 2002.
 
2.1.    Specimen certificate for the C Shares, together with an English translation (incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-80126 of Desc filed with the SEC on June 10, 1994 (the “Registration Statement”)).
 
2.2.    Amended and Restated Deposit Agreement among the Registrant, Citibank, N.A. and all registered holders from time to time of American Depositary Receipts issued thereunder, including the form of American Depositary Receipt (incorporated by reference to the Registration Statement).
 
2.3.    Form of Amendment No.1 to Deposit Agreement, including the revised form of American Depositary Receipt (incorporated by reference to Exhibit 4.3 to Registration Statement No. 333-5116 of Desc filed with the Securities and Exchange Commission on July 11, 1996).
 
8.1.    List of Subsidiaries.
 
The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, copies of any instruments that define the rights of holders of long-term debt of the registrant that are not filed as exhibits to this annual report.

92


Table of Contents
 
SIGNATURE
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20–F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 
DESC, S.A. DE C.V.
By:
 
        /s/    ARTURO D’ACOSTA RUIZ

   
Name:
Title:
 
Arturo D’Acosta Ruiz
Chief Financial Officer
 
Dated: June 28, 2002

93


Table of Contents
INDEPENDENT AUDITORS’ REPORT
 
To the Shareholders of
Desc, S.A. de C.V.,
 
We have audited the accompanying consolidated balance sheets of DESC, S.A. DE C.V. AND SUBSIDIARIES (collectively referred to as the “Company”) as of December 31, 2000 and 2001, and the related consolidated statements of income, shareholders’ equity and changes in financial position for each of the three years in the period ended December 31, 2001, all expressed in thousands of Mexican pesos of purchasing power as of December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the chemical segment (formerly GIRSA, S.A. de C.V. and Subsidiaries), Agrokén, S.A. de C.V. and Subsidiaries, Corfuerte, S.A. de C.V. and Subsidiaries (formerly Grupo Corfuerte, S.A. de C.V. and Subsidiaries), and Authentic Acquisition Corporation, Inc., which statements reflect total assets of 42% and 45% at December 31, 2000 and 2001, respectively, and total revenues of 53%, 49% and 50% for the years ended December 31, 1999, 2000 and 2001, respectively, of the related consolidated totals. Those statements 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 the other auditors.
 
We conducted our audits in accordance with auditing standards generally accepted in Mexico and in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
 
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Desc, S.A. de C.V. and Subsidiaries as of December 31, 2000 and 2001, and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in Mexico.
 
Also, in our opinion, the amounts in U.S. dollars included in the accompanying financial statements have been translated on the basis set forth in Note 17 for the convenience of the reader.
 
As mentioned in Note 4, beginning in January 2000, the Company adopted the provisions of Bulletin D-4, “Accounting for Income and Asset Taxes and Employee Profit Sharing”. The effect of the adoption was to recognize, an initial long-term liability for deferred income taxes in the amount of Ps.1,717,353 (thousands of Mexican pesos) affecting shareholders’ equity under “Cumulative effect of initial recognition of deferred income taxes” and Ps.712,329 (thousands of Mexican pesos) affecting minority interest. The provision for income taxes for the year 2000 increased by Ps.104,046 (thousands of Mexican pesos).

F-1


Table of Contents
 
Beginning in 2000, the Company changed its method for recording the effect from tax consolidation. Until 1999, it was recorded in the year in which the corresponding annual consolidated tax return was filed. Starting in 2000, this effect is recorded in the results of the year in which the benefit is generated. The effect from this change increased the benefit from tax consolidation by Ps.130,290 (thousands of Mexican pesos), which was recorded as a “change in accounting policy”.
 
Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with accounting principles generally accepted in Mexico but do not conform with accounting principles generally accepted in the United States of America (U.S. GAAP). A description of these differences and a reconciliation of consolidated majority net income and majority shareholders’ equity to U.S. GAAP, as permitted by Form 20-F of the Securities and Exchange Commission (SEC), which allows omission of the requirement to quantify, in the U.S. GAAP reconciliation, the differences attributable to the effects of comprehensive inflation adjustments recorded locally, are set forth in Notes 17 and 18.
 
Ruiz, Urquiza y Cía., S.C.
(A member firm of Andersen Worldwide until April 9, 2002.
Ruiz, Urquiza y Cía., S.C. has entered into an agreement
to associate with Deloitte Touche Tohmatsu.)
 
/s/    CPC ERNESTO GONZÁLEZ DÁVILA
CPC Ernesto González Dávila
 
Mexico City, Mexico
June 14, 2002
 

F-2


Table of Contents
DESC, S.A. DE C.V. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
AS OF DECEMBER 31, 2000 AND 2001
 
EXPRESSED IN THOUSANDS OF CONSTANT MEXICAN PESOS (Ps.) AND THOUSANDS OF U.S. DOLLARS ($)
 
    
2000

    
2001

    
2001

 
A S S E T S

                    
CURRENT:
                      
Cash and cash equivalents
  
Ps.   1,607,816
 
  
Ps.   1,371,014
 
  
$
148,058
 
Notes and accounts receivable, net
  
4,664,125
 
  
3,491,146
 
  
 
377,014
 
Inventories, net
  
3,834,729
 
  
3,168,208
 
  
 
342,139
 
Prepaid expenses
  
100,717
 
  
77,804
 
  
 
8,402
 
Real estate assets available for sale
  
1,260,396
 
  
17,844
 
  
 
1,927
 
    

  

  


Total current assets
  
11,467,783
 
  
8,126,016
 
  
 
877,540
 
LAND HELD FOR DEVELOPMENT AND REAL ESTATE PROJECTS
  
3,902,396
 
  
3,911,751
 
  
 
422,435
 
PROPERTY, PLANT AND EQUIPMENT
  
14,770,924
 
  
12,564,756
 
  
 
1,356,885
 
GOODWILL
  
1,524,295
 
  
1,303,044
 
  
 
140,717
 
OTHER ASSETS
  
1,860,809
 
  
1,589,041