-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IaJkUZOGCSQ9wnj5aiC/zCxRQtBwAAskpKQvcAn4JLktR2Tc1NVLDHKNlsC6C7g0 2BHDZpkqZDKolc5tqX+wlg== 0000950130-02-004549.txt : 20020625 0000950130-02-004549.hdr.sgml : 20020625 20020625110459 ACCESSION NUMBER: 0000950130-02-004549 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020625 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRUPO ELEKTRA SA DE CV CENTRAL INDEX KEY: 0000925050 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-13200 FILM NUMBER: 02686039 BUSINESS ADDRESS: STREET 1: EDIFICIO PARQUE CUICUILCO STREET 2: AV INSURGENTES SUR NO 3579 COL TLALPAN CITY: MEXICO STATE: O5 ZIP: DF 14000 BUSINESS PHONE: 5253263333 MAIL ADDRESS: STREET 1: EDIFICIO PARQUE CUICUILCO STREET 2: AV INSURGENTES SUR NO 3579 COL TLALPAN CITY: MEXICO D F STATE: O5 ZIP: 14000 20-F 1 d20f.txt FORM 20-F As filed with the Securities and Exchange Commission on June 25, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- Form 20-F ---------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 ---------------------- Commission file number: 1-13200 GRUPO ELEKTRA, S.A. de C.V. (Exact name of Registrant as specified in its charter) N/A (Translation of registrant's name into English) UNITED MEXICAN STATES (Jurisdiction of Incorporation or Organization) and the Co-registrants identified in footnote (1) below (Exact name of registrant as specified in its charter) Edificio Parque Cuicuilco (Esmeralda) Insurgentes Sur, No. 3579 Col. Tlalpan La Joya 14000 Mexico, D.F. (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which ------------------------------ Title of Each Class Registered ------------------- ---------- Grupo Elektra, S.A. de C.V.: - ---------------------------- Global Depositary Shares ("GDSs") evidenced by Global Depositary Receipts, each New York Stock Exchange Global Depositary Share representing ten Certificados de Participacion Ordinarios No Amortizables, each of which represents financial interests in and limited voting rights with respect to two Series B Shares, without par value, and one Series L Share, without par value, of Grupo Elektra, S.A. de C.V. Certificados de Participacion Ordinarios No Amortizables (Ordinary Participation New York Stock Exchange(2) Certificates ("CPOs")), each of which represents financial interests and limited voting rights with respect to two Series B Shares, without par value, and one Series L Share, without par value, of Grupo Elektra, S.A. de C.V. Series B Shares without par value New York Stock Exchange(2) Series L Shares without par value New York Stock Exchange(2)
------------------ (1) The following subsidiaries of Grupo Elektra, S.A. de C.V. are guarantors of our notes and are co-registrants: Administrativos Empresariales, S.A. de C.V.; Aerotraxis Metropolitanos, S.A. de C.V.; Almacenes Especializados, S.A. de C.V.; Bienes Raices en Promocion del Centro, S.A. de C.V.; Colchones, S.A.; Colchones Coloso, S.A. de C.V.; Comercios Elektra, S.A. de C.V.; Compania Operadora de Teatros, S.A. de C.V.; Control y Direccion Administrativa, S.A. de C.V.; Corporacion Plisa, S.A. de C.V.; Datacion y Supervision de Personal, S.A. de C.V.; Direccion de Administracion Central, S.A. de C.V.; Direccion de Administracion en Proyectos Aplicados, S.A. de C.V.; Direccion de Administracion en Proyectos Especiales, S.A. de C.V.; Direccion Especial, S.A. de C.V.; Direccion Sistematica Empresarial, S.A. de C.V.; Electronica del Moral, S.A. de C.V.; Elektra Centroamerica, S.A. de C.V.; Elektra del Milenio , S.A. de C.V.; Elektra del Peru, S.A.; Elektra Mexicana, S.A. de C.V.; Elektra Transfer, S.A. de C.V.; Elektrafin Comercial, S.A. de C.V.; Elmex Superior, S.A. de C.V.; Entrega Especializada, S.A. de C.V.; Gerencia Administrativas Operacionales, S.A. de C.V; Grupo Mercantil Finemsa, S.A. de C.V.; Grupo Proasa, S.A. de C.V.; Importaciones Electronicas Ribesa, S.A. de C.V.; Importadora y Exportadora Elektra de El Salvador, S.A. de C.V.; Inmobiliaria Hecali, S.A. de C.V.; Inmobiliaria Liur, S.A. de C.V.; Inmuebles Ardoma, S.A. de C.V.; Inmuebles Elektra, S.A. de C.V.; Inmuebles Selectos, S.A. de C.V.; Intra Mexicana, S.A. de C.V.; Mediciones y Representaciones Comerciales, S.A. de C.V.; Mercadotecnia Tezontle, S.A. de C.V.; Mercantil Agricola, S.A.; Mi Garantia Extendida, S.A. de C.V.; Operadora SYR, S.A. de C.V.; Operadoras en Servicios Comerciales, S.A. de C.V.; Salinas y Rocha, S.A.; Siglo XXI, S.A. de C.V.; Sistemas de Mision Estrategica, S.A. de C.V.; THE ONE, S.A. de C.V.; and The One.Com S.A. de C.V. (2) Not for trading, but only in connection with the registration of Global Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act: None -------------------- Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Title of Each Class ------------------- 12% Guaranteed Senior Notes Due 2008 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. Grupo Elektra, S.A. de C.V.: - ---------------------------- Series A Shares without par value 1,249,126,710 Series B Shares without par value 2,001,705,795 Series L Shares without par value 380,535,321 Compania Operadora de Teatros, S.A. de C.V.:** - -------------------------------------------- Series A Shares without par value 50,000 Series B Shares without par value 342,608,270 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 |_| Item 18 |X| ** All other registrants are wholly-owned subsidiaries of Grupo Elektra, S.A. de C.V. ================================================================================ TABLE OF CONTENTS
PAGE ---- Introduction ........................................................................... 1 Items 1-2. Not Applicable ........................................................... 2 Item 3. Key Information .......................................................... 3 Risk Factors .......................................................... 8 Item 4. Information on the Company ............................................... 19 Overview .............................................................. 19 Our Business .......................................................... 21 Elektra ............................................................... 29 Grupo SyR ............................................................. 41 The One ............................................................... 43 La Curacao Mexico ..................................................... 43 Additional Services ................................................... 47 Strategic Investments ................................................. 51 Regulation ............................................................ 54 Item 5. Operating and Financial Review and Prospects ............................. 55 Item 6. Directors, Senior Management and Employees ............................... 74 Item 7. Major Shareholders and Related Party Transactions ........................ 80 Major Shareholders .................................................... 80 Related Party Transactions ............................................ 81 Item 8. Financial Information .................................................... 84 Item 9. The Offer and Listing .................................................... 85 Nature of the Trading Market .......................................... 85 Trading on the Mexican Stock Exchange ................................. 87 Item 10. Additional Information ................................................... 87 Bylaws ................................................................ 87 Material Contracts .................................................... 91 Exchange Controls ..................................................... 91 Limitations Affecting Security Holders ................................ 91 Taxation .............................................................. 94 Documents on Display .................................................. 100 Item 11. Quantitative and Qualitative Disclosure about Market Risk ................ 101 Items 12-17. Not Applicable ........................................................... 104 Item 18. Financial Statements ..................................................... 104 Item 19. Exhibits ................................................................. 104
INTRODUCTION Presentation of Financial and Other Information Grupo Elektra, S.A. de C.V. ("Grupo Elektra," "we" or "the company") is a corporation (sociedad anonima de capital variable) organized under the laws of the United Mexican States. Grupo Elektra was formed in 1950 as a manufacturer of radios and became involved in retailing in 1957 when we opened our first Elektra store. In this Annual Report on Form 20-F (this "Annual Report"), references to "US$," "$," "Dollars" and "U.S. Dollars," are to United States dollars. In this Annual Report, all references to pesos are to the legal Mexican currency, and references to "P$," "Ps." or "Pesos" are to Mexican pesos. We maintain our books and records in Pesos and prepare our consolidated financial statements in Pesos. The Mexican Institute of Public Accountants has issued Bulletin B-10, "Recognition of the Effects of Inflation on Financial Information," and Bulletin B-12, "Statement of Changes in Financial Position." These bulletins outline the inflation accounting methodology mandatory for all Mexican companies reporting under generally accepted accounting principles in Mexico ("Mexican GAAP"). Pursuant to Mexican GAAP, financial data for all periods in the financial statements included in Item 18 (the "Consolidated Financial Statements") and for all periods throughout this Annual Report, unless otherwise noted, have been restated in constant Pesos as of December 31, 2001. Commencing January 1, 2000, we adopted Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing" issued by the MIPA. Under this statement, deferred taxes are initially recognized for all differences between book and tax values of assets and liabilities and for tax loss carry forwards and asset tax carry forwards that have a high probability of realization. Commencing January 1, 2001, we adopted Statement C-2 "Financial Instruments" issued by the MIPA. Under this statement, all derivatives are required to be recognized in the balance sheet as either assets or liabilities, and measured at fair value. Accounting principles generally accepted in Mexico differ in certain important respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the Consolidated Financial Statements. See Note 17 of our Consolidated Financial Statements. This Annual Report contains translations of certain Peso amounts into Dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Peso amounts actually represent such Dollar amounts or could be converted into Dollars at the rates indicated or at any other rate. Unless otherwise indicated, U.S. Dollar amounts have been translated from Mexican pesos at an exchange rate of Ps.9.1560 to US$1.00, the noon buying rate for pesos on December 31, 2001 as published by the Federal Reserve Bank of New York (the "Noon Buying Rate"). On June 21, 2002, the Noon Buying Rate was Ps.9.956 to US$1.00. As used in this annual report, EBITDA is operating income (loss) before interest expense, taxes, depreciation and amortization, and adjusted by eliminating monetary (loss) gain included in our revenues and cost, respectively. EBITDA is presented because we believe that EBITDA provides useful information regarding our Company. EBITDA should not be considered in isolation or as a substitute for the consolidated income statements or the consolidated statements of changes in financial position prepared in accordance with Mexican GAAP or as a measure of profitability or liquidity. EBITDA is not (a) a measure determined under U.S. GAAP, (b) an alternative to U.S. GAAP operating income (loss) or net income (loss) or (c) a measure of liquidity or cash flows as determined under U.S. GAAP. EBITDA does not represent discretionary funds. EBITDA, as calculated by us, may not be comparable to similarly titled measures reported by other companies. The term "billion" as used in this Annual Report means one thousand million. 1 Forward-Looking Statements This Annual Report contains words, such as "believe," "expect" and "anticipate" and similar expressions, that identify forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect our views about future events and financial performance. Actual results could differ materially from those projected in such forward-looking statements as a result of various factors that may be beyond our control, including but not limited to effects on our company from competition, limitations on our access to sources of financing on competitive terms, significant economic or political developments in Mexico and changes in our regulatory environment, particularly developments affecting the regulation of consumer installment sales. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. Items 1-2. Not Applicable 2 Item 3. Key Information SELECTED FINANCIAL DATA The following table presents selected consolidated financial information for each of the periods indicated. The selected consolidated financial information set forth below should be read in conjunction with, and is qualified in its entirety, by reference to our Consolidated Financial Statements, and the notes thereto, included elsewhere in this Annual Report. The Consolidated Financial Statements have been audited by PricewaterhouseCoopers, our independent accountants. Our Consolidated Financial Statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. See Note 17 to our financial statements, which provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Grupo Elektra and a reconciliation to U.S. GAAP of net income and stockholders' equity. Our financial statements were prepared giving effect to Bulletin B-10 and Bulletin B-12 issued by the Mexican Institute of Public Accountants ("MIPA"). Bulletin B-10 is designed to provide for the recognition of certain effects of inflation by requiring our company generally to restate non-monetary assets and liabilities and the components of stockholders' equity using the National Consumer Price Index (the "NCPI") and to record gains or losses in purchasing power from holding monetary liabilities or assets. Bulletin B-12 requires that the statement of changes in financial position reflect changes from the restated historical balance sheet to the current balance sheet. Pursuant to Mexican GAAP, the selected consolidated financial information set forth below, and all data in the Consolidated Financial Statements, have been restated in constant pesos as of December 31, 2001. The effects of inflation described above have not been reversed in the reconciliation to U.S. GAAP. See Note 17 to the Consolidated Financial Statements. Commencing January 1, 2000, we adopted Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing" issued by the MIPA. Under this statement, deferred taxes are initially recognized for all differences between book and tax values of assets and liabilities and for tax loss carry forwards and asset tax carry forwards that have a high probability of realization. Commencing January 1, 2001, we adopted Statement C-2 "Financial Instruments" issued by the MIPA. Under this statement, all derivatives are required to be recognized in the balance sheet as either assets or liabilities, and measured at fair value. The adoption of this statement on January 1, 2001 resulted in a loss of Ps.$8.3 million. 3
At and for the year ended December 31, ---------------------------------------------------------------------------- 1997 1998 1999 2000 -------------- -------------- ---------------- ----------------- (millions of U.S. dollars or million of constant Ps. as of December 31, 2001, except per share data and percentages) Income Statement Data Mexican GAAP: Merchandise, services and other revenues(2) ....... Ps. 9,439.4 Ps.11,590.2 Ps.13,044.8 Ps. 15,373.3 Cost of merchandise sold and of services(2) ....... 5,782.7 6,875.7 7,716.4 8,807.6 -------------- -------------- ---------------- ----------------- Gross profit ...................................... 3,656.7 4,714.5 5,328.4 6,565.7 Administrative and selling expenses ............... 2,283.5 3,017.2 3,352.3 4,203.7 Depreciation and amortization ..................... 232.9 437.9 549.6 631.6 -------------- -------------- ---------------- ----------------- Operating income .................................. 1,140.3 1,259.4 1,426.5 1,730.4 -------------- -------------- ---------------- ----------------- Interest income ................................ 47.3 104.7 179.0 204.7 Interest expense ............................... (281.7) (554.1) (809.5) (685.5) Foreign exchange (loss) gain ................... (98.4) (450.6) 26.1 (114.1) Gain on net monetary position .................. 162.9 294.6 292.4 297.2 Other financial operations ........................ -- -- -- -- ---------------- ----------------- ------------------ ------------------ Total comprehensive financing cost - Net(3) ...... (169.9) (605.4) (312.0) (297.7) --------------- --------------- ----------------- ------------------ Income before income taxes and employees' statutory profit sharing ....................... 970.4 654.0 1,114.5 1,432.7 Taxes and employees' statutory profit sharing ..... (139.4) (136.8) (109.9) (216.3) Equity in earnings (losses) of affiliated companies - Net(2) ............................. 170.0 (245.3) (92.4) (23.3) Net income ........................................ 1,001.0 271.9 912.2 1,193.1 Income of minority stockholders ................... (24.7) (5.2) (24.9) (21.2) --------------- --------------- ----------------- ------------------ Income of majority stockholders ................... Ps. 976.3 Ps. 266.7 Ps. 887.3 Ps. 1,171.9 ============== ============== ================ ================= Basic and diluted earnings per share ...................................... 0.275 0.075 0.258 0.323 Weighted average shares outstanding (in millions)(4) ................................... 3,553.6 3,574.7 3,440.5 3,622.8 U.S. GAAP Sales and money transfer services ................. Ps.7,738.9 Ps.9,433.1 Ps.10,605.3 Ps.12,466.0 Interest earned from customer credit operations ... 2,088.6 2,340.5 2,716.7 3,146.1 Operating income .................................. 1,296.8 1,832.7 1,959.0 2,392.6 Income before income taxes ........................ 659.6 787.0 1,368.5 1,682.2 Net income ........................................ 355.9 335.5 1,174.6 1,347.6 Basic and diluted earnings per share(4) ........... 0.10 0.09 0.34 0.37 Basic weighted average shares outstanding (in millions)(4) ................................... 3,553.6 3,574.7 3,440.5 3,622.8 At and for the year ended December 31, ------------------------------------- 2001 2001/(1)/ ---------------- ---------------- (millions of U.S. dollars or million of constant Ps. as of December 31, 2001, except per share data and percentages) Income Statement Data Mexican GAAP: Merchandise, services and other revenues(2) ....... Ps.15,608.4 US$1,704.7 Cost of merchandise sold and of services(2) ....... 8,977.1 980.5 ---------------- ---------------- Gross profit ...................................... 6,631.3 724.2 Administrative and selling expenses ............... 4,065.8 444.1 Depreciation and amortization ..................... 707.3 77.3 ---------------- ---------------- Operating income .................................. 1,858.2 202.8 ---------------- ---------------- Interest income ................................ 131.3 14.3 Interest expense ............................... (781.3) (85.3) Foreign exchange (loss) gain ................... (8.6) (0.9) Gain on net monetary position .................. 170.7 18.6 Other financial operations ........................ 135.5 14.8 ---------------- ---------------- Total comprehensive financing cost - Net(3) ...... (352.4) (38.5) ----------------- ----------------- Income before income taxes and employees' statutory profit sharing ....................... 1,505.8 164.3 Taxes and employees' statutory profit sharing ..... (543.1) (59.3) Equity in earnings (losses) of affiliated companies - Net(2) ............................. 187.0 20.4 Net income ........................................ 1,149.7 125.4 Income of minority stockholders ................... (13.0) (1.3) ----------------- ----------------- Income of majority stockholders ................... Ps. 1,136.7 US$ 124.1 ================ ================ Basic and diluted earnings per share ...................................... 0.309 0.034 Weighted average shares outstanding (in millions)(4) ................................... 3,682.9 3,682.9 U.S. GAAP Sales and money transfer services ................. Ps.12,396.1 Ps.1,353.9 Interest earned from customer credit operations ... 3,365.0 367.5 Operating income .................................. 2,474.0 270.2 Income before income taxes ........................ 1,645.9 179.8 Net income ........................................ 1,093.6 119.4 Basic and diluted earnings per share(4) ........... 0.30 0.03 Basic weighted average shares outstanding (in millions)(4) ................................... 3,682.9 3,682.9
4
At and for the year ended December 31, ------------------------------------------------------------------------- 1997 1998 1999 2000 ---------- ---------- ---------- ----------- (millions of U.S. dollars or constant Ps. as of December 31, 2001, except per share data and percentages) Balance Sheet Data Mexican GAAP: Accounts receivable due from customers - Net ....... Ps.2,125.8 Ps.2,016.9 Ps.2,691.4 Ps.3,853.8 Accounts receivable due from related parties - Net ................................... 215.9 261.9 230.6 180.4 Inventories ........................................ 2,912.5 2,734.9 2,758.3 2,987.4 Total current assets ............................... 6,375.6 6,997.6 6,859.1 8,293.8 Property, machinery and equipment - Net ............ 2,308.8 2,740.3 3,946.2 3,837.3 Total assets ....................................... 11,740.5 12,591.6 13,443.4 14,799.7 Total current liabilities .......................... 4,922.1 4,888.4 5,755.2 5,333.0 Short-term debt .................................... 2,467.8 1,970.1 2,335.4 1,645.0 Long-term debt ..................................... 1,260.2 2,770.2 1,749.8 2,906.1 Total debt ......................................... 3,728.0 4,740.3 4,085.3 4,550.9 Total stockholders' equity ......................... 5,531.5 4,776.5 5,331.9 5,704.6 U.S. GAAP Accounts receivable from customers-Net ............. 3,329.3 3,246.6 4,048.4 5,084.0 Inventories ........................................ 2,871.3 2,734.8 2,758.4 2,803.6 Total assets ....................................... 11,417.4 12,138.2 13,283.2 15,798.3 Short-term debt .................................... 3,588.1 1,970.1 2,562.9 2,612.6 Long-term debt ..................................... 1,221.6 4,000.0 2,879.4 4,328.4 Majority stockholders' equity ...................... 1,207.8 392.1 1,402.1 2,024.4 Other Financial Data (unaudited): Capital expenditures ............................... 1,191.2 776.1 520.9 461.1 Gross margin ....................................... 38.7% 40.7% 40.8% 42.7% Operating income margin ............................ 12.1% 10.9% 10.9% 11.3% Stores opened at period end ........................ 680 819 946 950 Number of open installment accounts ................ 948,054 682,163 812,676 923,546 Store space (square feet) .......................... 4,559,129 5,699,129 6,965,660 7,001,848 Earnings-to-fixed charges .......................... 2.4x 1.7x 1.9x 2.2x At and for the year ended December 31, ----------------------------- 2001 2001/(1)/ ---------- ---------- (millions of U.S. dollars or constant Ps. as of December 31, 2001, except per share data and percentages) Balance Sheet Data Mexican GAAP: Accounts receivable due from customers - Net ....... Ps.3,387.1 US$369.9 Accounts receivable due from related parties - Net ................................... 262.8 28.7 Inventories ........................................ 2,881.5 314.7 Total current assets ............................... 8,855.1 967.1 Property, machinery and equipment - Net ............ 3,657.1 399.4 Total assets ....................................... 15,358.5 1,677.4 Total current liabilities .......................... 4,475.6 488.8 Short-term debt .................................... 1,039.2 113.5 Long-term debt ..................................... 3,768.1 411.5 Total debt ......................................... 4,807.3 525.0 Total stockholders' equity ......................... 6,082.3 664.3 U.S. GAAP Accounts receivable from customers-Net ............. 4,797.3 523.9 Inventories ........................................ 2,789.8 304.7 Total assets ....................................... 15,317.9 1,673.0 Short-term debt .................................... 1,118.5 122.2 Long-term debt ..................................... 5,356.1 585.0 Majority stockholders' equity ...................... 2,572.2 280.9 Other Financial Data (unaudited): Capital expenditures ............................... 610.0 66.6 Gross margin ....................................... 42.5% 42.5% Operating income margin ............................ 11.9% 11.9% Stores opened at period end ........................ 953 953 Number of open installment accounts ................ 1,084,236 1,084,236 Store space (square feet) .......................... 7,223,929 7,223,929 Earnings-to-fixed charges .......................... 2.2x 2.2x (footnotes on following page)
5 - ---------------- (1) The U.S. dollar amounts represent the peso amounts as of December 31, 2001, translated at the exchange rate of Ps.9.1560 per U.S. dollar (Noon Buying Rate) and are unaudited. (2) Up to December 31, 1999, we included equity in income (loss) of CASA as part of Merchandise, services and other revenues, and the amortization of CASA goodwill was included in Cost of merchandise sold and of services. As of January 1, 2000, we changed the presentation of both items to include them in a separate line after the income after taxes. For purposes of this table, all periods are presented using the current presentation. (3) Comprehensive financing cost does not include interest income and expense associated with our receivables portfolio. See Item 5. "Operating and Financial Review and Prospects--Accounting for Installment Sales." (4) After giving effect to the ten-to-one split of our common stock, which was authorized on August 15, 1997, each GDS currently represents 10 CPOs, while each CPO continues to represent two B Shares and one L Share. However, our equity structure will be modified accordingly if the planned conversion of our Series B Shares and Series L Shares into one class of stock is approved by our shareholders. See "Item 5. Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." Exchange Rates Mexico has had a free market for foreign exchange since 1991. Prior to December 1994, the Mexican central bank, Banco de Mexico, kept the peso-U.S. dollar exchange rate within a range prescribed by the government through intervention in the foreign exchange market. In December 1994, the government suspended intervention by Banco de Mexico and allowed the peso to float freely against the U.S. dollar. The peso declined sharply in December 1994 and continued to fall under conditions of high volatility in 1995. In 1996 and most of 1997, the peso fell more slowly and was less volatile. In the last quarter of 1997 and for much of 1998, the foreign exchange markets were volatile as a result of financial crises in Asia and Russia and financial instability in certain countries, including Brazil and Venezuela. The peso declined during this period, but was relatively stable during 1999 and 2000. The peso strengthened during 2001 and the first quarter of 2002 but has begun to deteriorate during the second quarter of 2002. There can be no assurance that the government will maintain its current policies with regard to the peso or that the peso will not further depreciate or appreciate significantly in the future. The following table sets forth, for the periods indicated, the period-end, average, high and low, Noon Buying Rate, expressed in pesos per U.S. dollar, published by the Federal Reserve Bank of New York. The rates have not been restated in constant currency units. All amounts are stated in pesos. Free Market Rate/(1)/ ----------------------------------------------------- Year Ended December 31, High Low Average(2) Period End - ----------------------- ---- --- ------- ---------- 1997 8.41 7.71 7.96 8.07 1998 10.63 8.04 9.24 9.90 1999 10.60 9.24 9.56 9.48 2000 10.09 9.18 9.46 9.62 2001 9.97 8.95 9.33 9.16 2001: November 9.308 9.147 December 9.245 9.090 6 Free Market Rate/(1)/ ----------------------------------------------------- Year Ended December 31, High Low Average(2) Period End - ----------------------- ---- --- ------- ---------- 2002: January 9.250 9.095 February 9.170 9.048 March 9.114 9.012 April 9.360 9.002 May 9.291 8.946 - ------------------- (1) Source: Federal Reserve Bank of New York. (2) Average of end-of-month rates. On June 21, 2002, the Noon Buying Rate was Ps. 9.956 to US$1.00. Dividends The declaration, amount and payment of dividends are determined by majority vote of the holders of the A and B Shares and generally, but not necessarily, on the recommendation of the Board of Directors. Dividends are declared in the first quarter of each fiscal year based on our audited financial statements for the preceding fiscal year. The amount of any such dividend would depend on, among other things, our operating results, financial condition and capital requirements and general business conditions. Under our Amended and Restated Bylaws and the Mexican General Corporate Law, the gross profits of our company are applied as follows: At the annual ordinary general meeting of our shareholders, the Board of Directors submits our financial statements for the previous fiscal year, together with the report thereon by the Board, to the holders of A Shares for approval. Once the financial statements have been approved by the holders of A Shares, the holders of A and B Shares determine the allocation of our net profits for the preceding year. They are required by law to allocate at least 5% of such net profits to a legal reserve, which is not available for distribution except as a stock dividend, until the amount of the legal reserve equals 20% of our historical capital stock (before the effect of restatement). Thereafter, the holders of A and B Shares may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of our shares. The remainder of net profits is available for distribution in the form of dividends to the shareholders provided that the holders of A and B Shares resolve favorably for the distribution of dividends. Holders of B Shares and L Shares (directly or through CPOs) have equal rights, on a per share basis, to dividends. On March 30, 2001, we declared a dividend of Ps.0.16 per CPO or Ps.0.04 per A Share, and For B and L Shares that are not deposited in the CPO trust. This dividend, which was paid on April 20, 2001, was equal to 7.3% of EBITDA for the year ended December 31, 2000, or Ps.142.5 million (approximately US$15,000,000). On April 22, 2002, we declared a net dividend of Ps.0.12483 per CPO or Ps.0.04161 per A Share, and for B and L Shares that are not deposited in the CPO trust. This dividend, which was paid on April 29, 2002, was equal to 6% of EBITDA for the year ended December 31, 2001, or Ps.157 million (approximately US$16,000,000). The dividend payment per GDS was Ps.0.828 in 1998, Ps.0.975 in 1999, Ps.1.160 in 2000, and Ps1.2483 in 2001 (all figures are expressed in nominal pesos). Under the terms of our indebtedness, we are subject to certain financial covenants that directly or indirectly restrict the payment of dividends. See Item 5. "Operating and Financial Review and Prospects--Liquidity and Capital Resources." 7 RISK FACTORS Risks Associated with Grupo Elektra Our business is highly dependent on the Mexican economy. The success of our business is to a very large extent subject to the cycles of the Mexican economy, which in turn are very much influenced by the economy of the United States. Downturns of the Mexican economy directly impact the purchasing power of our target market and the quality of our receivables portfolio. The macroeconomic environment in which we operate is beyond our control. Changes in the Mexican economy are a major risk of our business and could have a material adverse effect on the success of our operations. Our success depends on our retention of certain key personnel, our ability to hire additional key personnel and the maintenance of good labor relations. We depend on the performance of our executive officers and key employees. In particular, our senior management has significant experience in the retail clothing, electronics, appliance, white goods and household furniture industries, and the loss of any of them could negatively affect our ability to execute our business strategy. Additionally, we do not have "key person" life insurance policies on any of our employees. Our future success also depends on our continuing ability to identify, hire, train and retain other qualified sales, marketing and managerial personnel. Competition for such qualified personnel is intense and we may be unable to attract, assimilate or retain them. Our businesses will be harmed if we cannot attract this necessary personnel. In addition, approximately 26% of our employees are members of various unions, and we could incur higher ongoing labor costs and disruptions in our operations in the event of a strike or other work stoppage. Our international operations expose us to numerous risks. We have retail operations in various foreign countries, including Peru, the Dominican Republic, El Salvador, Honduras and Guatemala, and we intend to pursue any beneficial opportunities that may arise in these and other countries. Net revenues in these foreign countries represented approximately 6.1% of our net revenues in 2001. We are subject to the risks inherent in conducting business across national boundaries, any one of which could negatively impact our business. These risks include: o economic downturns; o currency exchange rate fluctuations; o changes in governmental policy; o international incidents; o military outbreaks; o government instability; o nationalization of foreign assets; and o government protectionism. We cannot assure you that one or more of these factors will not impair our current or future international operations and, as a result, harm our overall business. In addition, we intend to phase out or sell our operations in the Dominican Republic in 2002 and are considering a phase-out of our operations in El Salvador. We cannot assure you that phasing out these operations will not have a negative effect on our results of operation. 8 We may have difficulty in obtaining enough quality, low-cost merchandise. Our future success depends on our ability to select and purchase quality merchandise at attractive prices. We have historically been able to locate and purchase quality merchandise, but such merchandise may not be available in the future, or it may not be available in quantities necessary to accommodate our expanding businesses, or it may become subject to higher import taxes than it currently is. We are not generally dependent on any single supplier or group of suppliers. Nonetheless, for white goods, Grupo Mabe and Grupo Vitro, and for electronics, Sony and LG Electronics, represent a very significant portion of our supplies. Our business and results of operations may be adversely affected by a disruption in the availability of sufficient quantities of high quality, affordable merchandise. Our future success depends on whether we can continue to deliver our products to our stores in a timely and cost-efficient manner. Our future success depends on whether we can continue to deliver our products to our stores in a timely and cost-efficient manner. Substantially all of our inventory is shipped or picked up directly from suppliers and delivered to our nine regional distribution centers in Mexico, and to our distribution centers in each of the other countries where we operate. The inventory is then processed and distributed to our stores. The orderly operation of our receiving and distribution process depends on effective management of our distribution centers and strict adherence to shipping schedules. Our rapid growth puts significant pressure on our distribution and receiving systems. Some of the factors that could have an adverse effect on our distribution and receiving systems are: o expansion, replacement and addition of distribution centers to accommodate our growth; o shipping disruptions; and o natural or other disasters, because a fire, explosion, hurricane, tornado, flood, earthquake or other disaster at our distribution facilities could result in a significant disruption in the receipt and distribution of goods. Our agreements with Western Union constitute a significant source of our U.S. dollar denominated income. Our Exclusive Services Agreement with Western Union (and certain related agreements) and our Foreign Exchange Agreement with Western Union are our principal sources of U.S. dollar denominated revenues. This source of revenue is particularly important to us because the cash flow which we use to service our indebtedness is generated primarily in Mexican pesos, while the majority of such indebtedness is denominated in U.S. dollars. Our agreements with Western Union expire in 2006, and we cannot assure that we will be able to renew these agreements, or that if we are able to renew, that such renewals will be on favorable terms. Failure to renew these agreements, and to secure new or additional sources of U.S. dollar denominated revenues may have an adverse effect on our results of operations. 9 We face various uncertainties regarding our planned banking activities. During 2002, we intend to establish a banking subsidiary. We will initially contribute up to $25 million of capital to the bank. We expect that the bank will eventually house our consumer financing activities by financing retail receivables of our customers, which are currently financed directly by us and by securitized transactions. This will result in a separation of our financial activities (other than our money transfer services, which not be performed through the bank) from our retail activities. If our bank subsidiary is created as or becomes an unrestricted subsidiary, it would not be a guarantor of our 12% Senior Notes due 2008, and it will not be subject to the restrictive covenants contained in indenture for the related notes. The establishment of the bank may require more capital than our initial contribution. In addition, the new bank will face competition from domestic banks and local branches of international banks. The bank will also be subject to banking laws and regulations that are not applicable to our other lines of business and which may place significant restrictions on its financial activities and on the flexibility of our operations generally. We cannot assure you that our banking activities will be successful or profitable, or that our retail segment will continue to perform well as a stand alone business. We also cannot assure you that we will be able to successfully integrate the bank's activities into our corporate structure or that the establishment of the bank will not have a negative effect on our overall profitability. Our financing arrangements contain restrictions that may limit management's discretion in the operations of our businesses. Our existing financing arrangements impose financial and other restrictions on us, including limitations on: o the incurrence of additional debt; o the ability to make investments o the ability to create liens; and o the ability to dispose of assets. Our debt and these financial restrictions are likely to make us more vulnerable to economic downturns, limit our ability to withstand competitive pressures and reduce our flexibility to respond to changing business or economic conditions. We rely on our relationship with our affiliates, and any impairment of that relationship may affect our businesses. Our main controlling shareholders are Hugo Salinas Rocha's heirs and Esther Pliego de Salinas, who, including the Chairman of our Board of Directors, Ricardo B. Salinas Pliego, are also the controlling shareholders of TV Azteca, the second largest Mexican commercial TV broadcaster. Advertising through the facilities of TV Azteca is an important element of our marketing strategy. Any impairment of our ability to obtain advertising on attractive conditions may have a material adverse effect on our business, results of operations or financial condition. We often engage in a variety of transactions with companies owned by our controlling shareholders which may cause conflicts of interest. We have engaged and will continue to engage in a variety of transactions with TV Azteca, Movilaccess, Unefon and other entities owned or controlled by Ricardo B. Salinas Pliego and our other 10 controlling shareholders. See Item 7. "Major Shareholders and Related Party Transactions--Related Party Transactions." While we intend to continue to transact business with related parties on an arms-length basis, we cannot assure you that such transactions will be unaffected by conflicts of interest between such parties and us. We have agreed to terms governing our indebtedness which restrict our ability to engage in transactions with our affiliates. Loss of existing or future market share to competitors may adversely affect our performance. Our businesses are highly competitive in all product categories. Earnings primarily depend on the maintenance of high per-store sales volumes, efficient product purchasing and distribution and cost-effective store operations. The retail sector throughout Latin America is fragmented and consumers are served by a number of formats, including traditional formats such as local, independent retail stores, modern formats such as retail chains and department stores, as well as informal outlets such as street vendors and outdoor markets. In general, our competitors in this business include other specialty stores, independent clothing, electronics and appliance stores and department stores, some of which are national and international in scope and may have greater resources than we possess in that specific country. Also, certain major U.S. retailers have established joint ventures with Mexican retailers and have opened stores in Mexico. We expect that other U.S. retailers may continue to do so in the future (especially in light of the implementation of the NAFTA agreement). We also face significant competition from the informal economy and parallel imports for the products that we carry. There can be no assurance that our performance will not be adversely affected by increased competition, consolidation of the retail sector and more sophisticated competitors from these and other sources. There may be an adverse impact on our margins from pricing pressure. Pricing competition in the specialty-retailing sector is intense. Pricing pressure from competitors is increasing as the sector consolidates and more competitors are able to benefit from economies of scale and reduce their prices to consumers. We also face pressure on the pricing of the credit we extend to our customers as part of our installment sales program. There can be no assurance that we will be able to maintain or increase our current margins, the reduction of which could have a material adverse effect on our business. We may not be able to finance our working capital needs. We use non-committed short-term credit lines from Mexican banks. Termination of such lines by these lenders would require us to refinance these short-term loans. We cannot assure you that such refinancing can be arranged on favorable conditions, or otherwise, on short notice. Similarly, we rely on our receivables securitization programs for part of our working capital needs. A downgrading or worsening of the quality of the receivables portfolio would prevent us from using such receivables securitization programs on an ongoing basis, and could have a material adverse effect on our business. Our operating results are likely to fluctuate in future periods and, therefore, are difficult to predict. Our annual and quarterly operating results are likely to fluctuate significantly in the future as a result of numerous factors, many of which are outside our control. These factors include seasonal factors. Historically, we have experienced increased demand during the second and fourth quarters, as customers increase spending for Mother's Day and the Christmas holiday relative to other times of the year. Our results of operations for any one quarter are not necessarily indicative of our annual results of operations. 11 Our business is dependent on the integrity of our employees. Our profitability and success depend on the integrity and quality of our employees in every segment of our distribution cycle. Failures in the integrity and quality of our employees could have a negative impact on our profitability and on the success of our operations in general. Our internet strategy may not succeed, which will impede our growth. We have pursued certain opportunities to sell our products over the internet. This was a relatively new business and marketing strategy for us and involved certain risks and uncertainties. Currently, we are focusing on the e-catalog segment of this business. We may not succeed in marketing our products over the internet and our internet strategy may require us to significantly increase our advertising and marketing expenditures. If we significantly increase such expenditures and such increase does not result in significant sales, our results of operations may be adversely affected. Risks Related to the Laws of the Countries in Which We Operate A change in consumer-related laws and regulations may have an adverse effect on our financial performance. The Ley Federal de Proteccion al Consumidor (the "Consumer Protection Act"), which regulates consumer installment sales in Mexico, became effective on December 25, 1992. This Act does not set a limit on the interest rate a merchant may charge a consumer in an installment sale, and it does not require the merchant to inform the consumer of the effective rate of interest charged. The effective interest rate which we charge for electronics, appliances, furniture and clothing is fixed at the time of the installment purchase. We cannot assure you that in the future, the Mexican Government will not impose limitations or additional informational requirements regarding such rates of interest. A substantial portion of our revenues and operating cash flow is generated by our installment sales program, and any such limitations or additional information requirements could have a material adverse effect on our financial performance. Furthermore, our financial performance could be materially adversely affected by any material change in the regulations governing our collection practices and repossession procedures. The consumer protection laws and their enforcement in the other Latin American countries where we do business are comparable to Mexican law. However, a change in the regulatory environment in Mexico, or in the other countries where we operate, or the imposition of authorization requirements could have a material adverse effect on our operations and our financial performance. The Mexican Antitrust Law could prevent us from consummating business combinations which could have an adverse effect on our businesses. The Ley Federal de Competencia Economica, the Mexican Antitrust Law, provides for various antitrust regulations and requires approval of the Comision Federal de Competencia, the Mexican Federal Competition Commission, for certain mergers, acquisitions and other corporate activities. We cannot guarantee that we will not be investigated by the Comision Federal de Competencia and, as a result thereof, be prevented from consummating business combinations or engaging in certain types of commercial activities in the future, or that such events would not have an adverse effect on our businesses. Differences between Mexican GAAP and U.S. GAAP may have an impact on the presentation of our financial information. Our consolidated financial statements are audited and published annually, and are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See Note 17 12 to our financial statements, which provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us. Risks Related to our GDSs (We note that we intend to terminate the CPO Trust, after which GDSs will represent directly shares of our common stock) Preemptive rights may be unavailable to GDS holders. Under Mexican law, whenever we issue new shares for cash, we generally must grant preemptive rights to our shareholders, giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. We may not be able to offer shares to U.S. holders of GDSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless: o a registration statement under the Securities Act of 1933, as amended (the "Securities Act") is effective with respect to such rights and shares; or o an exemption from the registration requirements of the Securities Act is available. We intend to evaluate at the time of any rights offering the costs and potential liabilities associated with a registration statement to enable U.S. holders of GDSs to exercise their preemptive rights, the indirect benefits of enabling U.S. holders of GDSs to exercise preemptive rights and any other factors that we consider appropriate at the time. We will then decide whether to file such a registration statement. We cannot assure you that such a registration statement would be filed. In addition, although the Depositary (as defined below) is permitted, if at the time it is both lawful and feasible, to sell preemptive rights and distribute the proceeds of the sale to holders of GDSs who are entitled to the proceeds, sales of preemptive rights are not lawful in Mexico at this time. As a result, U.S. holders of GDSs may not be able to exercise their preemptive rights in connection with future issuances of our shares. In this event, the interest of holders of GDSs in the total equity of our company would decrease in proportion to the size of the issuance. Depending on the price at which shares are offered, such an issuance could result in dilution to holders of GDSs. Holders of GDSs and CPOs have limited voting rights. Our CPOs have been issued by Banco del Atlantico, S.A. as trustee (the "CPO Trustee") for a Mexican trust (the "CPO Trust"). Each CPO represents financial interests in, and limited voting rights with respect to, two B Shares and one L Share. The GDSs have been issued by The Bank of New York as depositary (the "Depositary"). Each GDS represents 10 CPOs. Under the CPO Trust agreement, holders of CPOs who are not Eligible Mexican Holders have no voting rights with respect to the underlying B Shares. Eligible Mexican Holders are Mexican individuals and Mexican corporations whose charters contain a prohibition on ownership by non-Mexicans of the corporation's capital stock. For Mexican law purposes, the Depositary is considered the owner of the CPOs which are represented by the GDSs. Since the Depositary does not qualify as an Eligible Mexican Holder, the Depositary and, consequently, the holders of GDSs have no voting rights with respect to the underlying B Shares. The B Shares that are held in the CPO Trust on behalf of holders of CPOs who are not Eligible Mexican Holders are voted in the same manner as the respective majority of the B Shares are voted at the relevant meeting. Given that a majority of the B Shares are owned by the Controlling Shareholders, if the Controlling Shareholders vote the same way on a matter, the CPO Trustee will be required to vote the B Shares held in the CPO Trust on behalf of holders of CPOs who are not Eligible Mexican Holders in the same 13 manner as the B Shares held by the Controlling Shareholders are voted. See "Item 10. Additional Information--Limitations Affecting Security Holders--Limitations on Voting Rights." All holders of GDSs and CPOs, whether or not they are Eligible Mexican Holders, are entitled to give instructions as to the manner in which the CPO Trustee shall vote the L Shares whenever the holders of L Shares are entitled to vote. In the case of the holders of GDSs, those instructions must be given to the Depositary (who in turn conveys them to Banca Serfin, S.A., as Common Representative of the holders of the CPOs (the "Common Representative")). In the case of the holders of CPOs, the instructions must be given directly to the CPO Trustee. The Common Representative must receive the voting instructions at least five business days prior to the relevant meeting, and the CPO Trustee must receive it at least within 3 calendar days. See Item 10. "Additional Information--Limitations Affecting Security Holders--Limitations on Voting Rights." Under our bylaws and Mexican law, holders of L Shares are entitled to vote only in limited circumstances. Holders of L Shares may elect one of our nine directors and the corresponding alternate, and are only entitled to vote on specific matters, such as changes in our corporate form, certain mergers involving our company, the cancellation of the registration of our shares and actions that would prejudice the rights of holders of L Shares. However, during 2002, we intend to convert all of our existing classes of capital stock on a one-to-one basis into one class of common stock. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative" and Item 6. "Directors, Senior Management and Employees--Directors and Executive Officers--Directors." Holders of GDSs are not entitled to attend shareholders' meetings, and they may only vote through the Depositary. Under Mexican law, a shareholder is required to deposit its shares with a Mexican custodian in order to attend a shareholders' meeting. A holder of CPOs and GDSs will not be able to meet this requirement, and accordingly is not entitled to attend shareholders' meetings. A holder of GDSs is entitled to instruct the Depositary as to how to vote the shares represented by GDSs, in accordance with procedures provided for in the deposit agreement, but a holder of GDSs will not be able to vote its shares directly at a shareholders' meeting or appoint a proxy to do so. The payment and amount of dividends are subject to covenant restrictions and to the determination of our controlling shareholders. The payment of dividends by us, and the amounts of such dividend payments, are subject to the recommendation of our Board of Directors and approval by our shareholders. As long as our controlling shareholders continue to own a majority of these shares, they will have as a result the ability to determine whether or not dividends are to be paid and the amount of any dividends. In addition, our indentures contain covenants that restrict, among other things, our payment of dividends. The significant share ownership of the controlling shareholders may have an adverse effect on the future market price of our traded equity. Approximately 72% of our equity is controlled by the heirs of Hugo Salinas Rocha, including Ricardo B. Salinas and Esther Pliego de Salinas. These controlling shareholders have the power to determine the outcome of substantially all actions requiring shareholder approval, including the power to elect 8 of our 9 directors and to determine whether dividends will be paid. Moreover, actions by our controlling shareholders with respect to the disposition of the shares they beneficially own, or the perception that such actions might occur, may adversely affect the trading price of our equity on the Mexican Stock Exchange and the market price of the GDSs. See Item 7. "Major Shareholders and Related Party Transactions--Major Shareholders." 14 We have significant transactions with affiliates that create potential conflicts of interest. We regularly engage in transactions with affiliates, including entities owned or controlled by our Controlling Shareholders. See Item 7. "Major Shareholders and Related Party Transactions--Related Party Transactions." Transactions with affiliates may create the potential for conflicts of interest. To guard against these potential conflicts of interest, we have established a Related Party Transactions Committee of our Board of Directors to provide an independent review of transactions with affiliates to determine whether these transactions are related to our business and are consummated on terms that are at least as favorable to us as terms that would be obtainable in a similar transaction entered into on an arms-length basis with an unrelated third party. Holders of shares may experience dilution as a result of the exercise of stock options with exercise prices substantially below the market price of the shares. At December 31, 2001, we had outstanding stock options with respect to approximately 17 million CPOs at exercise prices ranging from approximately US$2.50 to US$4.00 per CPO. In addition to the options currently outstanding, we have in the past issued options at substantially below the then-prevailing market price of our CPOs. See Item 6. "Directors, Senior Management and Employees--Stock Option Plan." There are risks associated with the trading of our equity on the Mexican Stock Exchange. The Mexican securities market is not as large or as active as the securities markets in the United States and certain other developed market economies. As a result, the Mexican securities market has been less liquid and more volatile than other markets. To control excess price volatility, the Mexican Stock Exchange operates a system that suspends dealing in shares of a particular issuer when changes in the price of such shares (expressed as a percentage of that day's opening price) exceed certain levels. Under current regulations, this system does not apply to the CPOs (or the underlying shares following termination of the CPO Trust) so long as the GDSs are listed on the New York Stock Exchange or another foreign market. Developments in other emerging market countries may affect the prices for our securities. The market value of securities of Mexican companies is, to varying degrees, 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. In late October 1997, prices of both Mexican debt securities and Mexican equity securities dropped substantially, precipitated by a sharp drop in value of Asian markets. Similarly, in the second half of 1998, prices of Mexican securities were adversely affected by the economic crises in Asia, Russia and Brazil. We cannot assure you that the market value of our securities would not be adversely affected by events elsewhere, especially in emerging market countries. It may be difficult to enforce civil liabilities against us or our directors, officers and controlling persons. We are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, 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 or to enforce judgments against them, including 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. 15 The protections afforded to minority shareholders in Mexico are different from those in the United States. Under Mexican law, the protections afforded to minority shareholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not well developed, there is no procedure for class actions or shareholder derivative actions, and there are different procedural requirements for bringing shareholder lawsuits. As a result, in practice it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholders than it would be for shareholders of a U.S. company. Our bylaws restrict the ability of non-Mexican shareholders to invoke the protection of their governments with respect to their rights as shareholders. As required by Mexican law, our bylaws provide that non-Mexican shareholders shall be considered as Mexican in respect of their ownership interests in our company and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican shareholder is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder's rights as a shareholder, but is not deemed to have waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in our company. If you invoke such governmental protection in violation of this agreement, your shares could be forfeited to the Mexican government. Exchange rate fluctuations may affect the value of our securities. Fluctuations in the exchange rate between the peso and the U.S. dollar will affect the U.S. dollar value of an investment in our equity securities and of dividend and other distribution payments on those securities. See "--Key Information--Exchange Rates." Risks Associated with Mexico Economic developments in Mexico may adversely affect our business and results of operations. We are a Mexican corporation, and the majority of our subsidiaries are also Mexican corporations. As a result, our business may be significantly affected by the general condition of the Mexican economy, by devaluation of the peso, by inflation and high interest rates in Mexico, or by political developments in Mexico. Mexico has experienced adverse economic conditions. Mexico experienced a severe economic crisis following the devaluation of the peso in December 1994. In recent years, economic crises in Asia, Russia, Brazil and other emerging markets have adversely affected the Mexican economy and could do so again. In 1999, Mexico's gross domestic product, or GDP, increased 3.7% and inflation was 12.3%. In 2000, inflation declined to 9.0%, and real GDP increased by 6.6% in real terms in 2000, as compared with 1999. In 2001, inflation was 4.4% and real GDP growth decreased by 0.3% in real terms, as compared to 2000. According to preliminary estimates of the Mexican Government, Mexico's GDP contracted during the third and fourth quarters of 2001. If the Mexican economy continues to contract, the Mexican economy falls into a recession or if inflation and interest rates increase significantly, our business, financial condition and results of operations could suffer material adverse consequences because, among other things, demand for our stores' goods may decrease as consumers find it more difficult to pay for our products. 16 Depreciation of the peso relative to the U.S. dollar could adversely affect our financial condition and results of operations. Our sales volume may decrease following a significant devaluation or depreciation of the peso if consumers spend less on our products as a result. Although the value of the peso relative to the U.S. dollar has stabilized since 1998, any future depreciation or devaluation of the peso is likely to reduce our sales volume, which may have a material adverse effect on our results of operations. Declines in the value of the peso relative to other currencies increase our interest costs in pesos relative to our indebtedness denominated in such other currencies. Such declines could also cause us to register foreign exchange losses and could adversely affect our ability to meet our interest and principal obligations under our indebtedness. As of December 31, 2001, we had approximately US$497.9 million indebtedness denominated in U.S. dollars and the equivalent of US$16.6 million denominated in other currencies, and we may in the future incur additional non-peso-denominated indebtedness. The value of the peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. For example, from January 1, 1995 to March 31, 1996, the Mexican peso depreciated 50.8% to Ps.7.5375 per U.S. dollar and fluctuated from a high, relative to the U.S. dollar, of Ps.5.00 to a low, relative to the U.S. dollar, of Ps.8.14. Furthermore, severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our indebtedness. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future. To the extent that there are currency fluctuations, they are likely to continue to have an effect on our financial condition, results of operations and cash flows in future periods. Although the value of the peso/U.S. dollar exchange rate has stabilized in recent years, we can give no assurance that the peso will not depreciate in value relative to the U.S. dollar in the future. High levels of inflation and high interest rates in Mexico could adversely affect our financial condition and results of operations. Mexico has experienced high levels of inflation in past years. The annual rate of inflation, as measured by changes in the National Consumer Price Index, was 18.6% for 1998, 12.3% for 1999, 9.0% for 2000 and 4.4% for 2001. On December 31, 2001, the 28-day Cetes rate was 6.75%. High interest rates in Mexico may adversely affect our costs and thus our financial condition and results of operations. Political events in Mexico, including the recent transition to a new presidential administration, could affect Mexican economic policy and our operations. Mexican political events may also significantly affect our operations and the performance of Mexican securities, including our securities. In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition Partido Accion Nacional (National Action Party or PAN) won the presidency. His victory ended more than 70 years of presidential rule by the Partido Revolucionario Institucional (the Institutional Revolutionary Party or PRI). Neither the PRI nor the PAN succeeded in securing a majority in the Congress or Senate. President Fox assumed office on December 1, 2000, and to date, there have been no changes in Mexico's economic policies that would adversely affect our business. A change in economic policy, as well as currency instability, could have a material adverse effect on our business, financial condition, prospects and results of operation. 17 Item 4. Information on the Company Grupo Elektra is a corporation (sociedad anonima de capital variable) organized under the laws of the United Mexican States. Our offices are located at Edificio Parque Cuicuilco (Esmeralda), Insurgentes Sur, No. 3579, Col. Tlalpan La Joya, 14000 Mexico, D.F. OVERVIEW History Grupo Elektra was founded in 1950, and expanded over the years to become a leading retailer in Mexico with significant operations in a number of other Latin American markets. On March 10, 1999, a syndicate of banks holding a majority equity interest in one of our biggest competitors in Mexico, Grupo SyR, S.A. de C.V. ("Grupo SyR"), together with certain individual shareholders of Grupo SyR, declared Grupo Elektra the winner of an auction to acquire a 94.3% equity interest in Grupo SyR. Grupo Elektra won the auction with a bid of approximately US$77.7 million. In addition, Grupo Elektra acquired tax losses of Grupo SyR of approximately US$385.5 million, with a tax benefit of US$135 million. Corporate Reorganization--Merger After the acquisition of Grupo SyR, Grupo Elektra initiated a corporate reorganization to take advantage of certain tax loss carry-forwards reported by Grupo SyR, and to make the corporate structure more efficient. On July 30, 1999, Salinas y Rocha (the principal operating subsidiary of Grupo SyR) spun off three operating companies: On November 12, 1999, Corporacion Diprofin, S.A. de C.V. and Articulos Domesticos al Mayoreo, S.A. de C.V., subsidiaries of Grupo Elektra, merged with and into Grupo SyR. On December 8, 1999, Elektra, S.A. de C.V. and Elektrafin, S.A. de C.V., subsidiaries of Grupo Elektra, merged with and into Elektra Comercial, S.A. de C.V. and Elektrafin Comercial, S.A. de C.V., respectively. As a result of this corporate reorganization, Grupo Elektra owned 99.9% of Grupo SyR, which, at that time, had Elektra Comercial, S.A. de C.V., Elektrafin Comercial, S.A. de C.V., Salinas y Rocha and The One as its main operating companies. On December 18, 2000, Grupo Elektra merged with and into Grupo SyR. As a result, Grupo SyR, the surviving company, changed its name to Grupo Elektra, S.A. de C.V. and all of the operating companies, including Elektra Comercial, Elektrafin Comercial, Salinas y Rocha and The One were, at that time, its subsidiaries. On December 26, 2001, in a further internal reorganization, Elektra Comercial, S.A. de C.V., merged with and into Elektra del Milenio, S.A. de C.V. (formerly known as Grupo Hecali, S.A. de C.V). We expect to use Grupo SyR's tax credits over the next two to three years. Significant Subsidiaries The table below sets forth all of our direct and indirect significant subsidiaries and the percentage of equity of each subsidiary we owned directly or indirectly as of December 31, 2001. 18
Percentage ---------- Name of Company Owned - --------------- ----- % Elektra del Milenio, S.A. de C.V., a Mexican corporation .......................... 99.9% Elektrafin Comercial, S.A de C.V., a Mexican corporation .......................... 99.9% Salinas y Rocha, S.A. de C.V., a Mexican corporation .............................. 99.9% Mi Garantia Extendida, S.A. de C.V., a Mexican corporation ........................ 99.9% Importaciones Electronicas Ribesa, S.A. de C.V., a Mexican corporation ............ 99.9% Inmuebles Ardoma, S.A. de C.V., a Mexican corporation ............................. 99.9%
Our Company We are the largest specialty retailing group in terms of number of stores and revenues in Mexico and one of the largest in Latin America, with a significant presence in Peru, El Salvador, Guatemala, Honduras and the Dominican Republic. As of December 31, 2001, we operated 953 retail stores, of which 101 are located in five other countries in Latin America. We believe that through our 50 years of operations we have established a leading brand name and market position with regard to all our major products in Mexico. We have developed a standardized system for operating our Grupo Elektra stores. The system includes procedures for information technology, inventory management, transaction processing, customer relations, store administration, merchandise display and installment sales policies. As part of this effort, we have developed and maintain operating manuals outlining our procedures relating to maintenance, security and accounting. Our store operations are organized in operating areas. Our management structure provides that store managers generally report to regional managers, who report to area managers who, in turn, report to management at our headquarters in Mexico City. We operate four store formats that provide specific product mixes to well defined target markets. Our four formats are (i) traditional Elektra stores, (ii) MegaElektra stores, (iii) Salinas y Rocha stores and (iv) The One stores. The traditional Elektra and MegaElektra stores sell brand name consumer electronics, white goods, small appliances and furniture targeting low and middle income segments of the Mexican and Latin American population. The Salinas y Rocha stores offer a line of products that is similar to those offered by the Elektra stores but are oriented to a higher socioeconomic bracket, and The One stores sell fashionable clothing targeting mainly younger consumers. This segmentation of our target markets allows us to attract a varied mix of customers and we believe that it also allows us to retain such customers throughout their entire lives. We also provide consumer finance in the form of installment sales marketed to customers under the "Credimax" trademark. This is often the only financing option available to the majority of our customers. We believe that our installment sales program increases the number of potential customers and increases our existing customers' loyalty and purchasing power, thereby increasing overall sales and providing low-risk financing income, which results in increased profitability In addition, we offer a variety of additional services, including telephony services pursuant to an agreement with Unefon, money transfer services, savings account services, photo products and processing services, extended warranty services and home mortgage services. We have also introduced several new products in our stores, including mobile phone handsets and computers. See "--Additional Services." 19 OUR BUSINESS Our Target Market Our target market is the middle class of Mexico and Latin America. In Mexico, we define the middle class as the 83% of the population that controls 71% of Mexico's household income. The Mexican Association of Research Agencies has performed studies dividing the Mexican population into demographic groups based on household income as indicated below as of December 31, 2001: Percentage of Total ------------------- Demographic Group Household Income per Month Population ----------------- -------------------------- ---------- A/B More than US$7,000 5.9% C+ Between US$3,000 and US$7,000 7.6% C Between US$1,000 and US$3,000 15.0% D+ Between US$600 and US$1,000 28.8% D Between US$200 and US$600 27.3% E Under US$200 15.4% Our stronghold is the C and D groups. We believe that the "typical" customer of our Elektra stores is a person who is employed and owns his own home, but does not own a car and therefore shops in his neighborhood or at locations served by public transportation. Elektra's target market in all of the countries of Latin America is determined according to similar criteria, modified as necessary based on the specific social and economic conditions of each country. The target market for our Salinas y Rocha stores is the Mexican middle and upper-middle class, consumers who we believe have a household income between US$12,000 and US$36,000 per year and between US$36,000 and US$72,000 per year, respectively. Merchandise and Marketing Pricing Policy Our pricing policy is to offer products at cash prices that are competitive in our target market. In addition, we design the installment sales program to provide our customers with financing for our products at an affordable weekly cost. Our marketing department monitors prices at competing stores and adjusts our cash and installment sales prices as necessary to keep them competitive. In some regions, individual store managers have the flexibility to match the prices of local competitors. Customer Service We believe that our commitment to customer service is a significant factor in providing us with a loyal and expanding customer base. Grupo Elektra offers a wide range of customer services, including, among others, a guaranteed 30-day repair service for consumer electronics and appliances and a supplemental, limited warranty on all of our products other than furniture. We also operate a state-of-the-art customer service call-center that is open 365 days per year and staffed with approximately 80 agents. This call-center helps us deliver on our commitment to customer service. 20 Advertising Our marketing strategy emphasizes nine factors in attracting and retaining customers: strong brands, quality service, merchandise variety, convenient store locations, installment sales availability, low prices, product availability, customer satisfaction and functional display formats. We reinforce our marketing strategy through an aggressive advertising program utilizing television, radio and in-store promotional circulars, all of which are designed and prepared by our in-house advertising department. We vary the volume and specific media of our advertising efforts to match the size and customer profiles of our markets. Our advertising programs are designed to (i) highlight our broad selection of quality and brand name merchandise, (ii) introduce new products and (iii) publicize special promotions and events. We have supplemented our advertising strategy through the implementation of a direct marketing program using our database of customers. In July 1993, our controlling shareholders, together with an investor group, completed the acquisition of certain media assets including two national television networks, a chain of movie theater properties and a television and movie production studio. In March 1996, we acquired 35.8% of the capital stock of Comunicaciones Avanzadas, S.A. de C.V. ("CASA"), the indirect controlling shareholder of TV Azteca, one of the two national broadcasters in Mexico. On March 25, 1996, Elektra and Television Azteca (a subsidiary of TV Azteca) entered into a 10-year agreement pursuant to which Television Azteca agreed to air at least 300 advertising spots for Elektra per week, each spot for a 20 second duration, totaling 100 minutes per week or 5,200 minutes annually, during otherwise unsold airtime. We pay US$1.5 million annually for such advertising time. The agreement may not be terminated by TV Azteca, but may be terminated by Grupo Elektra, which may also transfer its rights under this Agreement to third parties. In December 1998, Elektra entered into a separate 5-year agreement pursuant to which TV Azteca agreed to air commercial spots for Elektra at discount rates based on the gross rating points assigned to the airtime chosen by Elektra for each commercial spot. At least 60% of the commercial spots must be aired during "stellar" airtime, i.e. from 7:00 p.m. to midnight, and half of this 60% (30%) of all commercial spots must be aired during "prime" airtime, i.e. from 9:00 p.m. to 11:00 p.m. The remaining 40% may be aired during airtime other than from 7:00 p.m. to midnight. Under this agreement Elektra determines each year how much airtime to purchase from TV Azteca for that particular year. Because we were able to satisfy our advertising requirements under our March 1996 agreement with TV Azteca, we purchased no airtime under this agreement in 2000 and 2001. On February 17, 2000, Elektra and TV Azteca entered into an additional one-year agreement pursuant to which TV Azteca will air commercial spots for Elektra at rates based on the rating points assigned per program. At December 31, 2001, Elektra had purchased airtime amounting to Ps.53.1 million under this contract. In May, 2001, Elektra del Milenio, S.A. de C.V., a subsidiary of ours, entered into an advertising agreement with TV Azteca pursuant to which Elektra del Milenio purchased advertising time on TV Azteca's channel 7 and channel 13 for the time period from May 2001 through December 2001. Elektra del Milenio paid a total of Ps.54.5 million, in five monthly installments, to TV Azteca for these services. We believe that our in-house advertising department provides us with valuable cost savings. Our annual expenditures for advertising were 2.1%, 1.7% and 1.6% of total revenues during 1999, 2000 and 2001, respectively. Approximately 33.0% of our advertising expenditures in 2001 was spent on television advertising, 16.0% was spent on radio advertising, and the remainder was spent on various other forms of advertising, including the printing of promotional circulars. We traditionally offer certain seasonal promotions on predetermined dates each year, including Christmas and Mother's Day. 21 We believe our relationship with TV Azteca enhances our ability to effect our promotion strategy relative to other national and regional specialty retailers and to develop brand awareness of all our brands. See Item 7. "Major Shareholders and Related Party Transactions--Related Party Transactions." Suppliers Three of Elektra's and Salinas y Rocha's suppliers, Grupo Mabe, Sony and LG Electronics, together accounted for 30% of our aggregate purchases of merchandise in the year ended December 31, 2001. Grupo Mabe accounted for 12% of merchandise, Sony accounted for 10% and LG Electronics accounted for 8%. No other supplier represented in excess of 7% of our purchases. Installment Sales Program We finance customer purchases through our Elektrafin subsidiary. Our pricing strategy is to provide customers with a choice of a cash price or an alternative installment purchase price. The effective rate of interest that we charge for our merchandise is determined at the time of an installment purchase and is a fixed rate. We believe that the weekly payments charged to our customers are competitive with those of competitors who offer similar programs. We do not provide a statement of the effective interest rate included in the installment sales price to the customer. The installment sales program is regulated by the consumer protection legislation of the countries where the respective customers are located. In Mexico, the Consumer Protection Act imposes no ceiling on the interest rate a merchant may charge a consumer in an installment sale and does not require disclosure of the effective rate of interest charged by the merchant. The following table sets forth certain information concerning the consolidated installment sales program for all of our operations:
As of and for the Year Ended December 31, ------------------------------------------------------- 1999 2000 2001 ---------- ---------- ---------- (in millions of Ps. as of December 31, 2001) Accounts receivable retail customers-net (at period end)(1) ............... 1,909.7 2,273.8 2,177.4 Installment sales as a percentage of merchandise revenues(2) .............. 66.4% 69.4% 68.1% Total number of open accounts (at period-end)(1) .......................... 812,676 923,546 1,084,236 Average balance per retail customer (Pesos) ............................... 2,349.9 2,462.0 2,008.3 Reserve for doubtful accounts after reduction for write-offs as a percentage of gross retail receivables after write-offs(3) ...... 4.8% 5.7% 5.4% Annualized weighted average cost of receivables financing(4) .............. 17.7% 15.9% 12.4%
- -------------- (1) Net of receivables securitization and net of allowance for doubtful accounts. (2) Includes mark-up on installment sales. (3) Net of receivables securitization. (4) Includes factoring and unsecured bank debt used to finance the receivables. We have provided in-store credit to our customers in our Elektra stores since 1957 and have introduced the same system in the other store formats through the years. Since our target customers are the segment of the Mexican population that typically has not had access to consumer credit, we have found the availability of an installment sales program to be an important factor in customers' purchasing decisions. We believe that the availability of an installment sales program also strengthens customer loyalty and increases overall revenues and provides us with additional income from a relatively conservative credit portfolio. 22 Credit Approval Approval for an installment purchase of electronics, appliances, white goods or furniture requires the customer to complete an application form, execute a credit contract and a promissory note, provide an official form of identification containing a photograph, a recent payroll receipt or income tax payment receipt, where an individual is self-employed, and evidence of home ownership, such as a receipt for property taxes. In addition, a second party is normally required to guarantee the promissory note if the customer does not meet the applicable financial requirements or does not own a home. We investigate the customer's and second party's credit prior to delivering the merchandise. Generally, we will not grant the customer credit if the weekly payments would be in excess of 20% of the customer's weekly gross income, or 12.5% in the case of a purchase at The One. A regional manager must approve installment sales where the amount being financed is in excess of Ps.5,500 and an area manager must approve installment sales where the amount being financed is in excess of Ps.9,000. Since there is no credit bureau in Mexico that reports on consumer credit (other than on more affluent consumers with credit cards), an employee personally visits the customer's residence to confirm the accuracy of the credit application. Although these policies and procedures are generally applied throughout our retail sales network, store managers and credit managers have the discretion to deviate, within certain limits, from these policies when they find it is appropriate. The verification period usually takes less than 24 hours. If approved for credit, the customer makes weekly payments in cash at the Grupo Elektra store where he made the purchase. Due to the lack of widespread telephone service among our customers, we personally visit many of our credit customers. We have processed and carried out investigations on over four million credit applications since 1993, creating a valuable computerized database of information on our customers. Installment sales on products sold through our stores are documented by credit contracts and fixed-term promissory notes with fixed weekly payments and stated interest, if any. These promissory notes provide for a penalty interest rate in the event that payments are not made when due. Such penalty interest is computed daily on the past due payments until the payments are current. Collection The collection practices and repossession procedures we use in our operations in Mexico are regulated under the Mexican Commercial Code, the Consumer Protection Act and the Mexican Civil Code. In Latin America, we are regulated by each country's commercial, civil and consumer protection laws and regulations. Our collection operations are implemented and monitored at the individual store level. Each store has an installment sales manager who, under the regional manager's supervision, is responsible for extending credit and collecting that store's outstanding accounts in accordance with corporate guidelines. Our accounting policy is to record five percent of the value of the cash price of the merchandise sold pursuant to our installment sales program, plus the mark-up, less the downpayment, if any, as a provision for doubtful accounts. We write off all the outstanding balances of accounts receivable once the amount past due becomes equal to 13 weekly payments but we continue collection efforts after writing off accounts receivable. Information Systems We have developed in-house a state-of-the-art point-of-sale information system, which allows centralized real time seamless management of our inventory. Our management information systems utilize point-of-sale scanners at individual stores to generate real-time information on sales, gross margins, inventory tracking, replacement requirements, merchandise mix, expenses and current versus historical performance. In addition, we use a system which provides real-time satellite communication between individual stores and our headquarters, which has improved the speed and efficiency with which merchandise is delivered from the distribution centers to the stores. 23 This system facilitates the flow of information between our stores and from our stores to our headquarters, thereby improving distribution of merchandise and facilitating the expansion of our installment sales operations. We are continuously designing new systems and improving existing systems with an in-house team of approximately 300 software engineers. In addition to point-of-sale systems, we are making a significant effort to improve distribution and logistics systems. These systems allow us to efficiently manage our distribution systems as well as the logistics and fulfillment of our store merchandise requirements. We have also established electronic data interchanges with the vast majority of our major suppliers to facilitate replenishment of inventory. Capital expenditures for information systems were Ps.83.8 million (US$12.4 million) in 1999, Ps.325.7 million (US$32.4 million) in 2000 and Ps.78.0 million (US$8.5 million) in 2001. Seasonality For a discussion of the seasonal fluctuations in our sales, see Item 5. "Operating and Financial Review and Prospects--Seasonality of Sales." Employees As of December 31, 2001, we employed approximately 18,235 people on a full-time basis in our operations. We employed 7,121 employers in our stores, 5,118 in our credit and collections operations and 5,996 in our corporate and administrative divisions. None of our operating companies has any employees directly, as personnel services are provided by our other subsidiaries. We employ part-time employees to meet seasonal needs as necessary. See also Item 6. "Directors, Senior Management and Employees--Employees." Each employee's compensation package is comprised of a fixed salary and commission, based on company profit, operation volume and personal performance. If the employee does not meet the minimum personal performance standard, the employee receives only a fixed salary. Newer employees, during the first three months of their employment, usually receive only their fixed salary. After three months, most employees surpass the minimum personal performance standards and receive compensation based on performance in addition to their fixed salary. On average, an employee's fixed salary is approximately 35% of his total compensation, with the remaining 65% of the compensation based on a variable scheme. This structure applies to salespeople, collectors and investigators. There is no limit to the amount that an employee may receive as variable compensation. Credit, store, regional and area managers are compensated by a combination of a fixed salary and performance bonuses for each business unit they manage. The performance bonus that a manager can receive from each unit is capped. Administrative personnel and the executive level employees are evaluated each trimester based on pre-established financial and operational goals, and based on the results, receive a performance bonus. On average, the fixed salary of an employee at this level represents approximately 65% of their total compensation, and the bonus represents the remaining 35%. This compensation program has contributed to the successful implementation of our business strategies, and our successful employees receive a compensation package well above the market average. In addition, we are implementing procedures that we believe will help us to more efficiently monitor the performance of our employees and more accurately apply our compensation structure. We recruit employees at high schools and universities and through advertisements at each of our stores. Our policy is to hire store employees from within the local community where the store is located to offer better customer service. 24 Training of Personnel We consider the training of our staff a high priority to ensure the highest levels of customer service. We recognize that the success of our retail operations ultimately depends in large measure on the level of service provided by its personnel. Every employee, from a cashier to a division manager, receives a description of his or her responsibilities and on-going training to help them develop the professional and personal characteristics necessary to provide Elektra's customers with the highest level of service. Employees are regularly briefed on the performance of their store and our operations as a whole. Since 1997, we have trained more than 70,000 employees at Elektra University, our in-house school of excellence, which includes model Elektra, Salinas y Rocha, Bodega de Remates and The One stores and offers over 120 educational programs. Elektra University also provides employees with skills training designed to train new employees and to keep current employees informed of changes and modifications to our operating procedures, as well as to demonstrate new products. New store employees generally receive two weeks of training at Elektra University prior to assuming responsibilities, and new store managers and credit managers, as well as new sales and credit regional managers, receive one month on average of training at Elektra University. Trademarks Our trademarks, including "Elektra", "MegaElektra", "Salinas y Rocha" and "The One", are registered with the Mexican Institute of Intellectual Property of the Ministry of Commerce and Industrial Development. We continue to invest in strengthening the protection of our trademarks through registration with the appropriate authorities in each country where we do business. In addition, we have an ongoing program in all countries in which we have businesses to protect our brand names against piracy. Capital Expenditures and Divestitures Capital Expenditures Capital expenditures in 2001, 2000 and 1999 were Ps.610.0 million, Ps.461.1 million and Ps.520.8 million, respectively. All were financed from both bank debt and resources provided by our operations. Our principal capital expenditures during 2001, 2000 and 1999 consisted of investments in stores, computers, machinery, fixtures and automobiles. Our capital expenditures are expected to be approximately US$75 million for 2002. Projected capital expenditures include the cost of opening new stores, expanding existing stores, enlarging our distribution network and investing in technology and systems. Our Strategy We expect to further expand our sales and increase our profitability by capitalizing on our position as a leading distributor of electronics, basic household goods, clothing and services in Mexico and elsewhere in Latin America and by leveraging our distribution network and customer base to offer new financial services and launch new ventures. Key elements of our strategy include: Mass Market Focus. We provide affordable goods and services to our target market, which is young and growing and includes the majority of the population in Mexico and those other countries where we operate. The Mexican middle class, which we have served for the past 50 years, is made up of 78 million Mexicans. We primarily target young customers, who are establishing new households and are relying on Elektra for their furniture, consumer electronics, appliances and white goods. 25 Growth Strategy. We believe that with 953 stores as of the end of 2001, we have reached the size and market exposure necessary to establish our leadership in the specialty retail sector in Mexico and in the countries of Latin America where we have a presence. In this regard, we expect to make a number of store closures in the future and are focusing on a qualitative growth approach. The keys to our growth strategy include: o Investment in Technology. We will continue to develop information and merchandise management systems that will allow us to achieve even more efficient management of our high-volume operations and to take full advantage of the satellite communications network that links most of our stores. As part of these efforts, we are negotiating to enter into an agreement with Manugistics, a global leader in intelligent solutions for supply chain management, under which Manugistics would implement its inventory forecasting system in our stores. o Investment in our Employees. Both in our stores and through our state-of-the-art-training center, Elektra University, which offers actual store environments and multi-media computer equipment, we intend to continue to emphasize the individual responsibility of our employees while providing them with extensive training in our corporate standards of excellence. We also intend to continue to motivate our employees with career advancement opportunities and with cash bonuses, incentive programs, public recognition and a company-wide stock option program. We firmly believe that our workforce is an essential element in the future success of our business. o Exploiting the Benefits of Our Extensive Store Network. We intend to continue to exploit the benefits of our extensive store network with the introduction of new products and services. We develop products and services that we believe will best capitalize on our current retail and consumer finance competencies, while providing benefits to customers and increasing traffic in our stores. International Growth. In 1997, we began to operate stores outside of Mexico. As of December 31, 2001, we operated 101 MegaElektra stores in El Salvador, Guatemala, Honduras, Peru and the Dominican Republic. Elektra follows a "cookie-cutter" strategy through which it transports its store formats and marketing strategies to countries that have similar demographics to those of Mexico. As of December 31, 2001, international operations represented approximately 6.1% of our consolidated revenues. We intend to phase out or sell our operations in the Dominican Republic during 2002 and are considering phasing out our operations in El Salvador. In addition, we have already discontinued our credit operations in our stores in the Dominican Republic and El Salvador. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Operations in Latin America." E-catalog. We have in the past pursued certain opportunities to sell our products over the internet. We believe that internet sales are a natural extension of our existing "brick & mortar" business units. Our e-commerce efforts have focused on the same product lines as those found in our stores. Currently, the only internet business that we engage in is our e-catalog business through which our customers can order our products from our "virtual store" through our on-line catalog. We believe that our e-catalog, if successful, will allow for more breadth within the existing product lines. Todito Agreement. On May 9, 2000, we signed a five-year strategic alliance with Todito.com, an internet portal and marketplace for North American Spanish-speakers. Through our indirect shareholding in TV Azteca, we currently own 9.1% of Todito, and as part of the alliance, we were also granted options to acquire up to 3% of Todito's capital stock over an eighteen-month period. The agreement covers the establishment of Todito Internet kiosks in our stores, reciprocal on-line promotion, as well as bilateral e-commerce support. The kiosks sell low-cost computers and web appliances packaged with a Todito Internet connection service. Qualified customers may purchase computer/Internet Service Provider/education packages 26 through our consumer credit program. As of December 2001, we expanded Todito Internet kiosks to approximately 640 Elektra Stores. Customer Loyalty. We want to attract young Latin American consumers with affordable products at Elektra, Salinas y Rocha and The One and, as they mature and their preferences and incomes change, retain their loyalty through the whole store network. In addition to providing credit to support the purchasing habits of our target market, we have developed loyalty programs, such as "cliente amigo", which are aimed at rewarding frequent users of our money transfer services and encouraging future use of such services. Investment in Advertising and Publicity. We invest in advertising and publicity to achieve further consumer recognition and deeper market penetration, in particular, through television advertising on TV Azteca, our affiliate. Branding. We have implemented a program called "Building Strong Brands", which focuses on enhancing our brand names. The program consists of several strategies. One such strategy is developing individual brand philosophies and concepts that underline our core values (closeness to the consumer, loyalty, trendiness and trust-worthiness). Our advertising campaign has been redesigned to depart from our traditional focus on low prices and is now stressing consumer value. Finally, we have trained our top 100 executives to better understand the importance of "branding." We believe that stronger brands will result in the customer's willingness to pay a premium for our products and thus higher margins for our company. Enhancement of Consumer Financing Opportunities. We intend to further emphasize installment sales to increase the number of our potential customers and the purchasing power of those customers, and to effectively manage our installment sales program in order to maintain the profitability and quality of our credit portfolio. We are considering additional opportunities in the finance area that permit us to leverage our customer base, our store network and our consumer finance competencies. We recently entered into a strategic alliance with Banca Quadrum, a Mexican financial institution, to market home mortgages financed by a Mexican government program through our network of Elektra stores. Customers will be able to build a credit history, complete their credit applications and make mortgage payments at Elektra stores through our "Credimax" program. We believe that this alliance will capitalize on our experience in credit approvals and collection efforts while leveraging our extensive consumer base. However, we can give no assurance that this or other projects will proceed and/or succeed. 27 ELEKTRA Stores In Mexico, we operate (i) 238 "traditional" Elektra stores, 61 of which are operated under our "Bodega de Remates" outlet format, and (ii) 391 "MegaElektra" superstores, in which we offer a broad range of internationally-recognized brand name consumer electronics, small appliances, white goods and household furniture. In Peru, El Salvador, Honduras, Guatemala and the Dominican Republic, we currently operate 101 MegaElektra superstores. Our traditional Elektra stores have an average size of 4,900 square feet. In 1992, we introduced our MegaElektra superstore format. The MegaElektra stores have an average size of approximately 9,400 square feet. The MegaElektra format allows us to increase our on-site inventory levels, increase the amount of floor space dedicated to our higher margin furniture product line, take advantage of certain economies of scale and lower our out-of-stock position. We have expanded the size of our newer traditional stores to increase the number of items (Stock Keeping Units or "SKUs") and the amount of furniture in those stores. Each of the MegaElektra stores offers approximately 505 SKUs, while each traditional Elektra store typically offers approximately 289 SKUs. Property, Plant & Equipment The following table sets forth information with respect to the value of our property, plants and equipment as of December 31, 2001.
As of and for the Year Ended December 31, 2001 ------------------------------------------------------- (in millions of Ps.) Assets under capitalized lease agreements Assets owned Category Net Book Value Net Book ------------------------ ------------------------------------------------- Value(1) Central and Mexico South America Total Total ------------- -------------- ----------- ---------- Land Ps. 901.1 Ps. 15.6 Ps. 916.7 Ps. - Buildings 704.1 23.4 727.5 - Investment in stores 620.3 95.5 715.8 - Computer equipment 340.4 21.4 361.8 223.3 Communication equipment 160.2 10.8 171.0 - Transportation equipment 165.2 6.5 171.7 - Furniture and fixtures 296.0 49.9 345.9 - Machinery and equipment 216.0 30.7 246.7 - ------------- -------------- ----------- ---------- Total Ps. 3,403.3 Ps. 253.8 Ps. 3,657.1 Ps. 223.3 ============= ============== =========== ==========
- ------------------- (1) Included in total fixed assets. 28 Merchandise and Marketing Merchandise Selection We offer our products at several different price points with the greatest inventory depth at the middle to low price levels. In addition, we sell Elektra-brand products at prices that are generally lower than the internationally-recognized brand name products that we sell in the same product category. Consumer electronics, which consist of video and audio equipment, as well as pagers, constitute our leading product category. We purchase the products that we sell from various domestic and international suppliers. Purchasing An important element of our marketing strategy is our ability to offer a wide selection of brand name products to our customers. We currently have a network of approximately 316 suppliers for our electronics, appliances and furniture products. Approximately 3.5% of these products are imported directly. We have developed strong relationships with both the world's major suppliers of electronics and household appliances and well-established local manufacturers of furniture and household goods. We always maintain an offering of our product lines through a variety of vendors. Customer Service Among the customer services we offer is a guaranteed 30-day repair service for our consumer electronics and appliances. Under this program, if a product cannot be repaired within 30 days, we provide the customer with a replacement product until the original product has been repaired. During the period of repair, payments and interest on the product are suspended. We also supplement the manufacturer's warranty with a limited warranty that provides a minimum of 12 months of warranty coverage on all of our products except furniture (which carries a 90-day warranty on materials and workmanship) and 18 months of warranty coverage on most televisions and major appliances. See "--Information on the Company--Additional Services--Extended Warranties." During 2001, we sold 538,052 million extended warranty policies. We also offer a 30-day refund and exchange policy on all of our products and operate a state-of-the-art customer service call center in Mexico that allows us to respond to customer inquiries and needs. Installment Sales Program Credit Sales Elektra customers can choose to pay for merchandise on a weekly basis for a period ranging from 13 to 53 weeks. Elektra's total credit sales in 2001 represented 68.6% of our consolidated merchandise revenues. As of December 31, 2001, 53-week plan sales represented 37.4%, the 39-week plan sales represented 39.0%, the 26-week plan sales represented 20.0% and the 13-week term plan sales represented 3.6% of the total amount of Elektra's installment sales. During the third and fourth quarters of 2001, Elektra promoted the 53-week plan (which has a higher rate of mark-up or interest than our other plans) in an effort to increase our margins. As a result, the average payment term was 46 weeks as of the end of 2001. We expect this trend to continue during the first half of 2002. 29 Collection Elektra currently has approximately 3,000 employees dedicated to installment sales collections and investigations related to purchases of merchandise at its Elektra stores. Customers make their weekly installment payments in person at the Elektra stores, which are open seven days a week, from 9:00 a.m. to 9:00 p.m. In the event that the customer misses two consecutive weekly installment payments, our collectors visit the customer in person at least once a week. If total arrearages exceed eight weekly payments, an installment sales supervisor will visit the customer weekly. When the customer's arrearages exceed 13 weekly payments, the matter is referred to our legal department, which sends an attorney to the customer's house or place of business to attempt to settle the collection matter. In the event that a customer's total arrearages exceed 16 weekly payments, we may institute judicial procedures to settle the claim by obtaining a court order for attachment of the customer's assets. However, our policy is to attempt first to reach an agreement with the customer whereby the customer resumes payment or the merchandise is returned. Returned merchandise is refurbished and transferred, together with floor models withdrawn from display, to Bodega de Remates, our chain of outlet stores created especially for this purpose. ELEKTRA IN MEXICO Stores At December 31, 2001, we operated a total of 629 Elektra stores in Mexico, including 391 MegaElektra superstores and 238 traditional Elektra stores (61 of which are operated as Bodega de Remates outlet stores). As of December 31, 2001, the total store area of Elektra stores in Mexico was 4,873,586 square feet, which reflects a 6.6% compound annual growth rate since 1997. At December 31, 2001, we owned 75 Elektra stores and leased 554 Elektra stores under one-year leases that typically allow us to renew such leases automatically for up to nine successive years. The following table sets forth certain statistics for traditional Elektra and MegaElektra stores in Mexico as of December 31, 2001:
Traditional Bodega de Elektra Remates Mega Total ----------- ---------- ---------- --------- Number of stores ........................................ 177 61 391 629 Aggregate store area (square feet) ...................... 843,858 376,199 3,653,530 4,873,587 Number of store employees(1) ............................ 1,654 271 2,925 4,850
- ------------- (1) Does not include corporate or credit and collections staff. 30 Location We operate Elektra stores in 31 Mexican states and the Federal District. The following table sets forth information with respect to the distribution of our traditional and MegaElektra stores in Mexico as of December 31, 2001:
Number of Stores Store Area (square feet)(1) ------------------------------------------- --------------------------------------------- % of all Stores -------- % of Total Zone Traditional BdeR Mega Tradit BdeR Mega Sales Areas - -------------------- ----------- ---- ---- -------- ------- ------- --------- ----------- Mexico City(2) ..... 49 23 100 27.3 229,787 157,391 969,443 27.8 Metro-North-Bajio... 11 5 26 6.7 64,487 28,826 215,450 6.3 Metro-South-Center.. 6 3 29 6.0 41,516 27,426 260,906 6.8 Northeast Frontier.. 27 6 58 14.5 114,485 26,748 577,774 14.8 Pacific Frontier ... 20 7 59 13.7 106,875 35,951 589,141 15.0 West-South ......... 38 11 58 17.0 160,684 73,819 527,119 15.6 Southeast .......... 26 6 61 14.8 126,024 26,038 513,697 13.7 Total .............. 177 61 391 100.0% 843,858 376,199 3,653,530 100.0% === == === ====== ======= ======= ========= ======
- -------------- (1) Based on total surface area of each store. (2) Includes the metropolitan area. Expansion Plan We anticipate opening approximately 40 additional MegaElektra stores in Mexico in 2002. In addition, we intend to convert all of our existing traditional Elektra stores in Mexico to the MegaElektra superstore format either by renovation or relocation within the next two years. The average cost of opening a new MegaElektra store in Mexico is approximately Ps.2.9 million, excluding the cost of inventory and real estate, while the cost of converting a traditional existing store into the MegaElektra format varies depending upon available space and required renovation and has in the past averaged approximately Ps.1.4 million. The average time required to set up a new store is approximately three months. The traditional Elektra stores and MegaElektra stores utilize standardized modular racking, tiles, lighting and equipment. The modular design of our stores allows us to quickly and inexpensively close under-performing stores and move the furniture, fixtures and inventory from such stores to new locations. Elektra stores are typically located in Mexico's middle class neighborhoods. Criteria for the location of an Elektra store usually include pedestrian traffic of at least 200 persons per hour during peak hours for a traditional Elektra store and 250 persons per hour during peak hours for a MegaElektra store. We also consider automobile traffic in selecting store sites, although we believe that the majority of Elektra consumers walk to our stores or travel to the store by public transportation. We have in the past located our new stores primarily in the major metropolitan areas of Mexico. However, as the Mexican population outside the major metropolitan areas continues to increase rapidly, we believe that it will become increasingly important to locate stores in small-to-medium sized population areas of the country. 31 We continuously evaluate our Elektra stores and close those stores that do not meet performance targets. We generally negotiate provisions in our leases for Elektra store locations that permit us to terminate our leases on three months' notice. The following table provides a history of our traditional and MegaElektra stores in Mexico since 1998:
1998 1999 2000 2001 ---- ---- ---- ---- Traditional Stores: Number of stores open at beginning of period .............. 254 235 232 232 Number of new stores opened ............................... 2 5 2 8 Number of stores converted to MegaElektra stores .......... 19 6 0 0 Number of stores closed ................................... (2) (2) (2) (2) Number of Traditional stores open at end of period ........ 235 232 232 238 MegaElektra Stores: Number of stores open at beginning of period .............. 272 346 366 366 Number of new stores opened ............................... 56 16 0 28 Number of stores opened by conversion of Traditional stores 19 6 0 0 Number of stores closed ................................... (1) (2) 0 (3) Number of MegaElektra stores open at end of period ........ 346 366 366 391 Traditional Stores and MegaElektra Stores: Number of stores open at beginning of period .............. 526 581 598 598 Total number of stores open at end of period .............. 581 598 598 629
Store Operations Our store operations in Mexico are organized into six operating areas. The operating areas contain four to five geographical regions, with each region consisting of nine to fifteen stores. Our management structure provides that store managers generally report to regional managers, who report to area managers who, in turn, report to management at our headquarters in Mexico City. Elektra stores in Mexico are open every day of the year, from 9:00 a.m. to 9:00 p.m. A typical, traditional Elektra store is staffed by a full-time manager, one installment sales manager, one credit investigator and two collectors and, on average, five sales and support personnel. A typical MegaElektra store has the same staff composition except that the number of sales and support employees ranges from 15 to 20, depending on the size of the store. We centralize the investigation and collection functions of our Elektra operations within a city when doing so is more efficient than handling such function at the individual store level. In Mexico City and Guadalajara, the credit investigation function has been centralized and is performed by a staff of 51 and 11 investigators, respectively. Our sales personnel operate on a sales commission basis, and store managers typically receive quarterly bonuses based on the profitability of the stores. Credit investigators and collectors are compensated based on the performance of their credit portfolios. Merchandise and Marketing Our centralized merchandising and buying group for Mexico consists of a staff of seven buyers. Our buyers are assisted by a sophisticated management information system that provides them with current inventory, price and unit sales information by SKU, thus allowing us to react quickly to market changes and to avoid inventory shortages or surpluses. We believe that our centralized purchasing system enhances our buying power and increases our ability to obtain favorable pricing and delivery terms from our suppliers. 32 We currently distribute products to our Elektra stores from a 215,278 square foot warehouse and distribution facility located in Mexico City with satellite distribution centers in Guadalajara (50,590 sq. ft.), Monterrey (39,826 sq. ft.), Tijuana (24,219 sq. ft.), and Chihuahua (21,527 sq. ft.), and a support facility in Laredo, Texas. Deliveries to Elektra stores are made primarily by contract trucking carriers, although Grupo Elektra has a small number of trucks at each distribution center for movement of merchandise between stores and for special delivery requirements. Management believes that our distribution centers and support facilities significantly reduce freight costs and delivery time by providing warehouse space relatively close to our stores and that our distribution network will be a key element of our e-catalog business. Quality Control We operate quality control laboratories at our distribution centers, conducting random testing of products and approving new products as part of our on-going effort to ensure the quality of the products we sell. Installment Sales Program The following table sets forth certain information concerning the installment sales program of Elektra's operations in Mexico:
As of and for the year ended December 31, --------------------------------------------------- 1999 2000 2001 ----------- ----------- ----------- (in millions of Ps. as of December 31, 2001) Accounts receivable retail customers - net (at period end)(1) .................................. Ps. 1,227.4 Ps. 1,462.3 Ps. 1,551.7 Installment sales as a percentage of merchandise revenues(2) ............................. 67.0% 70.8% 68.6% Total number of open accounts (at period end) (1) ......... 383,258 464,475 681,692 Average balance per retail customer (Pesos) ............... 3,202.6 3,148.3 2,276.2 Reserve for doubtful accounts after reduction for write-offs as a percentage of gross retail receivables after write-offs(3) .............. 4.3% 6.2% 5.5% Annualized weighted average cost of receivables financing(4) ............................ 16.9% 15.0% 12.1% - --------------------- (1) Net of receivables securitization and net of allowance for doubtful accounts. (2) Includes mark-up on installments. (3) Net of receivables securitization. (4) Includes factoring and unsecured bank debt used to finance the receivables.
Competition Our electronics, appliance and furniture retail business is highly competitive. Including cash and credit operations, we believe that Elektra's margins are among the highest in the retail sector of Mexico. Earnings primarily depend upon the maintenance of high per-store sales volumes, efficient product purchasing and distribution and cost-effective store operations. The Mexican retail sector is highly fragmented and consumers are served by a number of formats, including traditional formats such as local, independent retail stores, modern formats such as retail chains and department stores, and informal outlets such as street vendors and markets. Management believes, however, that no competing business has the combination of a specialization in consumer electronics, major appliances and household furniture, national coverage, availability of an installment sales program and experience selling to the middle class that we possess. In 33 addition, department stores and discount clubs that carry the same merchandise lines generally offer less product variety than we do. Certain international retailers have established joint ventures with Mexican retailers and have opened stores in Mexico. We expect that other international retailers will do so in the future. We also compete against a significant informal market for our products. We believe that our brand recognition, goodwill in our name, 50 years of experience, extended warranties, repair service and credit availability provide us with a competitive advantage over the lower-priced goods sold in this informal market. On March 10, 1999, we were declared the winner of an auction to acquire a 94.3% equity interest in our most significant competitor in Mexico, Grupo SyR. See "--Grupo SyR." We continue to face strong regional competition from Singer, Viana, Coppel, Famsa, other regional chains and an estimated 7,000 local, independent retail stores. The following table sets forth certain information concerning what we believe are our primary competitors in Mexico. Estimated Primary Region Number of Store of Operations Stores(1) - ------------------------- --------------------------- -------------- Elektra Nation-wide 800(2) Singer Nation-wide 157 Famsa Northeast 201 Coppel Northwest 115 Ceteco Southeast 38 Independent retail stores Nation-wide Approx. 7,000 - --------------- (1) Estimates of Grupo Elektra, as of December 31, 2001. (2) Includes Elektra and Salinas y Rocha stores. With 172 Elektra stores (including Bodega de Remates stores) in the Mexico City metropolitan area, we believe that we are a leading specialty retailer of consumer electronics, small appliances, white goods and household furniture in that region. In Mexico City, we consider Singer to be our major competitor in the electronics, small appliances and white goods retail market. Except for Singer, in regions of the country outside Mexico City, most of our formal competitors are regional and local department and specialty stores. We believe that, through our Elektra operations, we are well-positioned to compete in all of our markets in Mexico. Employees As of December 31, 2001, we employed approximately 4,850 people (excluding corporate and credit staff), on a full-time basis at our Elektra operations in Mexico. Approximately 25% of our employees in our Elektra stores worked in Mexico City and the remaining employees were located throughout the rest of the country. Approximately 20% of our full-time employees in our Elektra stores were represented by one of five unions. We have a collective bargaining contract with each of our unions. Mexican labor laws require union contracts to be reviewed and renegotiated yearly, with respect to salaries, and every other year with respect to fringe benefits. The average salary increase contained in each of the new collective bargaining agreements during the past year for the union employees referred to above was above the average inflation rate in Mexico. We believe our relations with the employees involved in Elektra and Elektrafin operations are good; we have not experienced a strike since 1983. 34 Portfolio Securitization Program We utilize Elektrafin, a subsidiary of Grupo Elektra, to securitize our receivables. In July 1997, we completed our initial securitization of Ps.625 million (nominal), and in December 1997, we completed a second offering of Ps.241.3 million (nominal) in Ordinary Participation Certificates ("CPOs") on the Mexican Stock Exchange. These two programs have been fully paid off. In April 1998, we launched a Ps.793.3 million (nominal) four-year revolving securitization program, the first of its kind in Mexico. The yield is based on the interbank rate (Tasa de Interes Interbancaria de Equilibrio) or "TIIE", plus 225 basis points. In December 1998, we launched our second two-year revolving securitization of receivables in an offering of Ps.200 million (nominal) with a yield equal to TIIE, plus 125 basis points. These two programs have been fully paid as of December 2001. In September 1999, we issued a three-year revolving securitization of receivables in an offering of Ps.200 million (nominal), at a rate equal to the higher of TIIE plus 150 basis points or a yield indexed to the UDI (inflation indexed units of accounts) over 28 days. This program was fully paid off in March 2002. In April 2000, we launched our sixth securitization program for Ps.127 million UDIs, equivalent to Ps.350.8 million (nominal). This issue has a total term of four years, three revolving and one of amortization, and yields a real rate of interest of 8.35%. per annum, Nacional Financiera, S.N.C., Fiduciary division, acted as the fiduciary issuer of the CPOs. This program is currently undergoing its amortization phase. In March 2001, we completed our seventh securitization program for Ps.650 million (nominal). This issue has a total term of three years, two revolving and one of amortization, and yields a real rate of interest of TIIE plus 200 basis points per annum. In July 2001, we launched our eighth securitization program for Ps.550 million (nominal) with a term of four years, three revolving years and one of amortization, which yields a real rate of interest of TIIE plus 70 basis points per annum. In February 2002 we launched our ninth securitization program for Ps.750 million (nominal) with a term of four years, three revolving years and one of amortization. This program yields a real rate of interest equal to TIIE plus 65 basis points per annum. Our first five revolving securitization programs during their redemption period were rated "AAA" by Fitch IBCA, and our last four programs were rated "AAA" at the commencement of their issuance. Our securitization programs provide attractive financing alternatives and the proceeds are used primarily to pay short-term debt and to finance our working capital. Our securitization programs are arranged on a non-recourse basis. Maintenance of the programs and reinvestment of collection proceeds in new receivables requires compliance with certain overcollateralization, quality and receivables performance standards. See Item 5. "Operating and Financial Review and Prospects--Liquidity and Capital Resources." In June 2002, we launched a Ps.500.9 million (nominal) four-year revolving securitization program. This program has a term of four years, three revolving years and one year of amortization, which yields a real rate of interest of TIIE plus 90 basis points per annum. In the future, we may enter into additional securitization programs. ELEKTRA IN LATIN AMERICA General In April 1997, we began our electronics, appliances and furniture retail operations in Latin America through the opening of four stores in Guatemala. This was the first step of our expansion process outside Mexico and into Guatemala, El Salvador, Honduras, the Dominican Republic and Peru. 35 At December 31, 2001, we operated 101 international Elektra stores, reflecting a decrease in stores of 1.0% since December 31, 2000. The total store area of these Elektra stores was in excess of 861,059 square feet. We owned five of these Elektra stores and leased the others under mid-term leases that typically contain terms from five to ten years. We believe that our strengths in management, credit and marketing expertise, technological infrastructure and merchandising will enable us to compete successfully in various markets in Latin America and, over time, become a leading competitor in the region. For our expansion into Latin America, we have established in each of the five foreign countries in which we operate a corporation organized under the laws of such country. These corporations are owned by Elektra Centroamerica, S.A. de C.V., a subsidiary of Grupo Elektra, which is organized under the laws of Mexico. Our Latin American retail operations headquarters are currently located in San Salvador, the capital of El Salvador. Target Market The target market for our international retail operations is similar to the target market for our domestic retail operations. The profile of the "typical" customer for our international operations is that of a person who is employed or is self-employed and owns his or her home, but does not own a car and therefore shops in his neighborhood or at locations served by public transportation. The populations in the Latin America countries (other than Mexico) in which we currently operate--Guatemala, El Salvador, Honduras, the Dominican Republic and Peru--are young. According to the Latin American and Caribbean Demographic Center, approximately 50% of the population of these countries is less than 24 years of age. We estimate that over 70% of the population of these countries is in the middle class, as we define it, with our stronghold being represented by the lower middle class. Stores The following table sets forth certain operating statistics for our Latin America Elektra stores (outside Mexico) as of December 31, 2001:
Dominican Guatemala El Salvador Honduras Republic Peru --------- ----------- -------- --------- ------- Number of stores .................... 26 13 16 23 23 Aggregate store area (square feet) .. 230,617 117,058 137,713 192,265 183,406 Number of store employees(1) ........ 253 75 184 169 282 Average selling space (square feet).. 8,870 9,004 8,607 8,359 7,974
- ----------------- (1) Exclusive of corporate and collections staff. As of December 31, 2001, Elektra had 101 MegaElektra stores and five distribution centers outside of Mexico, one distribution center in each of the foreign countries in which we operate (El Salvador, Guatemala, Honduras, Peru and the Dominican Republic). Of these stores, 96 are leased. Expansion Plan In 2002, we anticipate no store openings in the Latin American countries in which we operate. We plan to phase out or sell our operations in the Dominican Republic in 2002 and are considering phasing out our 36 operations in El Salvador. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Operations in Latin America." The average cost of opening a new international Elektra store has been approximately Ps.3.1 million, excluding the cost of inventory and real estate. The average time required to set up a new store is approximately three months. Store Operations The management structure for our international operations provides that store managers report directly to management at our headquarters, which is usually located in each country's capital (with the exception of Honduras, where our headquarters are located in the town of San Pedro Sula instead of the capital, Tegucigalpa). Our international Elektra stores are open every day of the year, except New Year's Day, usually from 8 a.m. to 8 p.m. A typical international Elektra store has the same staff composition as a MegaElektra store in Mexico. See "--Elektra--Elektra in Mexico--Store Operations." Merchandise and Marketing Purchasing and Distribution The centralized merchandising and buying group for our international retail operations consists of a staff of five buyers who purchase substantially all electronics, appliances and household furniture merchandise for the Elektra stores outside of Mexico. All electronics and appliance merchandise is purchased in each country from local suppliers of brand name consumer electronics and from suppliers of major appliances such as Mabe, Vitro, Tappan, Atlas and Bosch. Household furniture, such as living room furniture, complete kitchen units, dressers and mattresses are purchased in each country from local suppliers, whereas bedroom furniture, dinettes, tables and chairs are generally purchased from Mexican suppliers. We currently distribute products to our international Elektra stores from a leased central warehouse and distribution facility located in each country. Deliveries to Elektra stores are made primarily by contract trucking carriers. The following table sets forth certain information regarding the warehouses from which Grupo Elektra distributes products to its international Elektra stores: Country Warehouse Location (City) Warehouse Area (Sq. feet) - ----------- ------------------------- ------------------------- Guatemala Guatemala City 53,819.5 El Salvador San Salvador 21,527.8 Honduras San Pedro Sula 26,909.8 Dominican Republic Santo Domingo 64,583.5 Peru Lima 76,746.7 The computerized management information system we developed for our Mexican Elektra operations has been adapted to meet the various subtle differences in terminology in each country as well as the unique tax requirements of each country. The system provides real-time satellite communication among the individual Elektra stores, each country's company headquarters, our Latin America operations headquarters (located in San Salvador) and our main headquarters in Mexico City. 37 Our policies for our international retail operations with regard to pricing, customer service and advertising are substantially the same as those applied to our operations in Mexico. See "--Elektra--Elektra in Mexico--Merchandise and Marketing." One difference, however, is that every international Grupo Elektra store has an Express Service stand that offers the customer a fast repair service for small appliances and consumer electronics. Installment Sales Program The following table sets forth certain information concerning our installment sales program for our Latin America operations:
As of and for the year ended December 31, 2001 ------------------------------------------------------------- (in millions of Ps. as of December 31, 2001) El Dominican Guatemala Salvador Honduras Republic Peru --------- -------- -------- --------- ------- Accounts receivable retail customers-net (at period end) ........ Ps.74.1 Ps.9.9 Ps.31.0 Ps.18.4 Ps.99.4 Installment sales as a percentage of merchandise revenues(1) .... 66.3% 57.4% 71.6% 71.5% 81.6% Total number of open accounts (at period-end) ................... 38,007 7,599 21,471 9,064 54,839 Average balance per retail customer (in Pesos) .................. 1,949.0 1,306.3 1,445.0 2,030.0 1,812.4 Reserve for doubtful accounts as a percentage of gross retail receivables ................................................. 2.6% 0.0% 19.9% 11.0% 2.4% Annualized weighted average cost of receivables financing(2) .... 19.6% 13.3% 18.8% 22.5% 12.5%
- ------------- (1) Includes mark-up on installment sales. (2) Includes unsecured bank debt used to finance the receivables. Credit Sales Total credit sales in 2001 represented 72.2% of our total sales in our international operations. During the last quarter of 2001, we discontinued our credit operations in the Dominican Republic and El Salvador. Competition Our electronics, appliance and furniture retail businesses in Latin America face numerous competitors in all product categories. Earnings primarily depend on the maintenance of high per-store sales volumes, efficient product purchasing and distribution and cost-effective store operations. The retail sector throughout Latin America is fragmented and consumers are served by a number of formats, including traditional formats such as independent retail stores, modern formats such as retail chains and department stores, as well as informal outlets such as street vendors and markets. The competition from organized competitors in these regions is relatively weak. This situation provides us with an added opportunity for growth, and over the medium-term, we envision expanding our presence to other Spanish-speaking countries in Latin America. However, we face significant competition from the informal economy and parallel imports for the products we carry. We believe that our extended warranties, repair service and credit availability provide us with a competitive advantage over lower-priced goods sold in this informal market. 38 The following table sets forth certain information based on our estimates concerning our primary competitors in the five Latin American countries outside Mexico in which we operate: Country Competitor Estimated Number of Stores - ------------ ------------ -------------------------- Guatemala Curacao 35 Tropigas 13 Distelsa-Max 16 Radiovision 10 Agencias Way 37 Tirador 5 El Salvador Curacao 26 Prado 20 Tropigas 10 Omnisport 19 Honduras Curacao 24 Tropigas 13 Dominican Republic Curacao 24 Corripio 30 Ray Muebles 12 Plaza Lama 5 Peru Efe 14 Carsa 42 Curacao 30 Employees As of December 31, 2001, we employed approximately 2,020 people on a full-time basis in our international operations (including store, credit and collections and corporate and administration employees). We employ part-time employees to meet seasonal demand as necessary. None of our employees in the Latin American countries outside of Mexico in which we operate is represented by a union. We believe that our relations with these international employees have been good since inception in 1997. Grupo Elektra has never been subject to a strike by our international employees. Training We have an extensive in-house education program to train new employees, keep current employees informed of additions and modifications to our operating procedures and demonstrate new products. New store employees generally receive two weeks of training prior to assuming responsibilities, and new store managers, credit managers, sales and credit regional managers receive three months of training at the Elektra University located in Mexico City. In addition, we offer continuing education programs to our existing employees. Training consists of both product training and classes focused on the social and personal attributes important for the particular position. 39 GRUPO SyR Acquisition of Grupo SyR On March 10, 1999, a syndicate of banks holding a majority equity interest in Grupo SyR, together with certain individual shareholders of Grupo SyR, declared us the winner of an auction to acquire a 94.3% equity interest in Grupo SyR. At the time of its acquisition by Grupo Elektra, Grupo SyR was a holding company whose principal subsidiary, Salinas y Rocha, was engaged in the sale of furniture, household goods and clothing. In connection with this acquisition, we acquired tax losses of Grupo SyR of approximately US$385.5 million, with a tax effect benefit of US$135 million. Throughout the last three quarters of 1999, we consolidated the 86 traditional Salinas y Rocha stores into Grupo Elektra, sold 10 department stores to El Puerto de Liverpool, S.A. de C.V. ("Liverpool"), and converted the remaining department store into a Salinas y Rocha superstore. On December 18, 2000, Grupo Elektra merged with and into Grupo SyR, which, as the surviving entity, changed its name to Grupo Elektra, S.A. de C.V. Our management believes that the acquisition of Grupo SyR has resulted in an increase in the competitiveness and profitability of both the Elektra and Salinas y Rocha chains of stores. Since their acquisition by Grupo Elektra, the Grupo SyR operations have experienced a positive turn-around. Our management has restructured Grupo SyR by reducing costs, creating more efficient operations and introducing systems and business strategies proven in Elektra operations. Some stores and real estate have been sold, and the remaining stores have been remodeled. In addition, we have reduced the Grupo SyR workforce while imposing efficiencies by introducing store operations similar to those employed by Elektra. Finally, installment sales programs have been reintroduced, following the program used by Elektrafin. Strength of Retail Brand Name. The "Salinas y Rocha" brand name enjoys strong national recognition among Mexico's middle class. The acquired stores, which continue to operate under the Salinas y Rocha name, specialize in sales of furniture and home appliances and cater to a demographic group with more purchasing power than the traditional Elektra customers. As a result, we are increasing our penetration of a higher income sector. While Elektra has typically been associated with easy access and affordability, Salinas y Rocha is recognized as a lifestyle brand name. Opportunities for Creating New Value in Salinas y Rocha. We can successfully offer a number of our products and services in Salinas y Rocha stores, including the credit services traditionally offered at Elektra stores. We continue the conversion of Salinas y Rocha customers from the Salinas y Rocha credit system to Elektra's credit system. In addition, we will increase our television advertising efforts in order to promote products offered in Salinas y Rocha stores. As a result, management believes that the expanded variety of products offered at Salinas y Rocha stores should result in higher levels of sales and customer satisfaction. Target Market The target market of Salinas y Rocha's traditional stores is the Mexican middle and upper-middle class or consumers with household income between US$12,000 and US$36,000 per year and between US$36,000 and US$72,000 per year, respectively. Salinas y Rocha's target market is therefore more affluent and has more purchasing power than Elektra's traditional target market, the Mexican lower-middle and middle classes. The Salinas y Rocha brand name is highly recognized among the middle socioeconomic segments of the Mexican population. Regardless of the financial difficulties experienced by Grupo SyR prior to its acquisition by Grupo Elektra, the name Salinas y Rocha is still associated with broad selection, quality and accessibility. 40 Property As of December 31, 2001, Salinas y Rocha leased 77 stores and owned 13 stores. Merchandise Salinas y Rocha stores sell a combination of electronic goods, small appliances, white goods and furniture. Furniture provides larger profit margins than electronics and appliances. As a result of the fact that Salinas y Rocha stores sell a higher percentage of furniture (approximately 26% of Salinas y Rocha's total sales) relative to the percentage of furniture sold in Elektra stores (approximately 16% of Elektra's total sales), the potential consolidated gross margins for Grupo Elektra could be enhanced. Installment Sales Program Salinas y Rocha has offered in-store credit to its customers in the form of installment sales and revolving credit lines since 1936. Prior to its acquisition by Grupo Elektra, Salinas y Rocha's credit operations, unlike those of Elektra stores, involved the issuance of a Salinas y Rocha credit card, which could be used to purchase merchandise at any Salinas y Rocha store. In addition, Salinas y Rocha's credit operations were managed by regional credit centers, as opposed to the individual store supervision conducted by Elektra stores. Since we acquired Grupo SyR, Salinas y Rocha has discontinued its credit program and has implemented an installment sales program that is identical in all significant respects to the credit program conducted by Elektra stores, except that payments are made biweekly. Salinas y Rocha stores currently provide to customers a choice of a cash price or an alternative biweekly installment purchase price. Salinas y Rocha customers can choose to pay for merchandise on a biweekly basis for periods of 13, 26, 39 or 53 weeks. For the year ended December 31, 2001, Salinas y Rocha's total credit sales represented approximately 65.6% of Salinas y Rocha's total sales. As of the same date, 53-week plan sales represented 24.2%, 39-week plan sales represented 53.3%, 26-week plan sales represented 16.6% and 13 week plan sales represented 5.9% of the total amount of Salinas y Rocha's installment sales. In addition, as of the same date, 53-week receivables represented 46.2%, 39-week plan receivables represented 40.9%, 26-week receivables represented 10.7% and 13-week receivables represented 2.2% of Salinas y Rocha's installment sales receivables portfolio. The following table sets forth, as of December 31, 2001, certain information regarding Salinas y Rocha's installment sales operations under our ownership:
As and for the year ended December 31, ----------------------------------------------- 1999 2000 2001 ----------- ----------- ------------ (in millions of pesos as of December 31, 2001) Accounts receivable retail customers (at period end)(1) ........................ Ps. 211.3 Ps. 337.5 Ps. 290.5 Installment sales as a percentage of merchandise revenues(2) ................... 62.3% 63.4% 65.6% Total number of open accounts (at period end) .................................. 65,666 102,377 106,961 Average balance per retail customer (in Pesos) ................................. 3,217.2 3,296.3 2,716.1 Reserve for doubtful accounts after reduction for write-offs as a percentage of gross retail receivables before write-offs ................ 11.4% 8.2% 4.4% Annualized weighted average cost of receivables financing(3) ................... 16.9% 15.0% 12.1% - --------------- (1) Net of allowance for doubtful accounts. (2) Includes mark-up on installment sales. (3) Includes factoring and unsecured bank debt used to finance the receivables.
41 Credit Approval and Collection Prior to Grupo Elektra's acquisition of Grupo SyR, Salinas y Rocha's credit approval and collection procedures were conducted through regional credit centers, each of which was responsible for the implementation of these procedures for a number of Salinas y Rocha stores. After Grupo Elektra's acquisition of Salinas y Rocha, the operations of the regional credit centers were discontinued. Credit approval and collection procedures of Salinas y Rocha's installment sales program are now conducted by credit managers, investigators and collectors located in each Salinas y Rocha store. In addition, credit approval and collection procedures are now substantially similar to those of Elektra's installment sales program, except that Salinas y Rocha offers customers biweekly installment credit programs. See "--Elektra--Installment Sales Program--Credit Sales" and "--Collection." Employees At December 31, 2001, approximately 824 employees worked in Salinas y Rocha's operations (excluding corporate and credit staff), approximately 4.8% of which belonged to labor unions. Grupo SyR has never experienced a labor strike, and management believes that it has good employee and labor relations. During 1999, management began converting all employee compensation to the system currently utilized by Grupo Elektra, which provides for a higher percentage of performance-based compensation. In addition, we have converted all employee benefit plans to those currently provided by Grupo Elektra, including medical, life and pension benefits. THE ONE The One is our chain of clothing stores. At December 31, 2001, The One had 130 stores throughout Mexico (with an additional three Hecali Stores that we expect to convert into The One stores). Our strategy at The One is to expand our store network and support the stores with strong management, automated material handling, state-of-the-art information systems and communications, credit, substantial television advertising and selling space. Conversion of Hecali to "The One" During the second quarter of 1999, we initiated a conversion of the name and format of our Grupo Hecali, S.A. de C.V. ("Hecali") stores to "The One", a new apparel chain providing high-quality basic garments for the entire family. We originally expected to convert all Hecali stores into The One. As of the end of 2001, we had already converted 130 stores with the remaining 3 stores expected to be converted by the end of 2002. Conversion to the new format costs approximately US$100,000 per store. The One stores feature a higher quality and broader range of products within each line than Hecali stores. This change permits us to reduce the number of suppliers we deal with and lowers our inventory levels. Because the products are of a higher quality, prices at The One stores are generally higher than those at Hecali stores, and the products are expected to earn higher profit margins. The One stores have also provided us the opportunity to develop private labels. We offer financing to customers in The One stores similar to the financing provided to Hecali customers. On February 29, 2000, The One launched an Internet web-site (www.theone.com.mx), which may be accessed by customers at home or at The One stores. The web-site allows customers to place orders for The One products, for delivery to customers anywhere in Mexico. 42 Stores At December 31, 2001, there were 130 The One stores in operation (and another three Hecali stores that we expect to convert into the One Stores). At December 31, 2001 The One owned 15 stores and leased 118 stores under mid-term leases that typically contain terms from five to ten years. The One stores range in size from 1,184 to 11,281 square feet with an average 4,048 square feet of selling space. The following table sets forth certain operating statistics for The One stores as of, and for the year ended, December 31, 2001: Sales (Ps. Millions)(1) ................. 541.3 Number of stores ........................ 133 Aggregate store area (sq. ft.) .......... 538,378 Number of store employees(2) ............ 1,447 - ------------- (1) Excludes mark-up on installment sales. (2) Excludes corporate and collections staff. Location The One operates stores in 97 cities in 30 Mexican states. The following table sets forth information with respect to the distribution of The One stores in Mexico as of December 31, 2001:
Number of Stores Store Area (sq. ft.) -------------------------------- ---------------------------------- % of all % of Total Zone The One Stores The One Stores - ---------- ---------- ---------- ---------- ---------- Metropolitan .............. 17 12.8 68,975 12.8% Metro-North-Bajio ......... 6 4.5 19,138 3.6% Metro-South-Center ........ 6 4.5 28,610 5.3% Northeast Frontier ........ 18 13.5 78,275 14.5% Pacific Frontier .......... 22 16.5 92,279 17.1% West-South ................ 21 15.8 80,955 15.0% Southeast ................. 43 32.4 170,146 31.7% --------- --------- --------- --------- Total ......... 133 100% 538,378 100% ========= ========= ========= =========
Expansion Plan The One opened seven additional stores in Mexico in 2001, and closed 35 stores. We have closed 10 The One Stores during 2002 and anticipate no store openings for 2002. The average cost of opening a new The One Store is approximately Ps.2.3 million, excluding the cost of inventory and real estate. The average time required to set up a new The One store is approximately three months. The following table provides a history of The One store program as of December 31, 1999, 2000 and 2001.
1999 2000 2001 ------ ------ ------ The One Stores: Number of stores open at beginning of period .... 155 159 161 Number of new stores opened ..................... 5 3 7 Number of stores closed ......................... (1) (1) (35) --- --- --- Number of The One stores open at end of period .. 159 161 133(1) === === ===
43 - ------------- (1) Includes three Hecali Stores. Merchandise and Marketing Merchandise Selection The One stores, which average approximately 4,048 square feet of selling space, offer a broad range of basic and sports apparel and shoes for men, women and children at different price levels with the greatest inventory at the middle-to-lower price levels. The following table sets forth the approximate percentages of total retail merchandise revenues (excluding mark-up for installment sales) from each of The One's principal product lines for 1999, 2000 and 2001: Year Ended December 31, -------------------------------------- 1999 2000 2001 ------ ------ ------ Men's clothing ..................... 56.2% 50.5% 50.6% Children's clothing ................ 20.6 24.7 23.9 Ladies' clothing ................... 20.2 22.4 20.5 Other .............................. 3.0 0.3 1.6 Telephones ......................... -- 2.1 3.4 ----- ----- Total .................. 100.0% 100.0% 100.0% ===== ===== ===== Pricing Policy The policy for The One operations is to offer its products at cash prices that are competitive in its targeted markets. In addition, its installment sales plan is designed to provide its customers at The One stores with financing for the products offered at an affordable weekly cost. Purchasing and Distribution An important element of The One's marketing strategy is its ability to offer a wide selection of brand name products to its customers. As of December 31, 2001, The One had a network of approximately 124 suppliers, nine of which supplied the majority of its products. The centralized merchandising and buying group consists of a specialized staff of buyers who purchase substantially all merchandise for The One stores. The One currently distributes products to its stores from its Toluca warehouse. Deliveries to The One stores are made primarily by 11 contract trucking carriers, although Grupo Elektra has a nominal number of trucks at the distribution center for movement of merchandise between stores and special delivery requirements. The One's contract carriers employ a fleet of approximately 30 trucks to deliver merchandise to stores. Merchandise for The One can be sourced from a large number of suppliers (including private label manufacturers). Installment Sales Program Operations The One has developed a system to extend credit for lower-priced purchases, and has provided in-store credit to its customers since January 1996. 44 The following table sets forth certain information concerning the installment sales program on The One's products for the years 1999, 2000 and 2001:
As of and for the Year Ended December 31, ------------------------------------------------------ 1999 2000 2001 ---------- ----------- ----------- (in millions of Ps. As of December 31, 2001) Accounts receivable retail customers-net (at period end) .............. Ps. 132.8 Ps. 113.3 Ps. 102.4 Installment sales as a percentage of merchandise revenues(1) .......... 52.9% 48.3% 48.4% Total number of open accounts (at period-end) ......................... 219,813 194,355 164,603 Average balance per retail customer (in Pesos) ........................ 603.9 582.9 622.1
- ------------- (1) Includes mark-up on installment sales. Collection The One's collection practices are implemented and monitored at the individual store level. The One currently has approximately 535 employees dedicated to installment sales collections and investigations. Competition In general, The One's competitors in the clothing retailer business include other specialty stores, department stores and warehouse clubs, some of which are national and international in scope and have greater resources than The One. We believe the main competitors for The One are Super Jeans, Edoardos and the private labels of department stores. Employees As of December 31, 2001, The One employed approximately 1,447 people (excluding corporate and credit staff) on a full-time basis. Approximately 4.9% of The One full-time employees were represented by five unions. As of December 31, 2000, Mexican labor laws require union contracts to be reviewed and renegotiated yearly, with respect to salaries, and every other year with respect to fringe benefits. We believe that our relations with these employees are good; since assuming control of The One in 1996, Grupo Elektra has not been subject to a strike by employees working at The One stores. Strategies The One stores continue to lag in their performance and have not reached our expectations for this business segment. Our objective with respect to The One stores has been, and remains, to increase sales to achieve an acceptable level of profitability. In this regard, we have implemented the following strategies: (a) closing a number of stores that were not meeting our profitability objectives; and (b) lowering inventories with more "one-shot" purchases. The "one-shot" strategy involves buying merchandise in limited quantities and displaying such merchandise for a limited time period (2-3 months), which allows us to discount and quickly sell slow moving or obsolete items. 45 Our strategy also includes acceptance of all major credit cards for purchases of up to ten thousand pesos. We have also improved our product sourcing and hired 60 new store managers. In addition, we have instituted a new compensation system for our store associates. We are confident that these measures should lead to an enhanced profitability at The One. However, we will continue to consider other possible alternatives, including closing all of our The One stores and/or a total divestiture of this business segment, if these improvements are not successfully realized during 2002. LA CURACAO MEXICO On July 10, 2001, we acquired 35 La Curacao Mexico stores located in southeastern and central Mexico for US$5.4 million. La Curacao Mexico specialized in electronics, white goods and appliance sales and had revenues of approximately US$30 million in 2000. We have converted the 35 stores into 15 Elektra stores, 9 The One stores, 5 Salinas and Rochas stores and 4 Bodegas de Remates stores. We also closed 2 of the La Curacao Mexico stores. We believe that the acquisitions and conversions have strengthened our presence in the growing southeastern Mexico market area. ADDITIONAL SERVICES Money Transfer Business Through our operations in Mexico, we participate in two separate sectors of the money transfer business. Through "Dinero en Minutos", we act as paying agent in Mexico of electronic money transfers initiated by agents of Western Union Financial Services, Inc. to transfer funds electronically from abroad, primarily originating in the United States, to Mexico. Elektra and The One stores offer customers electronic money transfer services within Mexico under the brand name "Dinero Express." During 2001, we generated Ps.506.6 million in revenue from Dinero en Minutos and Dinero Express. Dinero en Minutos In October 1993, we entered into certain joint arrangements (the "Joint Venture Arrangement") with Western Union Financial Services, Inc. ("Western Union") to provide electronic money transfer services in Mexico. These arrangements provided us with the benefit of increased customer traffic in our stores and also generated U.S. Dollar revenue. Under the Joint Venture Arrangement, Western Union's worldwide network of agents originated electronic money transfers to Mexico, and Elektra's domestic network of stores, as well as certain banks and other retailers that do not compete directly with the retail operations of Elektra, distributed such electronic money transfers as agents in Mexico. Western Union's Will Call Money Transfer Service (the "Will Call Service") was marketed through the Joint Venture Arrangement in Mexico under the trade name "Dinero en Minutos." In January 1996, Elektra sold its interests in the entities established pursuant to the Joint Venture Arrangement to American Rapid Corporation Inc., a wholly-owned subsidiary of Western Union ("American Rapid"), for US$20 million and received its share of all undistributed net profits in the form of a dividend. In addition, Elektra and Western Union entered into a ten-year Exclusive Services Agreement dated January 11, 1996 (the "Exclusive Services Agreement"), which provided the framework for the continued service by Elektra as an agent for Western Union's Will Call Service in Mexico. Pursuant to the Exclusive Services Agreement, Elektra received US$142 million, which was deposited in escrow with First Bank, National Association (the "Escrow Agent"), in consideration for (i) the services to be rendered pursuant to the agency agreements described below, (ii) terminating the prior agreement relating to foreign exchange gains and (iii) agreeing to certain noncompete covenants. Grupo Elektra has caused the money deposited in escrow to be invested in 2% of the capital stock of each of Elektra, Elektrafin and Importaciones Electronicas Ribesa, S.A. 46 de C.V., each a subsidiary of Grupo Elektra (the "Western Union Transaction"). These subsidiaries in turn applied the funds to repay short-term debt of Grupo Elektra, to reduce accounts payable to our suppliers, to pay a portion of the cash consideration of our investment in CASA and for general corporate purposes. Each year, the escrow agent releases a portion of the shares held in escrow equivalent to US$14.2 million, and pays that amount to us as compensation for our services for the corresponding year. Under the Inbound Agency Agreement, dated January 11, 1996 (the "Inbound Agency Agreement"), between Elektra and American Rapid (entered into pursuant to the Exclusive Services Agreement between Elektra and Western Union), Elektra acts as one of the authorized agents used by Western Union to implement and provide the Will Call Service in Mexico. This service consists of the transfer of money originating outside Mexico by persons who pay Western Union's agents an amount in U.S. Dollars (or an appropriate local currency) to be sent to persons in Mexico who receive such amount in Pesos. Grupo Elektra transferred the equivalent of US$570.7 million in 1998, US$643.4 million in 1999, US$669.3 million in 2000 and US$646.6 million in 2001. We believe that we are one of the largest money transfer agents in Mexico. Elektra receives an agency fee in U.S. Dollars in respect of the transactions completed during each month. This agreement expires in January, 2006. Western Union and Elektra also entered into a Foreign Exchange Agreement, dated January 11, 1996 (the "F/X Agreement"), whereby Elektra receives a percentage of the net foreign exchange gain with respect to the portion of the money transfer business for which Elektra provides services. Under the F/X Agreement and the Inbound Agency Agreement, until January 11, 2000 Elektra received approximately 2.4% of the monies transferred into Mexico, as compensation for acting as the transfer agent. Under the same agreements, we now receive approximately 6% of such monies. The exact percentage depends on the spreads realized by Western Union in respect of foreign exchange transactions and the commission charged to its customers. The net foreign exchange gain for each month is paid in U.S. Dollars. This agreement expires in January, 2006. Elektra is the largest paying agent for Western Union in Mexico. We operate approximately 10.8% of the total volume of money transfers as reported by Banco de Mexico, and an estimated 7.3% of the total amount of U.S. dollars transferred to Mexico electronically. Competition Western Union's major competitor in the electronic money transfer business to Mexico is BBVA Bancomer, S.A. ("Bancomer") due to Bancomer's service agreements with more than 40 companies to pay out in Mexico money sent through such companies. MoneyGram has an agreement with Banco Nacional de Mexico, S.A. First Data Corporation, which in 1996 owned a controlling interest in both Western Union and MoneyGram, disposed of its interest in MoneyGram in December 1996 pursuant to a consent decree. We believe that the remainder of the market consists primarily of relatively small, often family-run, operations and some medium and small size companies. Dinero Express Dinero Express is the first standardized intra-Mexico money transfer service offered to our target customer group by a major enterprise. From the startup of Dinero Express's operations in February 1996 through December 31, 2001, the number of money transfers handled by Dinero Express grew at a compounded average annual rate of 24.7%. The number of money transfers grew 25.5% during 2001, due primarily to the opening of this service in our The One and Salinas y Rocha stores. We believe that Dinero Express has brought an increase in store traffic, and that television advertising through TV Azteca has been a large factor in the success of this business. 47 Fotofacil In January 1997, we began offering photo processing services at selected Elektra stores in Mexico under the trademark of "Fotofacil." The photography kiosks at Elektra stores offer products such as film, cameras, photo albums, batteries, frames and audiocassettes, as well as services such as film development and ID photography. The space required in Elektra stores for installation of photography minilabs is approximately 108 square feet (10 square meters). Generally, two specialized salespersons staff each minilab. The average development time for a roll of film is one hour. As of December 31, 2001, we had installed Fotofacil kiosks in 180 Elektra stores which generated a total of Ps.156.0 million in revenue. Banking Services In August 1997, we launched in Mexico a savings account service in alliance with Serfin, a Mexican bank. Through this alliance, we promote savings by Elektra's low to middle income customer base. This savings account service enables Elektra's customers to open Serfin bank savings accounts named "Guardadito" at small kiosks located within stores throughout Mexico. These small kiosks act as a limited Serfin branch, and Serfin hires and pays the employees who staff these kiosks. This venture increases the range of financial products and services being offered to the middle class consumer in Mexico, the majority of whom have formerly depended primarily on informal savings mechanisms, and increases traffic to our stores. Guardadito also provides increased profits from commissions from Serfin. A minimum deposit of Ps.20 is required to open an account, but there are no direct commissions or fees paid by the customer, and the savings in the account generate interest. Under our agreement with Serfin, we are entitled to a commission equivalent to 50% of the profit made by Serfin from Guardadito savings accounts. The profit is determined by multiplying the total deposits in Guardadito accounts by the difference between the TIIE rate and the rate paid by Serfin to Guardadito account holders, less any expenditures of Serfin in connection with the Guardadito savings account service. This commission is paid on a monthly basis. There are two different types of "Guardadito" accounts: "Guardadito Ahorro," which consists of a passbook savings account that generates interest, and "Guardadito Tanda," which consists of a savings club whereby the customer deposits a fixed amount of cash (a minimum of Ps.20) on a weekly basis for a certain term (eight to 32 weeks) after which the customer receives the total amount of cash saved along with the earned interest. As of December 31, 2001, there were approximately 998,000 "Guardadito" savings accounts maintained by Serfin with an average balance of approximately Ps.397.00. On April 4, 2002, the Mexican Ministry of Finance approved our application to operate a consumer bank. This was the first new banking license granted in Mexico since the 1994 Mexican economic crisis. We intend to establish a banking subsidiary during 2002. We are establishing the bank in order to ensure consistent financing for our customer receivables, which are an integral part of our retail strategy. The bank would house all of our consumer financing operations, while our money transfer operations would remain with the retail segment of our business. We do not intend to open stand-alone bank branches, but will have the bank's products and services offered through service windows or mini-branches located in our stores. The bank's credit operations would be funded through our current securitization program, deposits and the inter-bank and capital markets. We are currently in negotiations with Serfin to terminate our agreement with them and to eventually transfer the Guardadito accounts to our new bank. We cannot assure you that these 48 negotiations will be successful. We intend to eventually offer many of the services that are currently offered through Banco Serfin through our banking subsidiary. Unefon Agreement In November 2000, we entered into a ten-year service agreement with Unefon, S.A. de C.V., an affiliated provider of wireless telecommunications and other telephony products and services in Mexico. Pursuant to our agreement with Unefon, we market and distribute handsets, or mobile phones, which we generally purchase from Unefon and then re-sell in our stores. Unefon currently offers handsets manufactured by Nokia, Motorola, LG and Qualcomm. We must obtain Unefon's approval prior to selling models of handsets purchased from third parties for sale in our stores. In general, we receive compensation pursuant to this agreement based on the percentage of revenues generated by the sale of handsets and airtime sold in our stores. We receive a 20% discount on the price of handsets purchased from Unefon, 5.8% of revenue from all airtime sold at our stores for use on Unefon's network through virtual or prepaid cards, 5.8% of Unefon's net interconnection revenues from "calling party pays" subscribers signed-up through our stores, and 50% of the profits generated by any service Unefon provides that is collected at our stores, other than telephony-related services or airtime sold in our stores through prepaid or virtual cards and other value-added services bundled together with the sale of such cards. Unefon is entitled to defer both airtime and interconnection related amounts due during 2000, 2001 and 2002 until the end of 2004 and all amounts due during 2003 and 2004 until the end of 2005. On each due date, Unefon must pay the principal amount due plus interest calculated at a rate equal to the average annual cost of our indebtedness in pesos or U.S. dollars, depending on the currency of the amount due. For the year ended December 31, 2001, as a result of Unefon's right to defer payments, Unefon owed us Ps.22.8 million for commissions and discounts related to sales of airtime, value-added services and handsets in our stores. This amount represented approximately 22% of the airtime, value-added services and handset revenues generated by Unefon through our stores in 2000. As part of our investment in CASA and in TV Azteca through CASA, we indirectly own 9.1% of Unefon. TV Azteca has adopted a resolution to permit the spin-off, subject to certain conditions, of its interest in Unefon to its shareholders, including Azteca Holdings. See "--Strategic Investments--TV Azteca Spin-Off of Unefon." Extended Warranties In September 1997, we launched in Mexico our extended warranty service that includes warranty certificates and additional service contracts under the trademark of "Milenia." This service is becoming a more prominent contributor to our overall revenues. The extension of a product warranty is available only for electronics and appliance merchandise. There are three terms of extended warranties: two, three and five years. The program's goal is for Grupo Elektra's customers to rely on a professional product maintenance service and for the program to achieve a penetration of six percent of Elektra's total sales. Under the extended warranty program, Grupo Elektra independently repairs and provides maintenance for products when they are not covered by the manufacturer's warranty. This program is currently offered only to a limited number of products at the Elektra stores, but there are plans to introduce it to other product lines as well as in Salinas y Rocha stores. Grupo Elektra's customers can pay the price of the warranty through Grupo Elektra's installment sales program on the same credit terms that apply to the merchandise. 49 As of December 31, 2001, we have sold 538,052 extended warranties. The extended warranties generated Ps.208.1 million (US$22.7 million) in revenue in 2001. Computers Following a successful pilot program in 2000, we have begun offering computers in approximately 300 Elektra stores to target the underdeveloped computer market in Mexico. We expect to expand the number of Elektra stores selling computers to approximately 600 by the end of 2001. Because computer sales in Mexico have lagged significantly behind sales in the United States during the past ten years, we believe that by targeting our existing customer base we may be able to generate increased revenues and attractive margins through the sale of computers to first-time computer owners. STRATEGIC INVESTMENTS CASA On March 26, 1996, we purchased 35.8% of the capital stock of CASA, a holding company through which our Controlling Shareholders own their interests in TV Azteca and Grupo COTSA S.A. de C.V. ("Grupo COTSA"). CASA indirectly owns (through Azteca Holdings, S.A. de C.V., an intermediate holding company) approximately 56.7% of the outstanding common stock of TV Azteca and 26.2% of the outstanding common stock of Grupo COTSA. We acquired our interests in CASA in exchange for capitalizing US$45.4 million of accounts receivable due to us from CASA and its subsidiaries, and paying US$62.2 million in cash, which CASA used to repay bank debt incurred in connection with the acquisition of interests in TV Azteca and Grupo COTSA. We acquired non-voting "N" Shares in CASA, together with the right to exchange such "N" Shares for 226,492,629 CPOs of TV Azteca owned by Azteca Holdings. This exchange right allows us to effectively exchange all of the CASA "N" Shares for shares representing, approximately 7.6% of TV Azteca's capital stock. Elektra may make such exchange, in whole or in part, at any time prior to March 26, 2006. On September 1, 2000, we entered into an agreement with CASA pursuant to which we granted CASA a twelve-month option to purchase the 35.8% of CASA shares we currently own, for approximately US$316 million, based on the average price of TV Azteca's shares during the ninety day period preceding the date of the agreement, net of CASA's proportional share of Azteca Holdings' debt. CASA had until October 12, 2001 to exercise its option pursuant to the agreement. CASA did not exercise the option and paid a penalty of US$15.8 million, which we received on October 15, 2001. TV Azteca In July 1993, an investor group, including the Controlling Shareholders of Grupo Elektra, acquired a controlling interest in TV Azteca, one of Mexico's two over-the-air television broadcasters. TV Azteca owns and operates two national networks and more than 250 commercial repeater stations. TV Azteca is the second largest television broadcasting company in Mexico. TV Azteca is a holding company with three principal subsidiaries: Television Azteca, Azteca Digital, S.A. de C.V. ("Azteca Digital") and Grupo TV Azteca, S.A. de C.V. ("Grupo TV Azteca"). Television Azteca and Azteca Digital own and operate all TV Azteca's broadcast assets, including the licenses to operate television transmitters, TV Azteca's transmission equipment and TV Azteca's headquarters and production studios in Mexico City. Substantially all payments to TV Azteca from advertisers are made through Grupo TV Azteca. TV Azteca owns and operates two national television networks through two anchor stations in Mexico City and numerous other stations located throughout Mexico that rebroadcast the signals of TV Azteca's Mexico City stations. Although most of the stations outside Mexico City are repeater stations that solely rebroadcast the anchor stations' signals, stations in 31 of Mexico's larger metropolitan areas broadcast local 50 programming and advertising in addition to the national programming and advertising broadcast by the anchor stations. TV Azteca believes that its ability to provide a diverse mix of quality programming has been, and will continue to be, one of the primary factors in maintaining and increasing its overall ratings and share of the Mexican television audience. Since 1994, TV Azteca has focused on acquiring and producing programming that appeals to most Mexican television viewers, rather than targeting specific segments of the Mexican television audience. Todito.com On May 9, 2000, we signed a five-year strategic alliance with Todito.com, an internet portal and marketplace for North American Spanish-speakers. Through our indirect shareholding in TV Azteca, we currently own 9.1% of Todito. See "--Our Business--Our Strategy--E-commerce" and "--Strategic Investments--CASA." Unefon TV Azteca currently owns 46.5% of the equity of our telecommunication affiliate, Unefon, S.A. de C.V. As part of our investment in CASA and in TV Azteca through CASA and its 90% subsidiary Azteca Holdings, we indirectly own 9.1% of Unefon. See "--Additional Services--Unefon Agreement" and "Strategic Investments--CASA." TV Azteca Spin-Off of Unefon On October 19, 2000, TV Azteca granted, on a pro rata basis to certain of its shareholders, including Azteca Holdings, rights to acquire all of the shares of Unefon owned by TV Azteca. The grant of the rights remains subject to, among other things, the effectiveness of a registration statement filed with the U.S. Securities and Exchange Commission that registers the Unefon shares underlying the rights and the receipt of all applicable regulatory approvals. The aggregate exercise price for all Unefon shares subject to the rights is approximately US$177 million, all of which would be received by TV Azteca. The rights to acquire the Unefon shares do not trade separately from the TV Azteca shares and the rights are exercisable only on December 11, 2002, unless the time of exercise is extended by TV Azteca or an acceleration event occurs. Any rights that are not exercised on the exercise date will expire and TV Azteca will retain ownership of the Unefon shares underlying the rights. If, prior to December 11, 2002, the board of directors of TV Azteca approves a merger or consolidation of Unefon, a sale of all or substantially all of Unefon's assets or a sale (by tender or otherwise) of at least a majority of Unefon's shares or otherwise determines to accelerate the exercisability of the rights, each a sale event, TV Azteca will notify its shareholders that a sale event is anticipated to occur and the rights will be exercisable in connection with the sale event for a period of time to be determined by TV Azteca. Any exercise of the rights in connection with a sale event will be conditioned on the consummation of the relevant sale event. If such sale event is consummated, any rights which were not exercised during the period designated by TV Azteca will expire and TV Azteca will retain ownership of the Unefon shares underlying the rights. Of the 601,042,247 Series A shares of Unefon that Azteca Holdings may acquire pursuant to the rights, as a shareholder of TV Azteca, 511,743,120 shares are subject to a right to purchase granted in favor of Ricardo B. Salinas Pliego and Elisa Salinas Gomez, Mr. Salinas Pliego's aunt. Mr. Salinas and Mrs. Salinas Gomez paid a US$6.65 million non-refundable premium to Azteca Holdings for these purchase rights. However, in order to exercise these purchase rights, Mr. Salinas Pliego and/or his affiliates must first have directly or indirectly acquired the CASA shares or all of our outstanding capital stock, or we must have 51 exercised our right to exchange all of the shares of CASA owned by us for 226,492,629 CPOs of TV Azteca pursuant to the terms of the share exchange agreement dated March 26, 1996 between our company and Azteca Holdings. If Mr. Salinas Pliego and Mrs. Salinas Gomez have not so acquired the CASA shares, and we have not exercised our share exchange right, then we will have the right, in lieu of Mr. Salinas Pliego and Mrs. Salinas Gomez, to exercise up to 34% of Azteca Holdings rights to acquire Unefon shares. If we or Mr. Salinas Pliego and Mrs. Salinas Gomez, if applicable, exercise the purchase rights and acquire the Unefon shares, such shares, together with any cash proceeds or securities received upon the sale of such shares or acquired with such cash proceeds, will be pledged by the applicable party(s) as collateral to secure notes of Azteca Holdings. The purchase rights to acquire Unefon shares expire on December 11, 2002. COTSA On September 30, 1999, Inmuebles Ardoma, S.A. de C.V. (a wholly-owned subsidiary of Grupo SyR (now Grupo Elektra) acquired approximately 90% of the capital stock of Compania Operadora de Teatros, S.A. de C.V. ("COTSA") through the capitalization of Ps.369.6 million of accounts receivable due from COTSA. Before this acquisition, COTSA was a subsidiary of Grupo COTSA. The main assets of COTSA are 86 buildings, most of which are being converted to Elektra and The One stores. Among its assets, COTSA owns 46 properties (formerly theaters), which were transformed into Elektra and The One stores. Of those properties, seven are shared between Elektra and The One. We are currently in the process of transforming another five buildings into stores. 52 REGULATION Consumer Protection Laws The Ley Federal de Proteccion al Consumidor (the "Consumer Protection Act"), which regulates consumer installment sales in Mexico, became effective on December 25, 1992. This act does not set a limit on the interest rate a merchant may charge a consumer in an installment sale, and it does not require the merchant to inform the consumer of the effective rate of interest charged. The effective interest rate which we charge for electronics, appliances, furniture and clothing is fixed at the time of the installment purchase. We cannot assure you that in the future the Mexican Government will not impose limitations or additional informational requirements regarding such rates of interest. A substantial portion of our revenues and operating cash flow is generated by our installment sales program, and any such limitations or additional information requirements could have a material adverse effect on our financial performance. The collection practices and repossession procedures we use in our operations in Mexico are regulated under the Consumer Protection Act, the Mexican Commercial Code and the Mexican Civil Code. In Latin America, we are regulated by each country's commercial, civil and consumer protection laws and regulations. Our collection operations are implemented and monitored at the individual store level. Each store has an installment sales manager who, under the regional manager's supervision, is responsible for extending credit and collecting that store's outstanding accounts in accordance with corporate guidelines and applicable law. Any material change in the regulations governing our collection practices and repossession procedures could have a material adverse effect on our financial performance. The consumer protection laws and their enforcement in the other Latin American countries where we do business are comparable to Mexican law. However, a change in the regulatory environment in Mexico, or in the other countries where we operate, or the imposition of authorization requirements could have a material adverse effect on our operations and our financial performance. If we create a new banking subsidiary, such subsidiary will be subject to Mexican banking laws and regulations, which may restrict its financial and operational flexibility and may affect our financial performance and profitability. Free Trade Agreements Free trade agreements may increase competition as they make it easier for non-Mexican retailers to enter the Mexican market. The North American Free Trade Agreement (NAFTA) established a North American "free trade" zone and generally eliminates import duties, tariffs and barriers among Mexico, the United States and Canada. As a result, we expect to see an increase in the number of U.S. retailers in Mexico with whom we will compete. The free trade agreement between Mexico and the European Union, which became effective on July 1, 2000, will also make it easier for European retailers to enter the Mexican market. In addition, we face significant competition from the informal economy and parallel imports for the products that we carry. There can be no assurance that our performance will not be adversely affected by increased competition and more sophisticated competitors from these and other sources. 53 Item 5. Operating and Financial Review and Prospects The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report. Our financial statements have been prepared in accordance with Mexican GAAP, which differ in certain respects from U.S. GAAP. Note 17 to the Consolidated Financial Statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to our company and a reconciliation to U.S. GAAP of net income and stockholders' equity. The comparison of the years ended 2000 and 1999 below does not contain detailed segment and geographical information because we did not begin compiling such information until 2000. Basis of Presentation The Consolidated Financial Statements have been prepared on a consolidated basis to reflect the financial condition and the results of operations of our company and our consolidated subsidiaries. Mexican GAAP requires that the Consolidated Financial Statements recognize certain effects of inflation. Financial information for all periods in the Consolidated Financial Statements has been restated in constant Pesos as of December 31, 2001 in accordance with the Third Amendment to Bulletin B-10 of the Mexican Institute of Accountants. Effective January 1, 1997, the Fifth Amendment to Bulletin B-10 modified the method of restatement of non-monetary assets for the effects of inflation. Accordingly, the percentage increases discussed herein are adjusted for the general effects of inflation to permit period-to-period comparisons. In accordance with Bulletin B-10, we are required to report, as a gain or loss on our net monetary position, the effects of inflation on monetary assets and liabilities. This net amount reflects the gain or loss arising from holding a net monetary liability or asset position in an inflationary period, since over time a monetary liability can be settled for units of less purchasing power whereas a monetary asset decreases in value in real terms. Our operations continually generate monetary assets (primarily from our installment sales) while our accounts payable and borrowings to finance capital expenditures result in monetary liabilities. With effect from January 1, 2000, we adopted Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing" issued by the MIPA. Under this statement, deferred taxes are initially recognized for all differences between book and tax values of assets and liabilities and for tax loss carry forwards and asset tax carry forwards that have a high probability of realization. The adoption of this statement resulted in an increase in stockholders' equity of Ps.263.0 million, including Ps.5.2 million corresponding to minority interest. For the years ended December 31, 2001 and 2000, we recorded Ps.260.8 and Ps.215.2 million provisions, respectively, for deferred income tax, including the loss on monetary position related to the deferred tax asset. Through December 31, 1999, deferred taxes were recognized for non-recurring timing differences between financial pre-tax income and taxable income, which were expected to reverse in an identifiable period. In 2001, Statement C-2 "Financial Instruments" went into effect. Under this statement, all derivatives are required to be recognized in the balance sheet as either assets or liabilities, and measured at fair value. The adoption of this statement resulted in a loss for us of Ps.8.3 million. Critical Accounting Policies We have identified the following accounting policies and estimates that require significant judgment as critical to our business operations and the understanding of our results of operations. The associated risks related to these policies and the impact of these policies on our business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such 54 policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Notes 3 and 17 to the consolidated financial statements. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Allowance for doubtful accounts We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the established allowance, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Deferred income tax and employees' statutory profit sharing Our income tax expense and employees' statutory profit sharing is comprised of current expenses and deferred expenses. Deferred income tax represents future receivables or payables resulting from the temporary differences generated from the differences in the accounting and tax treatment of balance sheet items, such as our allowance for doubtful accounts, inventories, property, furniture, equipment and investment in stores, installment sales, and from operating loss carryforwards and credits. Deferred employees' statutory profit sharing is calculated in a similar manner. These temporary differences and tax loss carryforwards and credits are accounted for as deferred tax assets or liabilities on our balance sheet. The corresponding change in the balances of the recognized deferred tax assets and liabilities is recorded in earnings. Deferred tax assets and deferred employees, statutory profit sharing assets are subject to valuation allowances if their being realized is not more likely than not. To the extent that we establish a valuation allowance, or increase this allowance, during a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Property, furniture, equipment and investment in stores Property, furniture, equipment and investment in stores is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital strategy can result in the actual useful lives of such items differing from our original estimates. In those cases where we determine that the useful life of any property, furniture, equipment and investment in stores should be shortened, we depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Goodwill We periodically evaluate (acquired businesses for potential indicators of impairment of our goodwill. Our judgment regarding the existence of impairment indicators is based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. 55 Accounting for Installment Sales We sell products through our different store formats for cash and for credit under an installment sales program known as Credimax. The cost to the customer of merchandise purchased under the Credimax program includes a cash price component plus a mark-up component and, in certain circumstances, a stated interest component depending on our current marketing objectives. If stated interest is used, we disclose the applicable interest rate; however, the implicit cost of financing due to the mark-up is not disclosed to the customer. Mark-up and, if included, stated interest represent the costs associated with providing the installment sales program plus a profit margin. Such costs include the cost of financing, the cost of credit investigations and the cost of collection and legal process relating to bad debts. Revenues from Elektra installment sales are accounted for as follows: (i) an amount equivalent to the cash price of the merchandise is recorded as merchandise revenue at the time of sale; (ii) the installment sales mark-up, as described below, is recorded as merchandise revenue ratably over the life of the installment sale contract; (iii) stated interest, if any, is recorded as merchandise revenue ratably over the life of the installment sale contract; and (iv) penalty interest on past due installment sales payments is recorded as merchandise revenue when collected. Our income statement shows all the revenues and costs associated with the installment sales program within merchandise, services and other revenue and cost of merchandise sold and services, thus allowing a better matching of revenues with the costs needed to produce them. Accordingly, the cash price, mark-up, stated interest and penalty interest on installment sales are part of merchandise services and other revenues as well as operating income. In addition, parts of the revenues from installment sales are subject to a loss on monetary position from accounts receivable. Cost of sales includes the cost of merchandise sold, the cost of financing the installment sales program and the allowance for doubtful accounts, less any monetary gain on financing of receivables. The cost of financing our installment sales program is calculated by applying our average financing rate to the portion of our portfolio financed by bank debt. When an installment sale is made for products at Elektra, Salinas y Rocha, Bodega de Remates or The One stores, the customer signs a promissory note in the amount of the equivalent cash price of the merchandise plus the mark-up and, if applicable, stated interest minus any down payment. At the time of the sale, the equivalent cash price of the merchandise is booked as merchandise revenue, and a net account receivable is generated in the amount of the installment-sale-equivalent cash price minus any down payment. During the term of the installment sale contract, each weekly payment is applied proportionately among the equivalent cash price, the mark-up and the stated interest. The portion of the weekly payment allocated to the equivalent cash price is applied to reduce the account receivable and has no effect on our income statement. The portions allocated to mark-up and stated interest are recognized as merchandise revenues, in each case ratably over the term of the installment transaction. If the customer is late with a weekly payment, the mark-up and stated interest portion of the missed payment is recognized as merchandise revenue and the account receivable is increased by both amounts. Penalty interest is charged on amounts that are past due and is recognized when paid as merchandise revenues. Payments are applied first to any penalty interest balances. In summary, if a customer is current on the payment of an installment sale, the account receivable associated with the installment sale includes only the equivalent cash price portion of the sale (minus the down payment) and is amortized weekly in equal amounts during the term of the installment sale. To the extent that a customer is late on the payments of an installment sale, the account receivable associated with the installment sale includes the remaining equivalent cash price portion (minus the down payment) and any accrued but unpaid mark-up and stated interest. During 1999, most installment sales were made under the 26-week and 39-week terms, resulting in an average portfolio length of 34 weeks for 1999. During the first half of 2000, and in light of the political uncertainties at that time, we intentionally reduced our average portfolio to 33 weeks by the end of the second 56 quarter. After the smooth political transition following the presidential election on July 2, 2000, we lengthened again our average portfolio by promoting the 39-week term during the third quarter and the 53-week term during the fourth quarter. Our average portfolio length was 44 weeks in 2000. During the second half of 2001, the 53-week term was heavily promoted, therefore, our average portfolio length was 46 weeks. During the first quarter of 2002, as a result of our heavy promotion of the 53-week term, our average portfolio length was 53 weeks. Reserve for Doubtful Accounts We record a provision for doubtful accounts at the time of any installment sale in an amount equal to five percent of the cash price of the merchandise sold, plus the markup and less the down payment, if any. Normally, we require a ten percent down payment for all installment sales, but we waive this requirement from time to time for marketing purposes. After giving effect to write-offs, the reserve for doubtful accounts was 5.7% of accounts receivable (net of securitization) due from retail customers as of December 31, 2000 and 5.4% of accounts receivable (net of securitization) due from retail customers as of December 31, 2001. We believe that our reserve policy for installment sales is adequate to cover potential write-offs. Moreover, Elektra continues collection efforts after writing off accounts receivable. Effects of the Peso Devaluation and Inflation Our results of operations will continue to be affected by economic conditions in Mexico and in the other countries in which we operate. In periods of slow economic growth, demand for our products tends to be adversely affected. Poor economic conditions, particularly unemployment and high domestic interest rates, can also result in an increase in allowance for doubtful accounts. Devaluation of the peso, such as occurred most recently in 1998, also results in exchange losses on our foreign-currency denominated indebtedness. According to Banco de Mexico and the Mexican Ministry of Finance and Public Credit, for the year ended December 31, 2001, the Mexican economy weakened, with a gross domestic product decrease of 0.3%, compared to growth of 6.9% in 2000. Interest rates on 28-day Cetes in 2001 decreased to an average of 11.3%, compared to an average of 15.4% in 2000, and the peso appreciated 4.5% to Ps.9.17 per US$1.00 at the end of 2001 from Ps.9.60 per US$1.00 at the end of 2000. Inflation decreased to a rate of 4.4% in 2001 from 8.9% in 2000. We can give no assurances that economic conditions in Mexico and in the other countries in which we operate will not have adverse effects on our financial condition and results of operations. See Item 5. "Operating and Financial Review and Prospects--Basis of Presentation." Investment in CASA Since January 1, 1997, we have presented our statement of income to show the income associated with our investment in CASA, a holding company through which our Controlling Shareholders own the controlling interest in TV Azteca and Grupo COTSA, as part of merchandise, service revenue and other in order to emphasize this item within results of operations and to allow a better matching of such income with the amortization of goodwill related to such investment. This presentation is consistent with Mexican GAAP. We decided, as of January 1, 2000, to present the equity in income of CASA, net of the amortization of the goodwill related to the CASA acquisition, as a net item below income after taxes. Consequently, in the 1999 consolidated financial statements and the summary consolidated financial information, the equity in earnings of CASA and the related goodwill amortization have been reclassified to conform to the current presentation, which is also consistent with Mexican GAAP. 57 Seasonality of Sales We have historically experienced, and expect to continue to experience, seasonal fluctuations in sales, reaching highs in the months of May and December. Such seasonality results mainly from increases in general consumption associated with Mother's Day and the Christmas season. We typically experience lows during the months of February and September. Results of Operations The following table sets forth certain consolidated financial information of our company expressed as a percentage of total revenues (merchandise, service and other revenues) for the three years ended December 31, 1999, 2000 and 2001:
Year Ended December 31, ------------------------------ 1999 2000 2001 ------ ------ ------ Merchandise, service and other revenues .......................... 100% 100% 100% Cost of merchandise sold and of services ......................... (59.2) (57.3) (57.5) Gross profit ..................................................... 40.8 42.7 42.5 Administrative and selling expenses .............................. (25.7) (27.3) (26.0) Depreciation and amortization .................................... (4.2) (4.1) (4.5) Operating income ................................................. 10.9 11.3 12.0 Comprehensive financing cost (net) ............................... (2.4) (2.0) (2.3) Income before income taxes and employees' statutory profit sharing 8.5 9.3 9.7 Consolidated net income .......................................... 7.0 7.6 7.3
General Revenues We have increased prices to offset the increases in the cost of merchandise sold and operating expenses. Our gross profits do not vary materially within each of our consumer electronics product lines, although we realize a greater gross profit from the sale of Elektra brand products, which typically are the lowest priced merchandise in the consumer electronics product line. The introduction of, and emphasis on, furniture and clothing in the product mix has resulted in higher gross profits, since these products carry higher margins than the core electronic lines that we carry. We present penalty interest as part of our revenues. For the years ended December 31, 1999, 2000 and 2001, the amounts for penalty interest were Ps.369.1 million, Ps.373.7 million and Ps.367.7 million, respectively. Depreciation and Amortization Expense Prior to 1997, Bulletin B-10 required all property, machinery, equipment and other non-monetary assets, such as our stores and inventory, to be restated based upon replacement cost or the NCPI. Prior to 1997, we had generally restated assets based on replacement cost. Since 1997, the Fifth Amendment to Bulletin B-10 requires non-monetary assets of Mexican origin to be restated based on the NCPI but permits those of non-Mexican origin to be restated based on the devaluation of the Mexican peso against the relevant foreign currency after applying the inflation factor of the relevant foreign country. 58 Comprehensive Financing Cost As of December 31, 1999, 2000 and 2001, we had approximately US$267.0 million, US$413.7 million and US$497.9 million of monetary liabilities denominated in U.S. dollars, respectively. Virtually all of our monetary liabilities represented our outstanding indebtedness for borrowed money. Our U.S. dollar-denominated monetary assets as of December 31, 1999, 2000 and 2001 amounted to approximately US$33.6 million, US$84.3 million and US$131.2 million, respectively. At December 31, 1999, 2000 and 2001, we also had certain assets and liabilities denominated in several Latin American currencies. Those assets were equivalent to US$40.0 million in 1999, US$43.5 million in 2000 and US$39.3 million in 2001, and the liabilities were equivalent to US$55.1 million in 1999, US$48.8 million in 2000 and US$16.6 million in 2001. Interest income and interest expense associated with our receivables portfolio are reflected in revenue and cost of goods sold, and are not reflected as part of comprehensive financing cost. Interest expense. Interest on our foreign currency-denominated indebtedness exposes us to exchange rate fluctuations, with the peso cost of interest payments on such indebtedness increasing as the peso's value declines against the US dollar and other currencies. Interest income. Interest income is positively affected by inflation as we receive higher rates of return on our temporary investments, which are primarily fixed-rate short-term peso deposits in Mexican banks. Exchange (loss) gain. We record a foreign exchange gain or loss with respect to US dollar-denominated monetary assets or liabilities when the peso appreciates or depreciates in relation to the US dollar. Our US dollar-denominated monetary liabilities, which principally consist of our US dollar-denominated indebtedness for borrowed money, substantially exceed our US dollar-denominated monetary assets, which principally consist of US dollar bank deposits. As a result, we have recorded a foreign exchange loss during each period in which the peso depreciated in relation to the US dollar and vice versa. Gain on net monetary position. Gain or loss on net monetary position refers to the gains or losses, due to the effects of inflation, from holding net monetary liabilities or assets. A gain on monetary position results from holding net monetary liabilities during periods of inflation, as the purchasing power represented by nominal peso liabilities declines over time. Accordingly, since our monetary liabilities exceeded our monetary assets in 1999, 2000 and 2001, we recorded a gain on monetary position in those periods. We also allocate a portion of interest expense as part of cost of sales. Interest expense on funding our installment sales program, presented as part of our cost of sales was Ps.310.6 million, Ps.320.8 million and Ps.308.6 million for the years ended December 31, 1999, 2000 and 2001, respectively. Loss on monetary position from accounts receivable included in revenues for the years ended December 31, 1999, 2000 and 2001 was Ps.277.7 million, Ps.238.7 million and Ps.152.7 million. Gain on monetary position on loans obtained to finance the installment sales program was Ps.180.5 million, Ps.155.2 million and Ps.99.3 million for the years ended December 31, 1999, 2000 and 2001. Year ended December 31, 2001 compared to year ended December 31, 2000 Merchandise Revenue Total revenues in 2001 increased 2%, or Ps.234.6 million, to Ps.15,608.4 million from Ps.15,373.8 million in 2000. Merchandise revenues decreased 1% in 2001 to Ps.12,396.1 million from Ps.12,466.0 million in 2000. Credit revenues increased 10%, from Ps.2,907.3 in 2000 to Ps.3,212,3 million in 2001. Merchandise Revenue by Store Chain. Merchandise revenues include revenue from sales of merchandise and, to a lesser extent, revenue from sales of extended warranties and income from our money 59 transfers services. Merchandise revenues came primarily from Elektra's retail network, which accounted for 84% of total merchandise revenues, with 8.0%, 4.0% and 4.0% of revenues coming from Salinas y Rocha, Bodega de Remates and The One stores, respectively. Merchandise revenues in the Elektra stores increased 1% to Ps.10,366 million in 2001 compared to Ps.10,223 million in 2000. This increase was partially offset by decreases in our other store chains. Merchandise revenues decreased 2% , to Ps.958 million in 2001 from Ps.974 million in 2000 in our Salinas y Rocha stores. Merchandise revenues decreased 3%, to Ps.518 million in 2001 in our Bodega de Remates stores. Merchandise revenues sales decreased 25%, to Ps.554 million in 2001 from Ps.735 million in 2000, in our The One stores, as this store continues to perform below expectations, with below target sales and margins. The objective for The One continues to be growing sales to achieve an acceptable level of profitability. Merchandise Revenue by Products and Services. During 2001, sales in our core product lines (electronics, white goods, furniture and small appliances) decreased 4% to Ps.10,293 million, compared to Ps.10,723 million in 2000. This decrease was largely the result of overall declines in sales of electronics, white goods and furniture and was partially offset by an increase in sales of small appliances, both of which were caused by a slowdown in the Mexican economy. In addition, consolidated merchandise revenues were boosted by two new product lines, telephones, whose contribution to revenues rose to 3% in 2001 from 1% in 2000, and computers, which did not contribute to revenues in 2000 but represented 3% of merchandise revenues in 2001. Milenia. During 2001, our extended warranty program, Milenia, reported a 27% increase in revenue to Ps.208 million, from Ps.163 million in 2000. This increase was the result of an intensive point-of-sale advertising campaign to promote this service. Fotofacil. In 2001, Fotofacil continued to operate 180 mini-labs, reporting revenues of Ps.156 million, a 20% increase compared to Ps.130 million in 2000. This increase was the result of an intensive point-of-sale advertising campaign to promote this service. Unefon. In 2001, revenues related to our agreement with Unefon 2001 reached Ps.378 million, almost tripling sales of Ps.132 million in 2000. Unefon has reached coverage of 15 cities. To date we have sold more than 425,000 handsets at 350 stores. We have also generated increased revenue from sales of telephones and pre-paid calling cards (371 million minutes of airtime sold in 2001, compared to 22.5 million minutes in 2000). The increases were the result of Unefon's increased coverage in Mexico and the rollout of Unefon's products into an increased number of stores. As of December 31, 2001, we had a Ps.43.9 million outstanding account receivable from Unefon. Dinero en Minutos. During 2001, the volume of operations in our international money transfer service with Western Union faced increased competition that led to price declines. This resulted in a 4% decline in the volume of operations as compared to 2000, and in a 25% decrease in revenue for the year, to Ps.353 million, compared to Ps.468 million in 2000. Dinero Express. Grupo Elektra's intra-Mexico money transfer service reported an 18% increase in revenue, from Ps.131 million in 2000 to Ps.154 million in 2001. This was caused by an increase in our share of the Intra-Mexico money transfer market and our aggressive advertising of this product. Computers, peripherals and accessories. Revenues of this product line in 2001 reached Ps.331 million, the first year in which we offered these products. During 2001, we sold approximately 28,000 PC's and more than 63,000 peripherals. Merchandise Revenue by Region. During 2001, merchandise revenues from our operations in Mexico decreased 1% to Ps.11,681 million from Ps.11,757 million in 2000, while merchandise revenues from our operations outside Mexico increased Ps.715 million, or 1%, compared to Ps.709 million in 2000. 60 Installment Sales Revenue Installment Sales Revenue by Store chain. Installment sales revenues in 2001 came primarily from Elektra's retail network, which accounted for 86% of total installment sales revenues, with 9.0%, 3.0% and 2.0% of such revenues coming from Salinas y Rocha, Bodega de Remates and The One stores, respectively. Installment sales revenues in the Elektra stores increased 11% to Ps.2,769 million in 2001 compared to Ps.2,485 million in 2000. Installment sales revenue in the Salinas y Rocha stores revenue increased 17% to Ps.284 million from Ps.242 million in 2000, while Bodega de Remates installment sales revenue decreased 6% to Ps.96 million from Ps.102 million in 2000 and The One installment sales revenue decreased 19% to Ps.64 million from Ps.79 million in 2000. Installment Sales Revenue by Region. During 2001, installment sales revenues from our operations in Mexico increased 9% to Ps.2,974 million from Ps.2,722 million in 2000, while installment sales revenues from our operations outside Mexico reached Ps.239 million, a 28% increase compared to Ps.186 million in 2000. These increases were caused by the lengthening of our average receivables payment terms as a result of our promotion of the 53-week payment term in 2001. Gross Profit Consolidated gross profit rose 1% from Ps.6,566 million in 2000 to Ps.6,631 million in 2001. Meanwhile, consolidated gross profit as a percentage of total revenues decreased 20 basis points to 42.5% in 2001 from 42.7% in 2000. Merchandise gross profit decreased 3%, from Ps.4,423.8 million in 2000 to Ps.4,283.1 million in 2001. Merchandise gross margin fell 90 basis points from 35.5% in 2000 to 34.6% in 2001. This decrease was largely the result of a 31% decrease in same-store contribution in 2001 compared to 2000 from the The One store chain and was coupled with more aggressive price and promotion campaigns across all of our store chains. Credit gross profit rose 10%, from Ps.2,142.1 million in 2000 to Ps.2,348.3 million in 2001. Credit gross margin fell 60 basis points, from 73.7% in 2000 to 73.1% in 2001. This was primarily the result of a 9% higher provision for doubtful accounts in 2001 compared to 2000 and a 36% lower monetary gain from our credit operations. The repair provision for our extended warranty program, Milenia, increased 26.7%, or Ps.13.1 million, to Ps.62.1 million in 2001 from Ps.49.0 million in 2000. This increase was the result of a 27.5% increase in the sale of extended warranties to Ps.208.1 million in 2001 from Ps.153.3 million in 2000. Administrative and Selling Expenses Administrative and selling expenses, which include salaries, rent and other occupancy expenses, advertising, sales and collections commissions and other operating expenses, decreased 3%, to Ps.4,066 million in 2001 from Ps.4,204 million in 2000. This decrease was largely the result of our on-going expense-control initiatives, which led to declines in most of our expense lines. As a percentage of gross profit, administrative and selling expenses decreased to 26.0% in 2001 from 27.3% in 2000. EBITDA EBITDA, excluding monetary losses and gains reported in revenues and cost of goods sold, rose 7%, or Ps.173 million, to Ps.2,619 million in 2001 from Ps.2,446 million in 2000. This was largely the result of enhanced operating leverage and a decrease in operating expenses (excluding depreciation and amortization). Depreciation and Amortization Depreciation and amortization increased 12%, or Ps.75 million, to Ps.707 million in 2001 from Ps.632 million in 2000. This increase was due primarily to Ps.469.5 million in net capital expenditures associated 61 with the opening of new stores and the remodeling of existing stores, including the stores acquired from La Curacao Mexico. Comprehensive Financing Cost Comprehensive financing costs increased 70% in 2001 to Ps.507 million from Ps.298 million in 2000, due to a 35% increase in net interest expense and a 77% decrease in monetary gains, which were partially offset by a 92% decrease in foreign exchange loss. Interest income decreased to Ps.131 million in 2001 from Ps.205 million in 2000 as a result of lower interest rates in the local money market. Interest expense increased to Ps.781 million in 2001 from Ps.686 million in 2000, due primarily to the funding of the store expansion program and an increase in our credit portfolio. The foreign exchange loss was Ps.9 million in 2001 compared to a loss of Ps.114 million in 2000. Gains in the net monetary position decreased to Ps.170 million in 2001 from Ps.297 million in 2000 due to a lower Mexican inflation rate of 4.4% for 2001, compared with the 9.0% rate for 2000. In 2001, we reported Ps.135.5 million income from other financial operations which was the result of the penalty fee coming from the non-exercise of the CASA option. See "Item 4. Information on the Company--Strategic Investments--CASA." Taxes Income before taxes and employees' statutory profit sharing increased 5% to Ps.1,506 million in 2001 from Ps.1,433 million in 2000. Provision for income tax and employees' statutory profit sharing increased 151% or Ps.327 million, to Ps.543 million in 2001 from Ps.216 million in 2000, which resulted from greater use of our tax-loss carry forwards in 2001 compared to 2000. As a percentage of pre-tax income, the provision for income tax, asset tax and employees' statutory profit sharing increased to 36.1% in 2001 from 15.1% in 2000, due mainly to our election to consolidate our subsidiaries for tax purposes in 2001. This increase was partially offset by the use of the tax loss carry forwards of Grupo SyR, whose merger with Grupo Elektra was completed during 2000. We have several operating subsidiaries with tax loss carry forwards. Other than in connection with the merger of Grupo Elektra and Grupo SyR, which made available tax loss carry forwards to us, our subsidiaries file individual income tax returns. With effect as of 1999, the Mexican Income Tax Law modified the regulations for tax consolidation by limiting consolidation from 100% to 60% of net operating losses generated in the future. In 2001, Elektra's investment in CASA, which is booked under the equity participation method, recorded income of Ps.187.0 million, net of amortization of goodwill, compared to a loss of Ps.23.3 million in 2000. Net Income Income of minority stockholders in 2001 was Ps.13.0 million, a decrease of 39% from Ps.21.3 million in 2000. The income of minority stockholders is primarily related to the investment of funds put in escrow pursuant to the Western Union transaction in shares of Elektra affiliates. Net Income of majority stockholders decreased 3%, or Ps.35 million, to Ps.1,137 million in 2001 from Ps.1,172 million in 2000. Adjusted net income (net income excluding all non-cash items) decreased 12.2%, to Ps.889 million in 2001 from Ps.1,012 million in 2000. Earnings per CPO decreased 4%, or Ps.0.04 to Ps.0.93 in 2001 from Ps.0.97 in 2000. 62 Year ended December 31, 2000 compared to year ended December 31, 1999 Total revenues in 2000 increased 17.9%, or Ps.2,329.0 million, to Ps.15,373.3 million from Ps.13,044.3 million in 1999. Merchandise revenues (which includes mark-up on installment sales and penalty interest) accounted for 97.7% of total revenues in 2000 and 99.1% in 1999. Money transfer services increased to 3.9% of total revenues in 2000 from 3.0% in 1999. The monetary loss on accounts receivable represented (1.6%) of total revenues in 2000, compared to (2.1%) in 1999. Merchandise Revenue Merchandise revenues, including cash and installment sales, increased 16.1%, or Ps.2,087.0 million, in 2000 to Ps.15,013.6 million from Ps.12,926.6 million in 1999. Merchandise and credit revenues came primarily from Elektra's retail network at 86% of total merchandise revenues, with 8.2% and 4.9% of revenues coming from Salinas y Rocha and The One stores, respectively. The increase in merchandise and credit revenues was largely due to a 13.7% consolidated increase in same store sales and the opening of a net of four new stores, which increased selling space by 1%. This increase was partially offset by a 9.4% decline in sales at The One stores. Consolidated same-store contribution rose 15.1% in 2000, reflecting our successful strategy of focusing on high-margin products and services directed to our target market. Monetary loss on accounts receivable in 2000 decreased 14.0%, or Ps.38.9 million, to Ps.238.7 million from Ps.277.6 million in 1999, primarily due to a lower inflation rate of 8.9% in 2000, compared to 12.3% in 1999. Installment Sales Revenue Installment sales decreased as a percentage of our total merchandise revenues in 2000, representing 63.4% of total merchandise revenues in 2000, compared to 66.4% in 1999, while cash sales represented the remaining 36.6% and 33.6% in 2000 and 1999, respectively. Our aggregate revenue from mark-ups on installment sales and penalty interest, which is included in total revenues, increased by 15.8% in 2000, from Ps.2,716.7 million in 1999 to Ps.3,146.1 million in 2000. Included in these amounts are mark-ups on installment sales of Ps.2,772.3 million and Ps.2,347.5 million, and penalty interest of Ps.373.8 million and Ps.369.2 million in 2000 and 1999, respectively. The overall increase in revenues from installment sales largely resulted from a 13.6% increase in 2000 in the number of active installment sales accounts, which totaled 1.9 million as of December 31, 2000. Money Transfer Services Revenue Revenues from electronic money transfer services in 2000 rose 51.4%, or Ps.203.2 million, to Ps.598.5 million from Ps.395.3 million in 1999. Our U.S.-Mexico money transfer agreement with Western Union recorded a 64.4% increase in revenue, from Ps.284.0 million in 1999 to Ps.467.1 million in 2000, resulting from a 4.4% increase in the number of operations and the increase in our share of the commission. Elektra's intra-Mexico money transfer service recorded a 22.4% increase in revenue in 2000, due to a 28.5% increase in the number of transactions. Factors driving this growth in volume include the close proximity of our stores to customers, the convenient hours offered by our stores, and our "Frequent Client" loyalty program, through which frequent customers receive additional benefits. Gross Profit Gross profit as a percentage of total revenues rose to 42.7% in 2000 from 40.8% in 1999. This increase resulted from an increase in the gross margin of electronic money transfers from 95.8% in 1999 to 97.6% in 2000, due to increased commissions from the U.S.-Mexico money transfer service, and an increase in the gross margin of merchandise from 30.9% in 1999 to 32.8% in 2000. Gross margins of merchandise improved due to the gradual increase in our Latin American stores and strong demand in our Mexican stores, an increase in the number of our apparel store formats resulting from the conversion from Hecali to The One, 63 and better terms and conditions offered by suppliers. The increase in gross margin was partially offset by a decline in the gross margin of merchandise at our Salinas y Rocha stores. The gross margin for our credit sales declined slightly to 73.7% in 2000 from 74.9% in 1999. Interest on funding installment sales allocated to the cost of sales increased 3.3%, or Ps.10.2 million, from Ps.310.6 million in 1999 to Ps.320.8 million in 2000, while the provision for doubtful accounts rose 24.3% to Ps.599.7 million in 2000 from Ps.482.5 million in 1999. These increases resulted from a 20.0% increase in gross accounts receivable, from Ps.4.1 billion in 1999 to Ps.4.9 billion in 2000 and a slight increase in the amount reserved for doubtful accounts, from the usual 5% to 6%, effective on all installment sales as of the fourth quarter of 2000. The repair provision for extended warranties increased 65.0%, or Ps.19.3 million, to Ps.49.1 million in 2000 from Ps.29.8 million in 1999, resulting from a 64.9% increase in the sales of extended warranties in 2000 compared to 1999. Administrative and Selling Expenses Administrative and selling expenses, which include salaries, rent and other occupancy expenses, advertising, sales and collections commissions and other operating expenses, rose 25.4% to Ps.4,203.7 million in 2000 from Ps.3,352.2 million in 1999. As a percentage of total revenues, administrative and selling expenses increased to 27.3% in 2000 from 25.7% in 1999, resulting primarily from salary increases of senior management, increased hiring in our regional and corporate offices, increased freight costs associated with higher sales volume, increased consulting fees and information technology expenses and maintenance upgrades for all of our stores. We record such expenses immediately instead of capitalizing them over time. We believe that our increased administrative and selling expenses are associated with improvements in the performance and quality of our long-term operations. EBITDA EBITDA, excluding monetary losses and gains reported in revenues and cost of goods sold, rose 18.0%, or Ps.372.4 million, to Ps.2,445.6 million in 2000 from Ps.2,073.2 million in 1999. This was largely the result of enhanced operating leverage resulting from a 15.1% increase in same-store contribution in 2000. Depreciation and Amortization Depreciation and amortization increased 14.9%, or Ps.82.1 million, to Ps.631.6 million in 2000 from Ps.549.5 million in 1999. This increase primarily reflects the Ps.461.1 million spent in 2000 on capital expenditures associated with the acquisition of the ADN software operation system, the opening of eight stores, the conversion of 56 Hecali stores to The One, the closing of four stores, and the remodeling of five and the relocation of four Elektra stores. Comprehensive Financing Cost Comprehensive financing costs decreased 4.6%, or Ps.14.4 million, in 2000 to Ps.297.6 million from Ps.312.0 million in 1999, largely due to a 31.1% year-on-year decrease in net interest expense and a 1.6% year-on-year increase in monetary gain, which were only partially offset by a foreign exchange loss in 2000 compared to a foreign exchange gain in 1999. Net interest expense in 2000 decreased to Ps.480.8 million from Ps.630.4 million in 1999, due primarily to the placement of US$275 million in eight-year Senior Notes in March 2000, which significantly strengthened our financial position by enabling us to effectively retire shorter-term debt and extend our debt profile. We recorded a foreign exchange loss of Ps.114.1 million in 2000 compared to a Ps.26.1 million foreign exchange gain in 1999, due to decline of the peso against the US dollar 64 by 1.2% in 2000. Monetary gains rose to Ps.297.1 million in 2000 compared to Ps.292.3 million in 1999 due to a higher level of net monetary liabilities. Taxes Income before taxes and employees' statutory profit sharing increased 28.6%, or Ps.318.2 million, to Ps.1,432.7 million in 2000 from Ps.1,114.5 million in 1999. Provision for income tax and employees' statutory profit sharing increased 97.0% or Ps.106.5 million to Ps.216.3 million in 2000 from Ps.109.8 million in 1999, resulting from the application of Bulletin D-4 of the Mexican Institute of Accountants, which changed the recognition of deferred taxes. This increase was partially offset by the use of tax loss carry-forwards of Grupo SyR, whose merger with Grupo Elektra was completed during 2000. We have several operating subsidiaries with tax loss carry forwards. Except for the merger of Grupo SyR and Grupo Elektra, which made available tax loss carry-forwards to Grupo Elektra, our subsidiaries file individual income tax returns. As of 1999, the Mexican Income Tax Law changed the regulations for tax consolidation purposes by limiting consolidation from 100% to 60% of net operating losses generated in the future. In 2000, Elektra's investment in CASA, which is booked under the equity participation method, recorded a loss of Ps.23.3 million, net of amortization of goodwill, compared to a loss of Ps.92.4 million in 1999. Net Income Income of minority stockholders in 2000 was Ps.21.3 million, a decrease of 14.3% from Ps.24.8 million in 1999. The income of minority stockholders is primarily related to the investment of funds put in escrow pursuant to the Western Union transaction in shares of Elektra affiliates. Net income of majority stockholders increased 32.1% or Ps.284.6 million to Ps.1,171.9 million in 2000 from Ps.887.3 million in 1999. Earnings per CPO increased 32.9%, or Ps.0.24, to Ps.0.97 in 2000 from Ps.0.73 in 1999. Contractual Obligations The following table sets forth information with respect to the Company's contractual obligations as of December 31, 2001: 65
Payments Due by Period --------------------------------------------------------------------- Less than 1 After 5 Contractual Obligations Total year 1-3 years 4-5 years years - ---------------------------------------- ----------- ----------- ----------- --------- ----------- Long-Term Debt ......................... Ps 3,713.9 - Ps. 894.1 Ps. 298.0 Ps. 2,521.8 Capital Lease Obligations .............. Ps. 203.0 Ps. 129.1 Ps. 73.9 - - Operating Leases ....................... Ps. 1,510.2 Ps. 309.5 Ps. 519.6 Ps. 214.6 Ps. 466.5 Unconditional Purchase Obligations ..... - - - - - Other Long-Term Obligations ............ Ps. 31.9 Ps. 7.5 Ps. 15.0 Ps. 7.5 Ps. 1.9 Total Contractual Cash Obligations ..... Ps. 5,459.0 Ps. 456.1 Ps. 1,492.6 Ps. 520.1 Ps. 2,990.2
Liquidity and Capital Resources Liquidity Our net working capital increased to Ps.4,380 million as of December 31, 2001, compared to Ps.2,961 million as of December 31, 2000. The increase in our working capital during 2001 was principally attributable to a Ps.1,114 million increase in cash, coupled with a Ps.571 million decrease in short-term liabilities. Our cash and cash equivalents were Ps.1,914 million as of December 31, 2001, as compared to Ps.800 million as of December 31, 2000. Meanwhile, total interest-bearing liabilities at the end of 2001 were Ps.4,809 million, compared to Ps.4,520 million at the end of 2000. As a result, net debt at the end of 2001 reached Ps.2,893 million, representing a 18% decrease compared to the Ps.3,530 million at the end of 2000. We fund our operations through cash flow from operations and borrowings. Cash flow provided by operations in 2001 was Ps.1,830.4 million as compared to Ps.418.9 million in 2000. This increase is primarily attributable to an increased operating profitability, as evidenced by our year-to-year increases in both operating profits and EBITDA (7% and 2%, respectively), partially offset by increased needs in net working capital. Total debt with cost equivalent to US$524.4 million as of December 31, 2001 matures as follows: Maturity Date Debt Amount Year ended December 31, (in millions of US dollars) 2002 .......................... US $119.40 2003 .......................... 48.75 2004 .......................... 48.75 2005 .......................... 16.25 2006 .......................... 16.25 2008 .......................... 275.00 In 1999, 2000 and 2001, we advanced an aggregate of Ps.21.3 million, Ps.19.5 million and Ps.27.9 million, respectively, to affiliates. Outstanding advances to affiliates, including accrued interest, were Ps.34.8 million in 1999, Ps.44.9 million in 2000 and Ps.51.2 million in 2001. Certain advances were financed by short - term bank loans. As of December 31, 2001, we had accounts receivable of Ps.262.8 million that arose in the ordinary course of business with affiliates. 66 In July, 2001 we secured a US$130 million syndicated loan facility from an international group of financial institutions, led by Salomon Smith Barney. The loan was used to lengthen our debt position from an average term of 2.5 years to four years. The loan is structured in two US$65 million tranches. Tranche A carries an interest rate of LIBOR plus a margin of 275 basis points and matures in three years. Tranche B carries an interest rate of LIBOR plus a margin of 325 basis points and matures in five years. We also meet our working capital requirements through the financing of accounts receivable. Net receivables balances of Ps.3,387.1 million and Ps.3,853.7 million were on our books as of December 31, 2001 and 2000, respectively. We utilize Elektrafin to securitize our receivables. In 1997, we issued our first two securitization programs for a total of Ps.866.3 million (nominal) on the Mexican Stock Exchange with Nafin acting as the fiduciary issuer of the securities. These two programs have been fully paid off. In April 1998, we launched a Ps.793.3 million (nominal) four-year revolving securitization program, the first of its kind in Mexico. In December 1998, we launched our second two-year revolving securitization of receivables in an offering of Ps.200 million (nominal). These two programs were fully paid off as of December 2001. In 1999, we issued another three-year revolving securitization of receivables in an offering of Ps.200 million (nominal), with the rate being the higher of TIIE plus 150 basis points or the yield of the UDI over 28 days. This was our third revolving securitization and the fifth one completed through the Mexican Stock Exchange. In April 2000, we issued our sixth securitization program for a further Ps.350 million. This issue has a total term of four years, three revolving and one of amortization, and yields a real rate of interest of 8.35% per annum. In March 2001, we securitized Ps.650 million of accounts receivable under a three-year term with an interest rate of TIIE plus 200 basis points. In July, 2001, we securitized an additional Ps.550 million under a four year-term bearing an interest of TIIE plus 70 basis points. As of December 31, 2001, our revolving securitization programs have raised for us a total of approximately US$400 million. The high quality and performance of our revolving securitizations programs have enabled us to maintain a "AAAmex" rating. There has been a strong demand for our active issuances, which provides attractive financing alternatives for us where the proceeds are used primarily to pay short-term debt and to finance our working capital. Our securitization programs are arranged on a non-recourse basis. Maintenance of the programs and reinvestment of collection proceeds in new receivables requires compliance with certain overcollateralization, quality and receivables performance standards. Capital Expenditures Capital expenditures for the years ended December 31, 1999, 2000 and 2001 were Ps.520.9 million, Ps.461.1 million and Ps.610 million, respectively. Capital expenditures for store openings and improvements were Ps.182.9 million in 1999, Ps.129.0 million in 2000 and Ps.496.3 million in 2001. Other capital expenditures for distribution centers, data processing equipment and trucks totaled Ps.337.9 million in 1999, Ps.332.1 million in 2000 and Ps.113.7 million in 2001. The acquisition of Salinas y Rocha during 1999 involved a capital expenditure of Ps.991.3 million, or US$91.9 million. Our capital expenditures are expected to be approximately Ps.712 million for 2002, including the cost of opening new stores and expanding existing stores, as well as investing in information systems. Although we anticipate that cash flow from operations will remain positive, we will continue to require financing for our expansion plan and the anticipated growth of our receivables portfolio under our installment sales program. We expect that, absent a material adverse change in the Mexican economy, financing will be available, but there can be no assurance that it will be available on favorable terms. Recent Developments Dividend. On April 22, 2002, our shareholders declared a dividend equivalent to US$16 million, which represented 6% of the EBITDA of US$286 million reported for 2001. On March 30, 2001, our 67 shareholders had declared a net dividend of US$15 million, on an EBITDA of US$244 million for 2000. Our policy during the past years has been to declare a dividend of between 6% and 7% of EBITDA. Single Series Initiative. Our capital stock is currently comprised of three different series of shares as follows: o Series "A" shares, with full voting rights, representing 33.5% of total outstanding shares, o Series "B" shares, with full voting rights, representing 56.4% of total outstanding shares, and o Series "L" shares, with limited voting rights, representing 10.1% of total outstanding shares. At its meeting held on April 18, 2002, our Board of Directors passed a resolution to convert all of our existing shares into a single class of shares, with equal dividend and voting rights. In order to become effective, this conversion must be approved by our shareholders. Currently, our shares are publicly held in the form of Ordinary Participation Certificates ("CPOs"), which are comprised of two series "B" shares and one series "L" share, and in the from of Global Depository Receipts ("GDRs") that trade on the New York Stock Exchange (each of which represents ten CPOs). The CPOs and GDRs represent approximately 26.5% of the total economic rights of Grupo Elektra, but only 19.7% of the total voting rights. In connection with the conversion of our existing shares into a single class of shares, we intend to terminate the trust through which the CPOs are held (the "CPO Trust"). After the termination of the CPO Trust the ADRs will directly represent the new single class of shares. The conversion of the existing series of our capital stock into a single series will not alter the economic rights of our shareholders. However, the conversion will increase the voting rights of certain of our shareholders, in particular our minority shareholders because after the conversion, our shares that are publicly held will possess 26.5% of both our economic and voting rights. Through the conversion of our existing shares into a single series of shares, we are demonstrating our commitment to international best corporate governance practices. Through this initiative, we hope to: o Improve the liquidity of our capital stock. o Make it easier to track and evaluate per share performance. o Improve the fairness and transparency of our equity structure and provide the same rights for all of our shareholders by eliminating the CPO trust that currently holds some of our shares. o Continue being at the forefront of corporate governance best practices and meeting the expectations of the capital markets. The Banking License. On April 4, 2002, the Mexican Ministry of Finance approved our application to operate a consumer bank. This was the first new banking license granted in Mexico since the 1994 Mexican economic crisis. Initially, we expect to establish a bank during 2002 that will be our wholly-owned unrestricted subsidiary. We are establishing the bank in order to optimize financing for our customer receivables, which are an integral part of our retail strategy. Therefore, the bank will house all of our consumer financing operations, while our money transfer operations will remain with the retail segment of our business. We do not intend to open stand-alone bank branches, but will have the bank's products and services offered through service windows or mini-branches located in our stores. The bank's credit operations will be funded through our current securitization program, deposits, and the inter-bank and capital markets. We intend to eventually offer the services that are currently offered through Banco Serfin through our banking subsidiary. See Item 4. "Information on the Company--Services--Banking Services." 68 Securitization Program. In June 2002, we launched a Ps.500.9 million (nominal) four-year revolving securitization program. This program has a term of four years, three revolving years and one year of amortization, which yields a real rate of interest of TIIE plus 90 basis points per annum. Operations in Latin America. At the end of 2001, we discontinued credit sales in the Dominican Republic and El Salvador. This had a negative impact on sales in those countries. Our plan of action for this area includes the divestiture of the Dominican Republic operations and the possible closing of operations in El Salvador. As of the printing of this document, we have signed a term sheet with a group of local investors that we expect to acquire the 23 Dominican Republic stores, subject to a definitive agreement. We believe that this is a decision that will increase our focus and optimize returns on our most promising assets. The One Stores. During 2002, we closed 10 The One Stores as part of our strategy to increase efficiency and profitability in The One stores. See Item 4. "Information on the Company--The One--Strategies." Derivative Instruments From time to time, Grupo Elektra uses hedging instruments designed to lessen the impact of fluctuations in foreign currency exchange rates, interest rates and the Company's stock price. See Item 11. "Quantitative and Qualitative Disclosure about Market Risk." Other Items Income Tax The Mexican corporate income tax rate became 35% as of January 1, 1999. Our income tax expense as a percentage of income before taxes and employees' statutory profit sharing was 15.1% in 2000 and 36.1% in 2001. Before 2000, taxable income normally differed significantly from accounting income due to (i) the effect of the deduction for tax purposes of inventory purchases, offset by the non-allowable deduction of cost of sales, (ii) differences with respect to the amounts recorded to reflect the effects of inflation and (iii) certain nondeductible expenses. In accordance with this statement, the accrued tax effects as of January 1, 2000 (an increase of Ps.263.0) were recorded directly to stockholders' equity. For the year ended December 31, 2001, we recorded a Ps.260.8 million charge to income related to the deferred tax effects. Asset Tax Since 1995, an asset tax is payable at the rate of 1.8% on the net amount of certain assets and liabilities, but only when the amount of asset tax thus calculated exceeds the income tax due. Asset tax paid may be recovered in the following ten years to the extent income tax exceeds asset tax in those years. We were not required to pay such asset taxes for the years 1999, 2000 and 2001. U.S. GAAP Reconciliation Mexican GAAP differ in certain important respects from U.S. GAAP. The application of the latter would have affected the determination of consolidated net income, expressed in pesos of December 31, 2001 purchasing power for each of the three years in the period ended December 31, 2001, and the determination of consolidated stockholders' equity at December 31, 2000 and 2001, also expressed in pesos as of December 31, 2001 purchasing power, to the extent summarized in Note 17 to the Consolidated Financial Statements. 69 Pursuant to Mexican GAAP, our financial statements recognize certain effects of inflation in accordance with Bulletin B-10 and Bulletin B-12. These effects have not been reversed in the reconciliation to U.S. GAAP. Sales and money transfer services under U.S. GAAP were Ps.10,605.3 million, Ps.12,465.9 million and Ps.12,396.1 million for the fiscal years 1999, 2000 and 2001, respectively, compared with merchandise, service revenue and other under Mexican GAAP of Ps.13,044.4 million, Ps.15,373.3 million and Ps.15,608.4 million for the comparable periods. Operating income under U.S. GAAP as of December 31, 1999, 2000, and 2001 was Ps.1,958.9 million, Ps.2,392.6 million and Ps.2,474.0 million, respectively, compared to Ps.1,426.4 million, Ps.1,730.3 million and Ps.1,858.2 million, respectively, under Mexican GAAP. The principal difference between merchandise, service revenues and other under Mexican GAAP and sales and money transfer services under U.S. GAAP relates to the exclusion from sales and money transfer services of (i) the mark-up on installment sales and stated and penalty interest, which are included in operating income under U.S. GAAP in the line item "interest earned from consumer credit operations" and (ii) loss on monetary position from accounts receivable, which is included in "other financing expense." The principal differences between Mexican GAAP and U.S. GAAP that affect our operating income relate to the inclusion, for purposes of calculating operating income under Mexican GAAP but not U.S. GAAP, of the loss on monetary position from accounts receivable. Net income under U.S. GAAP was Ps.1,744.6 million (Ps.0.34 per share), Ps.1,347.6 million (Ps.0.37 per share) and Ps.1,093.6 million (or Ps.30 per share) for the fiscal years 1999, 2000, and 2001, respectively, compared with income of majority stockholders under Mexican GAAP of Ps.887.3 million (Ps.0.26 per share), Ps.1,171.9 million (Ps.0.32 per share) and Ps.1,136.7 million (Ps.0.31 per share) for the comparable periods. Majority stockholders' equity under U.S. GAAP as of December 31, 2000 and 2001 was Ps.2,024.4 million and Ps.2,572.2 million respectively, as compared to Ps.5,566.9 million and Ps.5,956.7 million, respectively, under Mexican GAAP. The principal differences between Mexican GAAP and U.S. GAAP that affect our net income relate to the treatment of the following items: (i) stock options granted to employees; (ii) acquisition of the interest in CASA; (iii) deferred income taxes; (iv) accounting for the acquisition of Grupo SyR; and (v) accounting for derivative and hedging transactions. The principal differences between Mexican GAAP and U.S. GAAP that affect our majority stockholders' equity relate to the treatment of the following items: (i) deferred income; (ii) deferred income taxes; (iii) goodwill relating to the acquisition of the interest in CASA; (iv) goodwill in connection with other acquisitions; and (v) derivative and hedging transactions. New Accounting Pronouncements Mexican GAAP In November 2001, the Mexican Institute of Public Accountants (MIPA) issued revised Bulletin C-9, "Liabilities, Provisions, Contingent Assets and Liabilities and Commitments" ("Bulletin C-9"), which supersedes existing Bulletin C-9, "Liabilities" and Bulletin C-12, "Contingencies and commitments". Bulletin C-9 establishes a methodology for valuation, presentation and disclosure of liabilities and provisions, as well as for valuation and disclosure of contingent assets and liabilities, and for disclosure of commitments. Among other things, Bulletin C-9 establishes guidelines for the recognition and non-recognition of liabilities in the event of extinguishments, restructurings or conversion to equity. In addition, it introduces the concept of discounting long-term provisions. With respect to contingent liabilities, Bulletin C-9 states that all contingent liabilities that have a probability of being realized must be accounted for and disclosed in the financial statements, contingent liabilities that have a possibility of being realized (but are not necessarily probable) should not be accounted for in the financial statements, but must be disclosed, and contingent liabilities that have a remote realization should not be accounted for in the financial statements and are not required to be disclosed. Bulletin C-9 also requires disclosure of committed amounts when such amounts represent 70 significant fixed asset additions, contracted services and goods that exceed the Company's immediate needs or if the commitment is considered a contractual obligation. The provisions of Bulletin C-9 are required to be applied beginning on January 1, 2003, although early adoption is recommended. We are currently evaluating the impact that the adoption of Bulletin C-9 will have on our consolidated financial statements. In December 2001, the MIPA issued Bulletin C-8, "Intangible Assets" ("Bulletin C-8"), which defines intangible assets as costs incurred and rights or privileges acquired that will generate a future economic benefit. Bulletin C-8 provides a clear definition of research and development costs, requiring that only development costs may be deferred to a future period. Furthermore, Bulletin C-8 states that preoperating costs should be expensed as a period cost, unless they can be classified as development costs. Bulletin C-8 requires that goodwill and intangible assets, including previously existing goodwill and intangible assets, with indefinite useful lives should not be amortized, but should be tested for impairment annually. Goodwill and intangible assets with finite useful lives should be amortized over their useful lives. The provisions of Bulletin C-8 are required to be applied beginning on January 1, 2003, although early adoption is recommended. We are currently evaluating the impact that the adoption of Bulletin C-8 will have on our consolidated financial statements. U.S. GAAP In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB No. 125", ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, but it carries over most of the provisions of SFAS 125 without change. SFAS 140 is effective for transfers of financial assets occurring after March 31, 2001. The adoption of SFAS 140 did not change the U.S. GAAP accounting of our current securitization program. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") which supersedes APB Opinion No. 16, "Business Combinations" and amends or supersedes a number of related interpretations of APB 16. The statement is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS 141 addresses financial accounting and reporting for business combinations, eliminates the pooling-of-interests method of accounting for business combinations, and prescribes the initial recognition and measurement of goodwill and other intangible assets, accounting for negative goodwill and the required disclosures in respect of business combinations. The adoption of SFAS 141 did not have a material impact on our consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses the manner in which intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business acquisition) should be accounted for in financial statements. SFAS 142 addresses how goodwill and other intangible assets should be accounted for both upon their acquisition and after they have been initially recognized in the financial statements. SFAS 142 discontinues the practice of amortizing both existing and future acquired goodwill. Furthermore, negative goodwill must now be reflected as a one-time extraordinary gain. In addition, SFAS 142 states that upon adoption, any remaining negative goodwill must be written off as a change in accounting principle. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and is required to be applied to all goodwill and other intangible assets recognized in the financial statements at that date. We are currently evaluating the impact that the adoption of SFAS 142 will have on our consolidated financial statements. As of December 31, 2001, intangible assets under US GAAP consisted of goodwill Ps331,010 and negative goodwill Ps496,234. 71 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires the recognition of a liability for the legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction and (or) normal operation of the asset. The liability is recognized at fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. A corresponding asset retirement cost is added to the carrying value of the long-lived asset and is depreciated to expense using a systematic and rational method over its useful life. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Upon initial adoption, a liability is recognized for existing asset retirement obligations and the associated asset retirement cost is capitalized as an increase to the carrying value of the asset. The recognized liability and asset are adjusted for cumulative accretion and accumulated depreciation, respectively, from the time period when the asset retirement obligation would have originally been recognized had this statement been in effect to the date of initial adoption. The cumulative effect of initial adoption of SFAS 143 is recorded as a change in accounting principle. We estimate that the adoption of SFAS 143 will not have a material impact on our consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used, but resolves a number of implementation issues and establishes a single accounting model for assets to be disposed of SFAS 144 also retains the requirement of reporting discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that either has been disposed of by sale, abandonment or distribution to owners or is classified as being held for sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and their interim periods. The provisions of SFAS 144 for long-lived assets to be disposed of by sale or otherwise are effective for disposal activities initiated after the effective date of SFAS 144 or after its initial application. We are currently evaluating the impact that the adoption of SFAS 144 will have on our consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002." SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be classified as extraordinary items unless they meet the criteria of unusual or infrequent as described in Accounting Principles Boards Opinion 30, "Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In addition, SFAS 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements by making various technical corrections and clarifying certain definitions, or describe their applicability under changed conditions. We are presently evaluating the impact, if any, that these new standards will have on our consolidated financial statements. 72 Item 6. Directors, Senior Management and Employees Directors Our Board of Directors is composed of nine members and their alternates who are elected for one-year terms at our ordinary meeting of shareholders. Eight of the directors are elected by the holders of Class A Shares and Class B Shares voting as a single class. The remaining member is appointed by the holders of Class L Shares. Four of the directors appointed by the Class A and Class B shareholders and the director appointed by the Class L shareholders must be independent directors who are not employed by or affiliated with us. The following table lists our current directors, their position, their principal occupation and the year of their appointment to the board. On August 28, 2000, our shareholders elected a new Board of Directors, comprised of the following persons.
Name Principal Occupation Director Since Age - ---- -------------------- -------------- --- Appointed by A and B Shareholders Ricardo B. Salinas Pliego(1) ....... Chairman of the Board of Grupo Elektra 1993 46 Hugo Salinas Price(2) .............. Honorary President of Grupo Elektra 1993 70 Pedro Padilla Longoria ............. Chief Executive Officer of TV Azteca 1993 36 Elisa Salinas Gomez(1) ............. Director of Production, Azteca Digital 1993 37 Guillermo Salinas Pliego(1) ........ President of Dataflux, S.A. de C.V. 1993 42 David Williams ..................... Chairman of Alliance Capital Management Corporation 2000 70 Carlos Fernandez Gonzalez .......... Vice Chairman & Chief Executive Officer of Grupo Modelo S.A. de 2000 36 C.V. Karen L. Hendricks ................. Retired Chairman of Baldwin Piano & Organ Company 2002 54 Appointed by L Shareholders Roberto Servitje Achutegui ......... Chairman of Grupo Altex, S.C 2000 49 - --------------- (1) Child of Hugo Salinas Price. (2) Father of Ricardo B. Salinas Pliego and Guillermo Salinas Pliego.
Statutory Auditor In addition to the Board of Directors, our bylaws provide for a statutory auditor elected at the ordinary general meeting of shareholders and, if determined at such meeting, an alternate statutory auditor. Under Mexican law, the duties of statutory auditors include, among other things, the examination of the operations, books, records and any other documents of a company and the presentation of a report of such examination at the annual ordinary general meeting of shareholders. The statutory auditor is required to attend all of our Board of Directors and shareholder meetings. We currently have one statutory auditor, Francisco Javier Soni Ocampo, a partner at PricewaterhouseCoopers, who has held the position since 1993. Corporate Governance In October 1999, our shareholders approved amendments to our bylaws which enacted significant changes in our corporate governance policies. These changes were designed to increase our transparency and accountability to our shareholders and to encourage good communications with our minority shareholders. The shareholders approved a decrease in the size of the Board of Directors, from 14 directors to 9. In addition, 73 the number of independent directors increased from three to four. Of the nine directors, no more than five may be nominated by or affiliated with the Controlling Shareholders or with our management, providing for greater representation of minority shareholders. In addition, the shareholders approved a corporate governance charter and a requirement that beginning with the 1999 Annual Report, our annual report will contain a section on corporate governance and on the work of each of the Board committees during that fiscal year. The shareholders also authorized the creation of the following new board committees, each of which is comprised of three members, two of whom must be independent directors. o The Investments Committee reviews any material investments we make outside the ordinary course of business or not included in the annual budget and, with regard to such investments, evaluates opportunities and business risks. The members of the Investments Committee are Karen L. Hendricks (Chairman), Carlos Fernandez Gonzalez, Guillermo Salinas Pliego and Alvaro Rodriguez Arregui (upon invitation). o The Audit Committee reviews our financial reporting procedures and internal financial control systems, as well as the activities and independence of independent auditors and the activities of internal audit staff. Audit Committee meetings are attended by both external auditors and our controller. The members of the Audit Committee are Carlos Fernandez Gonzalez (Chairman), Karen L. Hendricks, Guillermo Salinas Pliego and Javier Soni Ocampo (non-member of the Board of Directors). o The Management Compensation Committee reviews and makes recommendations to the Board of Directors with regard to the compensation, including incentives and bonuses, of senior executive officers of our company. The members of the Compensation Committee are Roberto Servitje Achutegui (Chairman), David Williams, and Pedro Padilla Longoria. o The Related Party Transactions Committee reviews any material transactions with a related party of our company or our Controlling Shareholders. The members of the Related Party Transactions Committee are David Williams (Chairman), Roberto Servitje Achutegui and Pedro Padilla Longoria. In 2000, this committee considered and approved the decision to enter into an option agreement with CASA. See Item 4. "Information on the Company--Strategic Investments--CASA." In addition, the committee also approved the decision to enter into an agreement with Todito in May 2000. See Item 4. "Information on the Company--Our Business--Our Strategy--E-catalog" and "--Strategic Investments." 74 Executive Officers The following table lists each of our senior executive officers, his position, years of service as an executive officer (with us or our predecessor entities), and age, as of May 27, 2001:
Years as Name Position Executive Officer Age - ---- -------- ----------------- --- Ricardo B. Salinas Pliego .... Chairman of the Board and President 19 46 Javier Sarro Cortina ......... Chief Executive Officer 11 36 Arturo Ramos Ochoa ........... Chief Operating Officer 9 51 Mario Gonzalez Gonzalez ...... Vice President Marketing 2 48 Gonzalo Garcia De Luca ....... Vice President Financial Services 2 36 Manuel Gonzalez Palomo ....... Vice President Information Technology 2 44 Alvaro Rodriguez Arregui ..... Chief Financial Officer 2 34 Filiberto Jimenez Diaz ....... General Director of Store Operations 6 31 Gabriel Roqueni Rello ........ General Counsel 40 Ricardo Martinez Cruz ........ Secretary of the Board of Grupo Elektra (not a member of the Board) 10 31
Director and Officer Biographies Ricardo B. Salinas Pliego has served as our President since 1989 and as Chairman of our Board of Directors since 1993. Mr. Salinas is also President of Unefon since 1998 and a director of Unefon since 1999. Prior to joining us in 1981, he worked at Arthur Andersen and The Brinkman Company. Mr. Salinas studied public accounting at the Instituto Tecnologico y de Estudios Superiores in Monterrey ("ITESM") and graduated with Honors in 1977. He went on to receive his Masters in Finance from the University of Tulane in 1979. Mr. Salinas also serves on the board of directors of numerous Mexican companies including Dataflux, Biper, Cosmofrecuencias and Todito. Recently, Mr. Salinas Pliego became the first foreigner to be recognized by the University of Tulane as a Distinguished Alumni. Hugo Salinas Price has served as our Honorary President since 1993. From 1952 to 1987, Mr. Salinas served as a director of our company. In 1997, he founded the Asociacion Civica Mexicana Pro-Plata A.C., for which he currently serves as president. Mr. Salinas holds degrees from Wharton and ITESM and a degree in Law from the Universidad Nacional Autonoma de Mexico ("UNAM"). Pedro Padilla Longoria has served as a Series A and B Director since 1993 and served as our Chief Executive Officer from 1993 until 2001. Mr. Padilla has been Chief Executive Officer of TV Azteca since August, 2000 and he also serves on the board of directors of Biper, Unefon and Cosmofrecuencias. Mr. Padilla has extensive experience in cross border financial and commodities transactions. Mr. Padilla holds a degree in Law from UNAM. Elisa Salinas Gomez has served as a Series A and B Director since 1993. She currently serves as Adjunct Vice President of Production of soap operas for Azteca Digital. In the past, Ms. Salinas opened her own shoe store which expanded into a chain of 32 establishments. She also opened a haute couture boutique on Madison Avenue in New York City for the Mexican designer Enrique Martinez. Guillermo Salinas Pliego has served as a Series A and B Director since 1993. He also serves on the board of directors of Television Azteca and is Chairman of the board of Dataflux. Mr. Salinas founded Dataflux while studying at ITESM and is currently the primary shareholder of the company. He has studied at the Colegio Britanico de la Ciudad de Mexico and at St. Andrew's College in Canada. Mr. Salinas holds a CPA degree from ITESM. 75 David Williams has served as a Series A and B Director since 2000. Since 1977 he has been the Chairman of Alliance Capital Management Corporation, an investment management firm. Prior to joining Alliance Capital he served as Chairman of Mitchell, Hutchins, Inc. and Vice President of Waddell & Reed Inc. Mr. Williams is a graduate of the University of Texas, and holds an MBA from the Harvard Business School. He is also a Director of AXA Financial, Inc., and a trustee of the American Federation of Arts, the Foreign Policy Association and the Metropolitan Museum of Art. Carlos Fernandez Gonzalez has served as a Series A and B Director since 2000. He is Vice Chairman and CEO of Grupo Modelo, S.A. de C.V., Mexico's largest brewer and beer distributor. Mr. Fernandez is a graduate of Anahuae University and the Executive Management Program of the Instituto Panamericano de Alta Direccion de Empresa ("IPADE"). Mr. Fernandez serves as a Director of several Mexican and foreign companies including Anheuser-Busch Inc. Karen L. Hendricks is the retired President, CEO, and Chairman of the Baldwin Piano & Organ Company where she served from 1995 to 2001. Prior to joining Baldwin, she was Executive V.P. and General Manager of the Dial Corporation's Skin Card Division. She is currently a Board member of Corn Products International, Inc. and formerly served on the Boards of the Columbia Energy Group and AC Nielsen Corporation. Roberto Servitje Achutegui has served as the Series L Director since 2000. From 1993 until 2000, he served as an external advisor to our board of directors. He is the Chairman of Grupo Altec S.C. Formerly he was Executive Vice President and Director of Grupo Industrial Bimbo, Mexico's leading producer and distributor of bakery goods, where he worked for over 28 years. Mr. Servitje graduated from the Universidad Iberoamericana and holds an MBA from the J. L. Kellogg Graduate School of Business at Northwestern University. Javier Sarro Cortina has served as our Chief Executive Officer since January 2001. He originally joined Grupo Elektra in 1995 as Vice President for Financial Services. Other positions he has held include the position of manager of new product development and telecommunications division of Grupo Salinas. In addition, he served as the first CEO of Unefon, building its management team, strategic supplier relations and financial structure. Mr. Sarro began his career in the financial services industry. He has an MBA from the Instituto Panamericano de Alta Direccion de Empresas (IPADE) and completed undergraduate law studies at the Universidad Iberoamericana. Arturo Ramos Ochoa has served as Chief Operating Officer since 1993. His prior experience at our company includes positions as Director of Furniture, Director of Merchandise, Director of Sales and Director of General Operations. Mr. Ramos has a bachelor's degree in Accounting from the Guadalajara University. Mario J. Gonzalez joined our company in 1999 and currently serves as our Vice President for Channel and Marketing. Prior to joining us, Mr. Gonzalez spent over 23 years in marketing, marketing research, sales and operations in both local and international markets. During this period he worked with prominent multi-national companies including Nabisco, Gillette, Pepsico and Casa Cuervo in the consumer goods, food and beverages, liquors and spirits and services. Mr. Gonzalez holds a degree in Business Administration and a Marketing Specialization from the Universidad Iberoamericana. Gonzalo Garcia de Luca has served as Vice President for Financial Services since March 2000. His responsibilities include our credit sales, collection, money transfer business and savings program. Since joining our company in 1996, he has also been responsible for our first securitization of accounts receivable as well as financial planning, structured finance and investor relations. Prior to 1996, he worked for Banamex, Grupo Posadas, Bursamex, and the Mexican Internal Revenue Service (Secretaria de Hacienda y Credito Publico). Mr. Garcia holds an MBA from the IPADE and a bachelor's degree from the ITAM. 76 Manuel Gonzalez Palomo has served as Vice President of Systems since 2000. Since joining Electra in 1990, he held the positions of Director of Finance, Director of Human Resources and General Director of Systems. Mr. Gonzalez holds a bachelor's degree in accounting, an MBA and a Masters in Operations Research, all from the Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM). Alvaro Rodriguez Arregui has served as our Chief Financial Officer since 1999. Appointed Chief Financial Officer of Unefon in 1997, he helped raise US$1 billion to start that company, and established its accounting, administration, budget, finance, legal and treasury departments. Before joining Unefon he worked for several years as a banker in Latin America, Europe and the United States. Mr. Rodriguez holds a bachelor's degree from the Instituto Tecnologico Autonomo de Mexico (ITAM) and an MBA from Harvard Business School. Filiberto Jimenez Diaz has served as the General Director of Store Operations since 2000. He joined our company in 1996 after spending two years at a consulting firm, and has oversaw the launch of our Latin American operations as one of his early job responsibilities. Since then, he has served as the Director of Operations for our Elektra stores, and as the CEO of the Salinas y Rocha after we purchased the company in March 1999. Mr. Jimenez holds a degree in Marketing and an MBA with a major in International Business. Gabriel Roqueni Rello has served as our General Counsel since 2000. Since joining our company in 1990, he previously served as a General Corporate Lawyer and as General Director of Operations. Mr Roqueni is a graduate of The Universidad Panamericana (UP). Ricardo Martinez Cruz has served as our Corporate and Legal Affairs Director and as a non-member Secretary of our Board of Directors since 1999. He joined our company in 1992 as a General Corporate Lawyer. Mr. Martinez holds a Bachelor's Degree in Law from the Universidad Nacional Autonimo de Mexico (UNAM). Compensation of Directors and Officers For the year ended December 31, 2001, the aggregate compensation paid to our executive officers (a total of 75 persons in senior and middle-level management) for services in all capacities was approximately Ps.71.9 million (approximately US$7.4 million). Traditionally, a token compensation was paid by our company to each member of the Board of Directors represented by one gold coin (centenario) per meeting attended. On January 26, 2000, our shareholders approved a resolution to pay each director an annual fee of US$25,000. In 1994, we established a non-contributory pension plan for our employees, including our officers. During 1999, 2000 and 2001, the charges to income related to such pension plan and seniority premiums were approximately Ps.7.4 million, Ps.9.5 million and Ps.7.6 million, respectively. As of December 31, 2001, the liabilities related to seniority premiums and such pension plan were Ps.56.8 million compared to Ps.49.2 million 2000. Stock Option Plan On February 28, 1994, our Board of Directors adopted an executive stock option plan (the "Stock Option Plan") through which store managers and all personnel senior to store managers employed prior to January 1, 1994 were granted options to purchase CPOs at the price of Ps.2.50 per CPO. The Stock Option Plan also allowed employees whose employment date was during 1994 or 1995 to receive options beginning in 1996 and 1997, respectively, at an exercise price of Ps.3.25 (1994 employees) or Ps.4.00 (1995 employees) per CPO. The Stock Option Plan authorizes the sale of up to a total of 70 million CPOs (after giving effect to the ten-to-one split of our stock authorized on August 15, 1997). Options granted under the Stock Option Plan are exercisable ratably over each year in the five-year period after the date on which they were granted as long as the rate of increase in our net profits over the previous year is more than 25%. If we fail to meet this 77 performance target in any given year, the options that would have been exercisable in such year are eligible to be exercised in the following year and the five-year term of options is extended one year. As of December 31, 2001, options to acquire approximately 63 million CPOs at prices of Ps.2.50, Ps.3.25 or Ps.4.00 per CPO (depending on the relevant employment date) had been granted to 457 executives and key employees, of which 45,678,828 had been exercised. See Note 11 to our Consolidated Financial Statements. Set forth below are the number of CPO options, their exercise price and the expiration dates of all options outstanding as of December 31, 2001:
Number of Unexercised Options Exercise Prices Current Expiration Dates ------------------------------ ----------------- -------------------------- 15,755,581 2.50 February 28, 2024 888,441 3.25 February 28, 2024 638,337 4.00 February 28, 2024 ----------------- Total 17,282,359 =================
Employees The following table sets forth the number of our employees, broken down by category of employment and geographical location for the years ending December 31, 1999, 2000 and 2001.
Number of Employees as at December 31, ------------------------------------------ 1999 2000 2001 --------- -------- --------- Number of employees ........................ 18,541 19,442 18,235 Category of activity Store employees ....................... 9,389 9,171 7,121 Credit and collections employees ...... 4,251 4,471 5,118 Corporate and administrative .......... 4,901 5,800 5,996 Location Mexico ................................ 16,765 17,430 16,215 Dominican Republic .................... 198 375 522 El Salvador ........................... 372 314 192 Guatemala ............................. 471 518 359 Honduras .............................. 326 336 388 Peru .................................. 409 469 559
For a more detailed discussion of our employees and labor relations, see Item 4. "Information on the Company--Our Business--Employees;" "--Elektra--Elektra in Mexico--Employees;" "--Elektra--Elektra in Latin America--Employees;" "--Grupo SyR--Employees;" "--The One--Employees." Share Ownership As of May 1, 2002, the heirs of Hugo Salinas Rocha, including Ricardo B. Salinas, our President and Chairman of the Board of Directors, and members of his immediate family, may be deemed to have beneficial ownership of 85.92% of our Series A Shares, 66.72% of our Series B Shares, and 11.78% of our Series L Shares. See Item 7. "Major Shareholders and Related Party Transactions--Major Shareholders." None of our other directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock. 78 Item 7. Major Shareholders and Related Party Transactions. MAJOR SHAREHOLDERS Grupo Elektra, S.A. de C.V. As a result of a ten for one stock split in October 1997, at December 31, 2001, we had 4,329,459,055 shares of capital stock authorized, of which 1,495,024,470 were Series A Shares, 2,347,018,555 were Series B Shares and 487,416,030 Series L Shares. At December 31, 2001, 1,249,126,710 Series A Shares were issued and outstanding, 2,001,705,795 Series B Shares were issued and outstanding and 380,535,321 Series L Shares were issued and outstanding. The following table sets forth, as of December 31, 2001, certain information with respect to the beneficial ownership of our capital stock of (i) each person who is known by us to own more than 5% of either the currently outstanding A Shares, B Shares or L Shares and (ii) all executive officers and directors as a group.
SHARES OWNED ------------------------------------------------------------------------------------------------- SERIES "A" SHARES SERIES "B" SHARES SERIES "L" SHARES -------------------------- ---------------------------- ------------------------- Aggregate Percentage of Percentage of Percentage of Percentage Outstanding Identity of Owner Number Class Number Class Number of Class Shares - ----------------- ----------- ------------- ------------- ------------- ---------- ----------- ----------- Hugo Salinas Rocha's heirs(1) 318,229,59 25.48 512,739,174 25.78 7,101,285 1.89 23.19 Esther Pliego de Salinas(2) 650,307,870 52.06 60,570,340 3.05 30,285,170 7.97 20.49 All executive Officers and 968,537,464 77.54 1,218,681,414 61.28 44,775,590 11.92 1.67 Directors of the Group(3)
- ------------- (1) In February 1997, Mr. Hugo Salinas Rocha, our Honorary President of the Board of Directors, grandfather of Ricardo B. Salinas Pliego (our current President and Chairman of the Board of Directors), father of Mr. Hugo Salinas Price and father-in-law of Esther Pliego de Salinas, died, distributing the capital stock of Corporacion HSR, S.A. de C.V., the company through which he principally held shares of our company, to his children. Therefore, the heirs of Mr. Salinas Rocha as a group control his shares. (2) Upon Mr. Hugo Salinas Rocha's death, a hereditary trust terminated and the shares held in trust were delivered to Esther Pliego de Salinas. (3) In this item are included the shares of Hugo Salinas Rocha's heirs and Esther Pliego de Salinas as well as those in a trusteeship related to Sheung Wong Co. Ltd., a company controlled by the Controlling Shareholders. The capital structure of our company, as of May 31, 2002 is the same as set forth in the above table. The controlling beneficial shareholders of our company are the heirs of Hugo Salinas Rocha, including Ricardo B. Salinas and Esther Pliego de Salinas (collectively, the "Controlling Shareholders"). The Controlling Shareholders collectively own 968,537,464 A Shares, representing 77.54% of the currently outstanding A Shares, and 1,218,681,414 B Shares, representing approximately 61.28% of the currently outstanding B Shares. In addition, the Controlling Shareholders own 44,777,590 L Shares, representing approximately 11.92% of the outstanding L Shares. The Controlling Shareholders thus control approximately 71% of our equity, while 29% is owned by outside investors. Through ownership of these shares, the Controlling Shareholders currently have the power to determine the outcome of substantially all actions requiring shareholder approval, including the power to elect eight of our nine directors and to determine whether or not dividends will be paid. 79 If our single series initiative is approved by our shareholders, our equity structure will reflect the single class of stock. See "Item 5. Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." U.S. Shareholders As most of our GDSs are held by a nominee of The Depository Trust Company, it is not practicable for us to determine the number of GDSs or the number of our company's Class A, B and L Shares beneficially owned in the United States. RELATED PARTY TRANSACTIONS Interest of Management in Certain Transactions Historically, we have engaged, and we expect to continue to engage, in a variety of transactions with our affiliates, including entities owned or controlled by our Controlling Shareholders. Since 1995, we have had a committee on related party transactions to provide an independent review of transactions with affiliates to determine whether these transactions are related to our business and are consummated on terms that are at least as favorable to us as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm's-length dealings with an unrelated third person. In October of 1999, our shareholders approved amendments to our bylaws which enacted significant changes in our corporate governance policies. These changes were designed to increase our transparency and accountability to our shareholders and to encourage good communications with our minority shareholders. Among these changes, the shareholders approved amendments to our bylaws which formalize the existence of the committee on related party transactions. The committee is comprised of three members, two of whom must be independent directors. On January 26, 2000, we appointed independent directors to the related party transactions committee. We anticipate that we will continue to engage in transactions with affiliates and that our current arrangements and any future renewals of these arrangements with our affiliates will receive a favorable review from the new committee. We have also agreed to terms governing our indebtedness which restrict our ability to engage in transactions with affiliates. Loans to Affiliates From time to time, we have made loans to our affiliates. However, as of April 29, 2002, there were no material loans to affiliates outstanding. Loans from Affiliates On January 19, 2000, January 28, 2000 and February 15, 2000, TV Azteca made a series of short-term loans to our company, for an aggregate amount of Ps.200.4 million (US$20 million), each accruing interest at an annual rate of 13%. We repaid these loans on March 31, 2000. Purchase of CASA "N" Shares On March 26, 1996, we purchased 35.8% of the capital stock of CASA, a holding company through which our controlling shareholders own their interests in TV Azteca and Grupo COTSA. CASA indirectly owns (through Azteca Holdings, S.A. de C.V., an intermediate holding company) approximately 56.7% of the outstanding common stock and 51% of the voting stock of TV Azteca and 26.2% of the outstanding common stock and 50.0% of the voting stock of Grupo COTSA. On September 1, 2000, we entered into an option agreement with CASA pursuant to which we granted CASA a twelve-month option to purchase all of our shares of CASA. CASA had until October 12, 2001 80 to exercise this option. CASA did not exercise the option and paid a penalty of US$15.8 million to us for such failure to exercise. See "Item 4. Information on the Company--Strategic Investments--CASA." TV Azteca Advertising Agreements In connection with the investment in CASA, the shareholders of CASA caused subsidiaries of TV Azteca to enter into a Television Advertising Time Agreement with us on March 25, 1996 (the "Unsold Airtime Agreement"). Under the Unsold Airtime Agreement, TV Azteca agreed to air not less than 300 commercial spots per week for a period of 10 years, each spot with 20 seconds average duration, totaling 5,200 minutes each year, in otherwise unsold airtime. In exchange for such television advertising time, Elektra agreed to pay TV Azteca US$1.5 million each year, payable in advance each year. TV Azteca may not terminate the Unsold Airtime Agreement. However, we may terminate the Unsold Airtime Agreement at any time upon at least 90 days' notice. Our rights under the Unsold Airtime Agreement may be transferred to third parties. For the years ended December 31, 1999, 2000 and 2001, we recorded advertising expenses of Ps.11.1 million, Ps.15.3 million and Ps.17.1 million, respectively, under this agreement On December 22, 1998, we entered into a Television Advertising Time Agreement with TV Azteca (the "Prime Airtime Agreement"). Under the Prime Airtime Agreement, TV Azteca has agreed to air commercial spots for Elektra at discounted rates based on the gross rating points assigned to the airtime chosen by us for each commercial spot. At least 60% of the commercial spots must be aired on "stellar" airtime, i.e. from 7:00 p.m. to midnight, and half of this 60% (30%) must be aired on "prime" airtime, i.e. from 9:00 p.m. to 11:00 p.m. The remaining 40% may be aired on airtime other than from 7:00 p.m. to midnight. Under the Prime Airtime Agreement, we determine each year how much airtime to purchase from TV Azteca for that particular year. In 1999, we purchased Ps.21 million of airtime under this agreement, but in 2000 and 2001, we did not purchase any airtime under this agreement. The Prime Airtime Agreement was executed for a term of five years. The Prime Airtime Agreement may not be terminated by Elektra, but may be terminated at any time by TV Azteca upon at least 15 business days' notice. Our rights under the Prime Airtime Agreement may not be transferred to third parties. On February 17, 2000, we entered into an additional advertising agreement with TV Azteca effective for one year, pursuant to which TV Azteca will air commercial spots for us at rates based on the rating points assigned per program. At December 31, 2001 and 2000, we purchased airtime amounting to Ps.53.1 million and Ps.53.2, respectively, million under this contract. In May, 2001, Elektra del Milenio, S.A. de C.V., a subsidiary of ours, entered into an advertising agreement with TV Azteca pursuant to which Elektra del Milenio purchased advertising time on TV Azteca's channel 7 and channel 13 for the time period from May 2001 through December 2001. We paid a total of Ps.54.5 million, in five monthly installments, to TV Azteca as consideration for this agreement. COTSA On September 30, 1999, Inmuebles Ardoma, S.A. de C.V. (a wholly-owned subsidiary of Grupo SyR) acquired approximately 90% of the capital stock of COTSA in exchange for capitalizing Ps.369.6 million of accounts receivable due from COTSA. See Item 4. "Information on the Company--Strategic Investments--CASA." Unefon Agreement As part of our investment in CASA and through CASA, in TV Azteca, we indirectly own 9.1% of Unefon. At the August 31, 2000 meeting of our Committee on Related Party Transactions, it was agreed to terminate our previous agreement with Unefon, dated October 15, 1999, and to enter into a new ten-year agreement beginning January 1, 2000. 81 Pursuant to our agreement with Unefon, we market, sell and distribute Unefon's wireless telecommunications and other telephony products and services through our stores. See "Item 4. Information on the Company--Additional Services." On October 19, 2000, TV Azteca granted to its shareholders, including Azteca Holdings, rights to acquire all of its shares of Unefon. See "Item 4. Information on the Company--Strategic Investments--TV Azteca Spin-Off of Unefon." Biper Elektra's relationship with Biper, a Mexican company that provides wireless e-mail and traditional messaging services, is governed by two separate agreements: On March 31, 1996, Elektra and Biper entered into an Agency Agreement pursuant to which Elektra acts as Biper's agent to promote Biper's paging and message delivery services, sign-up Biper's subscribers, provide customer support and carry out collection. In exchange, Elektra is entitled to 2.5% of every payment received by Elektra from Biper's customers, plus an additional 5% whenever Elektra carries out collection services. The Agency Agreement was entered into for an undetermined duration and may be terminated by either party upon at least 30 days notice. On March 15, 1997, Elektra and Biper entered into an Exclusive Distribution Agreement. In exchange for an exclusivity commitment by Elektra, Biper makes Elektra its first channel of distribution for new products or services. The Exclusive Distribution Agreement was entered into for a 10-year term. We recorded revenues under these agreements of Ps.56.9 million, Ps.26.4 million and Ps.4.7 million for the years ended December 31, 1999, 2000 and 2001, respectively. We also sell certain goods to Biper and Radiocel including electronic devices, computers and communication equipment. Revenues from sales to Biper and Radiocel for the years ended December 31, 1999, 2000 and 2001 amounted to Ps.79.6 million, Ps.125.2 million and Ps.5.8 million, respectively. Todito.com ("Todito") As approved by our Related Party Transactions Committee, we entered into an agreement with Todito on May 9, 2000 for a duration of five years, pursuant to which Elektra, Salinas y Rocha and The One rent space in their stores to Todito, in which Todito installs Internet kiosks and offer its services through its www.todito.com Internet portal. In addition, our stores provide Todito with space on all their web pages (www.elektra.com.mx, www.salinasyrocha.com.mx ) to place a fixed icon with the Todito logo, and, in return, Todito provides the stores with space on its website to place a fixed icon, which works as a link to the stores' web pages. The stores also grant the right to Todito to sell, on an exclusive basis, its banner and button inventory appearing on their web pages. Customers may make payments for sales completed through the Todito Internet portal at our stores, which will be paid a commission on payments received. The stores are required to deposit the amounts collected in a Todito account within three days following the collection. For the year ended December 31, 2001 we generated Ps.0.2 million of revenues from this agreement, while in 2000 the agreement generated no revenue for us. 82 Item 8. Financial Information Consolidated Financial Statements See Item 18. "Financial Statements." and pages F-1 through F-85. Legal Proceedings We do not believe that any legal proceedings to which we or any subsidiary are a party will, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operation. Suspension of Payments In September 1983, Elektra Mexicana, S.A. de C.V. ("Elektra Mexicana") and certain subsidiaries of Elektra Mexicana were subject to suspension of payments proceedings in Mexico as a result of the inability to pay debts due to the devaluation of the peso in the early 1980s. Elektra Mexicana is currently a subsidiary of our company and was, at the time of the suspension of payments proceedings, the owner and operator of our Elektra stores. In 1984, the Mexican court having jurisdiction over the suspension of payments proceedings approved a plan of reorganization (the "Plan") for Elektra Mexicana and its subsidiaries. As a result of the suspension of payments proceedings, we and our current operating subsidiaries were formed to operate our business. Elektra Mexicana has paid the settlement claims stipulated in the Plan and is in the process of proving the payment of such claims to the authorities. Once payment has been proven, the suspension of payments process will be formally terminated. We are aware of three creditors who did not consent to the Plan. Two of these creditors have filed no objection to the Plan and have not sought to collect any amounts owed to them. One financial institution (the "Financial Institution") has sought to enforce a promissory note in the original principal amount of US$3,375,000, together with accrued interest and penalty interest to the date of repayment. Under the terms of the Plan, the Financial Institution is entitled to receive Ps.444,251. The Financial Institution has instituted two separate proceedings in the Mexican federal courts seeking to enforce the promissory note. Each of these proceedings has been dismissed, the court holding that the suspension of payments proceeding is the appropriate forum for the Financial Institution to pursue its claim. The last of these proceedings was dismissed on August 12, 1993. Since such date, the Financial Institution has taken no further action to enforce its claim, and we believe that such claim would now be barred by the statute of limitations. We believe that the maximum amount for which Elektra Mexicana may be liable to the three creditors who did not consent to the Plan is Ps.1.7 million, which we have recorded as a liability. Based on the advice of our legal counsel, we believe our potential liability does not exceed the amount already recorded. If the Financial Institution were to prevail for amounts significantly in excess of the amount recorded by us and if Elektra Mexicana could not otherwise satisfy the Financial Institution's claim, a court could order the sale of certain property leased to us (including a warehouse and a small number of stores). There can be no assurance that we would be able to renew any such leases on the same or similar terms. General Manufacturers of defective products in Mexico may be subject to liability for loss and injury caused by such products, but the Mexican laws providing for such liability have been rarely invoked. Mexican law does not recognize product liability claims against a seller of a defective product that did not manufacture the product. Because we do not currently manufacture any of our products, we do not believe we will be exposed to future product liability claims. Dividend Policy For a discussion of our dividend policy, see Item 3. "Key Information--Dividends." 83 Item 9. The Offer and Listing. NATURE OF THE TRADING MARKET Our CPOs are traded on the Mexican Stock Exchange. Each CPO represents financial interests in, and limited voting rights with respect to, two B Shares and one L Share. The GDSs have been issued by the Depositary. On August 15, 1997, our shareholders approved a ten-for-one split of our stock. Prior to October 3, 1997, the effective date of this stock split, each GDS represented 2 CPOs. Thereafter and as of December 31, 2000, each GDS represented 10 CPOs, as issued by the CPO Trustee for the CPO Trust. The GDSs are traded on the New York Stock Exchange (the "NYSE"). The GDSs are also quoted on the Stock Exchange Automated Quotation system of the International Stock Exchange of the United Kingdom and the Republic of Ireland, Ltd. (SEAQ International). Our A, B and L Shares (together, "the Shares") are also listed on the Mexican Stock Exchange. The A and B Shares have traded infrequently. Since the initial issuance of L Shares on December 13, 1993, the L Shares have been traded on Subsection "A" of the Mexican Stock Exchange. Subsequent to the restructuring of our capital effected on July 12, 1994 (the "Recapitalization"), the CPO has replaced the L Share as the principal form of equity security of our company traded in Mexico. In December 1994, we completed a Level II listing in the form of GDRs on the NYSE which is traded under the symbol "EKT". On December 18, 2000, we completed the merger of Grupo Elektra into Grupo SyR, as a result of which all pre-merger Shares, CPOs and GDSs were technically replaced with identical numbers of post-merger Shares, CPOs and GDSs, with identical features, of Grupo SyR, which is now named Grupo Elektra. At December 31, 2000, 111,731,940 of our CPOs were represented by 11,173,194 GDSs. Approximately 9% of our total number of CPOs were held in the form of GDSs in 2000. At December 2001 there were 85,437,420 of our CPOs represented by 8,543,742 GDSs. Approximately 7% of our total number of CPOs were held in the form of GDSs in 2001. As most of the GDSs are held by a nominee of The Depository Trust Company, it is not practicable for us to determine the number of GDSs or shares beneficially owned in the United States. The following tables set forth, for the periods indicated, the reported high and low sales prices of our principal form of equity security on the Mexican Stock Exchange, and of GDRs on the New York Stock Exchange. Prices have not been restated in constant currency units or to reflect the stock split described below.
Mexican Stock Exchange New York Stock Exchange Nominal Pesos Per CPO US$ per GDS High Low High Low ---- --- ---- --- 1996 Ps. 6.42 Ps. 3.37 US$ 16.38 US$ 8.75 1997 14.30 6.07 37.12 15.00 1998 14.40 3.18 18.00 2.88 1999: First Quarter Ps. 6.70 Ps. 3.80 US$ 7.06 US$ 3.50 Second Quarter 7.42 5.22 8.00 5.43 Third Quarter 5.54 4.04 5.93 4.37 Fourth Quarter 9.46 4.30 9.93 4.43 2000: First Quarter Ps. 13.20 Ps. 7.84 US$ 14.25 US$ 8.12 Second Quarter 11.80 6.80 12.68 6.93 Third Quarter 11.30 8.00 11.62 8.68 Fourth Quarter 10.80 7.84 11.00 8.12
84
Mexican Stock Exchange New York Stock Exchange Nominal Pesos Per CPO US$ per GDS High Low High Low ---- --- ---- --- 2001 First Quarter Ps 10.20 Ps. 7.64 US$ 10.62 US$ 7.87 Second Quarter 9.20 7.80 9.98 8.16 Third Quarter 9.25 4.44 10.07 4.70 Fourth Quarter 6.47 4.40 6.95 4.55 2002 January Ps. 6.88 Ps. 5.95 US$ 7.50 US$ 6.40 February 6.77 6.01 7.43 6.55 March 7.54 6.50 8.50 7.07 April 8.93 7.50 9.67 8.30 May 9.20 7.80 9.98 8.44 June 9.22 8.28 9.80 8.20
- -------------------------------- (1) Through June 20, 2001. At our annual ordinary and extraordinary meeting of shareholders held on April 25, 1998, our shareholders approved the establishment of a reserve in our stockholders' equity account in the amount of Ps.6.7 million for the repurchase of our stock, in accordance with rules established by the Comision Nacional Bancaria y de Valores, the Mexican banking and securities commission (the "CNBV"). We may purchase our CPOs on the Mexican Stock Exchange and our GDSs on the New York Stock Exchange at prevailing prices to the extent of funds remaining in this reserve account. Any shares so repurchased will not be deemed to be outstanding for purposes of calculating any quorum or voting at a shareholders' meeting during the period in which such shares are owned by us. At its meeting held on April 18, 2002, our Board of Directors approved the conversion of all of our existing shares into a single class of shares. In connection with the conversion of our existing capital stock into a single class, we intend to terminate the trust through which certain of our CPOs are held, after which our GDSs will directly represent the new single class of capital stock. The conversion of the existing series of our capital stock into a single series will not alter the economic rights of our shareholders. However, the conversion will increase the voting rights of certain of our shareholders, in particular our minority shareholders. After the conversion, our shares that are publicly held will possess 26.5% of both our economic and voting rights. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." Changes in Securities and Changes in Security for Registered Securities On December 18, 2000, as part of our corporate reorganization, we merged with and into Grupo SyR. As a result, Grupo SyR, the surviving company, changed its name to Grupo Elektra, S.A. de C.V., which, as legal successor to the former Grupo Elektra, has assumed the obligations of our predecessor, and is now the issuer of the 12% Guaranteed Senior Notes Due 2008. 85 TRADING ON THE MEXICAN STOCK EXCHANGE The Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C.V.), located in Mexico City, is the only stock exchange in Mexico. Founded in 1907, it is organized as a corporation whose shares are held by 30 brokerage firms, which are exclusively authorized to trade on the Exchange. Trading on the Mexican Stock Exchange takes place principally on the Exchange through automated systems. The Mexican Stock Exchange is open between the hours of 8:30 a.m. and 3:00 p.m. Mexico City time, each business day. Trades in securities listed on the Mexican Stock Exchange can also be effected off the Exchange. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the L Shares that are directly or indirectly (for example, through GDSs) traded on a stock exchange (including for these purposes NASDAQ) outside Mexico. Settlement is effected two business days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of the Mexican National Securities Commission (CNBV). Most securities traded on the Mexican Stock Exchange, including our shares, are on deposit with Instituciun para el Depusito de Valores, S.A. de C.V. (Indeval), a privately owned securities depositary that acts as a clearinghouse for Mexican Stock Exchange transactions. Item 10. Additional Information. BYLAWS Set forth below is a brief summary of certain significant provisions of our bylaws and Mexican law. This description does not purport to be complete and is qualified by reference to our bylaws, which have been filed as an exhibit to this Annual Report. For a description of the provisions of our bylaws relating to our Board of Directors, Executive Committee and statutory auditors, see Item 6. "Directors, Senior Management and Employees." Organization and Register Grupo Elektra is a sociedad anonima de capital variable organized in Mexico under the Mexican General Corporate Law (Ley General de Sociedades Mercantiles). Our company was registered in the Public Registry of Commerce of Mexico City on September 18, 2000 under the number 119,176-35,112. Purposes The purposes of our company are set forth in Chapter 1, Article 2 of our bylaws as follows: a) to incorporate, organize and invest in the capital stock and patrimony of all type of mercantile and civil companies and associations, industrial, commercial and services enterprises, radio and tourist concessionaires and other kind of concessionaires, either national or from abroad, as well as in certificates of participation as permitted by law; b) to acquire, transfer and in general negotiate with all type of shares, interests of partners, participation or interests and any other security permitted by law; c) to issue, subscribe, accept, endorse and negotiate with all type of credit instruments or bearer securities permitted by law; d) to obtain and grant loans, with or without guarantee, that do not imply the execution of acts reserved to credit institutions under the Law of Credit Institutions; e) to grant special endorsements, bonds and guarantees of any kind, real or personal, regarding our obligations or the obligations of third parties with which we do business; f) to register, acquire, use and dispose of in any manner of patents, trademarks, trade names and copyrights; g) in general, to enter into any civil or mercantile acts and to execute all kind of agreements permitted by law for the performance of its corporate purpose. 86 Voting Rights Each A Share and B Share entitles the holder thereof to one vote at meetings of our shareholders. Holders of Series L Shares with limited right to vote have the right to attend and to vote exclusively in Special Meetings of such Series and in Extraordinary Shareholder Meetings while dealing with the following matters: o the transformation of our company from one type of company to another, o any merger with other corporations or companies, o cancellation of the issuance of Series L Shares in the Securities or Special Sections of the Registro Nacional de Valores e Intermediarios (National Register of Securities and of Intermediaries) or in other national or foreign stock exchange in which such shares are registered. Holders of L Shares have the right to designate one member of the Board of Directors. Under Mexican law, holders of shares of any series are also entitled to vote as a class on any action that would prejudice the rights of holders of shares of such series but not rights of holders of shares or other series, and a holder of shares 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 the Board of Directors or other party calling for shareholder action. A negative determination would be subject to judicial challenge by an affected shareholder, and the necessity for a class vote 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. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." Shareholders' Meetings General shareholders' meetings may be ordinary meetings or extraordinary meetings. Extraordinary general meetings are those called to consider certain matters specified in Article 182 of the Mexican General Corporate Law, including, principally, amendments of the bylaws, liquidation, merger and transformation from one type of company to another, as well as to consider the removal of our company's shares from listing on the Mexican Stock Exchange or any foreign stock exchange. General meetings called to consider all other matters are ordinary meetings. The director elected by the holders of L Shares is elected at a special meeting of holders of L Shares. All other matters on which holders of L Shares are entitled to vote would be considered at an extraordinary general meeting. Holders of L Shares are not entitled to attend or address meetings of shareholders at which they are not entitled to vote. A special meeting of the holders of L Shares must be held each year for the election of directors. An ordinary general meeting of the holders of A Shares and B Shares must be held each year to consider the approval of the financial statements for the preceding fiscal year, to elect directors and statutory auditors and to determine the allocation of the profits of the preceding year. The quorum for an ordinary general meeting of the A Shares and B Shares is 50% of such shares, and action may be taken by a majority of the shares present. If a quorum is not available, a second meeting may be called at which action may be taken by a majority of the A Shares and B Shares present, regardless of the number of such shares. Special meetings of holders of L shares are governed by the same rules applicable to ordinary general meetings of holders of A Shares and B Shares. The quorum for an extraordinary general meeting at which holders of L Shares may not vote is 75% of the A Shares and B Shares, and the quorum for an extraordinary general meeting at which holders of L Shares are entitled to vote is 75% of the outstanding capital stock. If a quorum is not available in either case, a second meeting may be called and action may be taken, provided a majority of the shares entitled to vote is present. Whether on first or second call, actions at 87 an extraordinary general meeting may be taken by a majority vote of the A Shares and B Shares outstanding and, on matters which holders of L Shares are entitled to vote, a majority vote of all the capital stock. Shareholders' meetings may be called by the Board of Directors, the statutory auditors or a court. The Board of Directors or the statutory auditors may be required to call a meeting of shareholders by the holders or 33% of the A Shares and B Shares or, in the case of a meeting at which holders of L Shares are entitled to vote, by the holders of 33% of the outstanding capital stock. Notice of meetings must be published in the Diario Oficial de la Federacion or a newspaper of general circulation in Mexico City at least fifteen days prior to the meeting. In order to attend a meeting, shareholders must deposit their shares with us at our office in Mexico City, with a Mexican or foreign banking institution or with a Mexican exchange broker. If so entitled to attend the meeting, a shareholder may be represented by proxy. Dividend Rights At the annual ordinary general meeting of holders of A Shares and B Shares, the Board of Directors submits our financial statements for the previous fiscal year, together with a report thereon by the Board, to the holders of A Shares and B Shares for approval. The holders of A Shares and B Shares, once they have approved the financial statements, determine the allocation of our net profits for the preceding year. They are required by law to allocate 5% of such net profits to a legal reserve, which is not thereafter available for distribution except as a stock dividend, until the amount of the legal reserve equals 20% of our historical capital stock (before effect of restatement). The remainder of net profits is available for distribution. All shares outstanding at the time a dividend or other distribution is declared are entitled to share in such dividend or other distribution. Preemptive Rights In the event of a capital increase, a holder of existing shares of a given series has a preferential right to subscribe for a sufficient number of shares of the same series to maintain the holder's existing proportionate holdings of shares of that series. Preemptive rights must be exercised within 15 days following the publication of notice of the capital increase in the Diario Oficial de la Federacion and a newspaper of general circulation in Mexico City. Under Mexican law, preemptive rights cannot be waived in advance of the issuance thereof and cannot be represented by an instrument that is negotiable separately from the corresponding share. As a result, there is no trading market for the rights in connection with a capital increase. Holders of GDSs that are U.S. persons or located in the United States may be restricted in their ability to participate in the exercise of such preemptive rights. See "Risk Factors--Risks Related to Our Controlling Shareholders and Capital Structure" for a description of the circumstances under which holders of GDSs may not be entitled to exercise such rights. Limitations on Share Ownership Ownership by non-Mexicans of shares of Mexican enterprises is regulated by the 1993 Foreign Investment Law (the "Foreign Investment Law") and the 1998 Regulations (the "Regulations"). The National Commission on Foreign Investment (the "Foreign Investment Commission") is responsible for administration of the Foreign Investment Law and Regulations. In order to comply with restrictions on the percentage of their capital stock that may be owned by non-Mexican investors, Mexican companies typically limit particular classes of their stock to Mexican ownership. Under the Foreign Investment Law, a trust for the benefit of one or more non-Mexican investors may qualify as Mexican if the trust meets certain conditions that will generally ensure that the non-Mexican investors do not determine how the shares are voted. Our bylaws allow our capital stock to be acquired by Mexican or foreign individuals or juridical persons. However, any foreigner who, at the time of incorporation or thereafter, acquires an interest or participation in our company shall be deemed by such acquisition to be a Mexican citizen with respect to said 88 interest or participation, as well as to the assets, rights, concessions, participation or interests in which our company holds title, or of the rights and obligations derived from the contracts with Mexican authorities to which our company is a party, and shall be understood to have agreed not to invoke the protection of its Government under penalty, upon failure to comply with such agreement, of forfeiting such interest or participation in favor of the Mexican government. Other Provisions Variable capital. Our capital stock has a fixed minimum of Ps.556,237,160, without right of redemption, represented by 4,329,459 055 common or ordinary, non par value Series A and/or Series B Shares and/or Series L Shares with limited right to vote. The variable part of our capital stock is unlimited and is represented by shares of equal characteristics. However, no variable capital has been subscribed as of December 31, 2001. Increases in the fixed minimum portion of the capital stock without the right of retirement are carried out by resolution of the General Extraordinary Shareholders Meeting, being necessary in those cases to amend these bylaws. The variable part of the capital stock of our company may be increased without modifying the bylaws, by resolution of the General Ordinary Shareholders Meeting. The minimum fixed portion of the capital stock may only be reduced by resolution of the General Extraordinary Shareholders Meeting and the consequent amendment of the bylaws, complying in every case with what it is disposed in article nine of the Mexican General Corporate Law. Reductions of the variable part of the capital stock may be carried out by resolution of the General Ordinary Shareholders Meeting. As required by Articles 220 and 221 of the Mexican General Corporate Law, if there were any holders of the variable portion of our capital stock, such holders would be entitled to require us to redeem such shares at the holder's option at any time at a redemption price equal to the lower of (i) 95% of the average market value of such shares on the Mexican Stock Exchange for 30 trading days preceding the date on which the exercise of the option is effective and (ii) the book value of such shares at the end of the fiscal year in which the exercise of the option is effective. Exclusive jurisdiction. Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws shall be brought only in Mexican courts. Duration. The duration of the corporation is for 99 years from the date of registration with the Public Registry of Commerce. Purchase by our company of our shares. According to Mexican law, we may repurchase our shares on the Mexican Stock Exchange at any time at the then prevailing market price. Each year, the stock repurchase policies are established by the Board of Directors, and the amount of shares to be repurchased must be approved by the annual general ordinary shareholders meeting. In the event of any such repurchase, our capital stock is reduced automatically in an amount equal to the assumed par value of each repurchased share (determined by dividing our outstanding capital stock by the number of shares outstanding immediately prior to such repurchase); if the purchase price of such shares exceeds the assumed par value, the difference is charged against amounts allocated from net earnings to a special reserve created for the repurchase of shares. Repurchased shares are held by our company as treasury stock, pending future sales thereof on the Mexican Stock Exchange or cancellation. Our capital stock is automatically increased upon the resale of such shares in an amount equal to their assumed par value; any excess amount is allocated to the special reserve referred to above. The economic and voting rights corresponding to repurchased shares may not be exercised during the period in which such shares are owned by us, and such shares are not deemed to be outstanding for purposes of calculating any quorum or vote at any shareholders' meeting during such period. 89 If the conversion of our existing shares into a single series is approved by our shareholders, we will make appropriate amendments to our by-laws to reflect the single series equity structure. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." MATERIAL CONTRACTS On September 1, 2000, we entered into an option agreement with CASA, pursuant to which CASA held a twelve-month option to purchase the 35.8% of CASA stock that we currently own. CASA did not exercise the option and paid us a penalty of US$15.8 million for such failure to exercise. See Item 4. "Information on the Company--Strategic Investments--CASA." EXCHANGE CONTROLS Mexico has had a free market for foreign exchange since 1991, and the government has allowed the Peso to float freely against the U.S. dollar since December 1994. There can be no assurance that the government will maintain its current foreign exchange policies. See Item 3. "Key Information--Selected Financial Data--Exchange Rates." LIMITATIONS AFFECTING SECURITY HOLDERS Prior to June 4, 1999, our bylaws limited the ownership of Series A Shares to eligible Mexican holders and credit institutions acting as trustees. Our bylaws did not impose any limitations on the ownership of Series B Shares and Series L Shares or on the ownership of CPOs. On June 4, 1999, we amended our bylaws and removed all foreign investment restrictions on ownership of Series A Shares. As a result of such amendment, our bylaws contain no restrictions on the ownership of our shares or on the ownership of CPOs (subject to certain limitations on voting rights described below). Ownership by non-Mexicans of shares of Mexican enterprises is regulated by the Ley de Inversion Extranjera (the "Foreign Investment Law") and the Reglamento de la Ley de Inversion Extranjera y del Registro Nacional de Inversiones Extranjeras (the "Foreign Investment Regulations"). The Foreign Investment Law and Regulations require that we register any non-Mexican owner of CPOs, or the applicable depositary with respect to any Global Depositary Shares, with the National Registry of Foreign Investment. A non-Mexican owner of CPOs who has not been registered is not entitled to vote any shares underlying the CPOs that he otherwise would have the right to vote or to receive dividends with respect to the shares underlying the CPOs. We have registered the Depositary for this purpose with respect to the GDSs and the CPOs (and the B Shares and L Shares, as applicable, represented thereby). If the conversion of our existing shares into a single series and the termination of the CPO trust is approved by our shareholders, the limitations set forth above will be applicable to our new single series of common stock. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." Limitations on Voting Rights Under the CPO Trust agreement, holders of CPOs who are not Eligible Mexican Holders have no voting rights with respect to the underlying B Shares. For Mexican law purposes, the Depositary is considered the owner of the CPOs which are represented by the GDSs. Since the Depositary does not qualify as an Eligible Mexican Holder, the Depositary and, consequently, the holders of GDSs have no voting rights with respect to the underlying B Shares. The B Shares that are held in the CPO Trust on behalf of holders of CPOs 90 who are not Eligible Mexican Holders are voted in the same manner as the respective majority of the B Shares are voted at the relevant meeting. Given that a majority of the B Shares are owned by the Controlling Shareholders, if the Controlling Shareholders vote the same way on a matter, the CPO Trustee will be required to vote the B Shares held in the CPO Trust on behalf of holders of CPOs who are not Eligible Mexican Holders in the same manner as the B Shares held by the Controlling Shareholders are voted. All holders of GDSs and CPOs, whether or not they are Eligible Mexican Holders, are entitled to give instructions as to the manner in which the CPO Trustee shall vote the L Shares whenever the holders of L Shares are entitled to vote. In the case of the holders of GDSs, those instructions must be given to the Depositary (who in turn conveys them to the Common Representative). In the case of the holders of CPOs, the instructions must be given directly to the Common Representative. In both cases the Common Representative must receive the voting instructions at least five business days prior to the relevant meeting. Under our bylaws and Mexican law, holders of L Shares are entitled to vote only in limited circumstances. Holders of L Shares are entitled to elect, at a special stockholders meeting of such series, one of our nine directors, and the corresponding alternate directors. Holders of L Shares are entitled to vote at general extraordinary stockholders meetings on the following corporate actions: (i) transforming our company from one type of company to another, (ii) any merger in which we are not the surviving entity, and (iii) de-listing of the L Shares or securities representing them from the Mexican Stock Exchange or any foreign stock exchange or cancellation of the registration of such shares with the National Securities Registry. Holders of L Shares are also entitled to vote at special stockholders meetings of such series on actions that would prejudice the rights of holders of such series but not the rights of holders of other series. Limitation on Rights to Withdraw Underlying Securities Holders of CPOs may not withdraw the B Shares and L Shares underlying such CPOs until July 1, 2004. At such time, such securities may continue to be represented by CPOs until the expiration of the CPO Trust or, at the option of the holder and subject to certain conditions described herein, the B Shares and L Shares represented by the CPOs may be removed from the CPO Trust and may be traded separately. Restrictions Imposed by Bylaws, CPO Trust Agreement and Mexican Law Our bylaws provide that legal actions relating to the execution, interpretation or performance of the Bylaws may be brought only in courts in Mexico, D.F. The CPO Trust Agreement provides that all disputes arising therefrom must be submitted to courts located in Mexico, D.F., and that all parties to the CPO Trust Agreement, including CPO holders, agree that they will not submit such disputes to any other courts. Our bylaws and the CPO Trust Agreement provide that non-Mexican stockholders and CPO holders, respectively, of our company formally agree with the Foreign Affairs Ministry (i) to be considered as Mexicans with respect to the shares or the CPOs, as the case may be, of our company that they acquire or hold as well as with respect to the property, rights, concessions, participation or interests owned by us and with respect to the rights and obligations derived from any agreements we have with the Mexican Government and (ii) not to invoke the diplomatic protection or intervention of their own governments. If a non-Mexican stockholder or CPO holder should invoke governmental diplomatic protection or intervention in violation of this agreement, its shares or CPOs, as the case may be, could be forfeited to the Mexican Government. Under Mexican law, it is not clear what actions would constitute invoking governmental protection or intervention that would result in forfeiture of shares or CPOs or what process would be implemented in connection with the forfeiture provisions; however, institution of judicial proceedings in a foreign country would not be deemed an invocation of diplomatic protection or intervention which would result in a forfeiture of shares. In the event of a capital increase, holders of existing shares have a preferential right to subscribe for a number of shares sufficient to maintain the holders' existing proportionate holding of shares, except in limited 91 circumstances. Holders of GDSs may be restricted under Mexican law in their ability to participate in the exercise of preemptive rights to acquire shares or rights of any other nature and as a result their economic interest in our company could be diluted in the event of a capital increase. Whenever the stockholders approve a change of corporate purposes, change of nationality of the corporation or transformation from one form of company to another, any stockholder entitled to vote on such change that has voted against it has appraisal rights whereby it may withdraw from our company and receive an amount, attributable to its shares calculated as specified under Mexican law. Such appraisal rights must be exercised within 15 days following the relevant shareholders meeting. Because the L Shares may vote only on certain matters, such appraisal rights will only be available to holders of L Shares, including L Shares underlying the CPOs (or GDSs), in the case of transformation of our company from one type of company to another. In addition, because the CPO Trustee is required by the terms of the CPO Trust Agreement to vote the B Shares held by non-Mexican nationals in the CPO Trust in the same manner as the majority of B Shares are voted at the relevant meeting, appraisal rights will not be available to non-Mexican holders of B Shares represented by CPOs (and GDSs). If approved by our security holders, the CPO Trust will be dissolved and the CPO certificates will be cancelled in connection with our single series initiative. See Item 5. "Operating and Financial Review and Prospects--Recent Developments--Single Series Initiative." 92 TAXATION The following summary contains a description of the principal Mexican and United States federal income tax consequences of the purchase, ownership and disposition of the Notes, CPOs or the GDSs, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based on the tax laws of Mexico and the United States in force on the date of this Annual Report, including the provisions of the income tax treaty between the United States and Mexico (the "Tax Treaty"), which are subject to change. This summary deals only with holders that will hold Notes, CPOs or GDSs as capital assets and does not address tax considerations applicable to investors that may be subject to special tax rules, such as banks, tax-exempt organizations, insurance companies, dealers in securities or currencies, persons that will hold the Notes, CPOs or GDSs as part of an integrated investment (including a "straddle") comprised of Notes, CPOs or GDSs and one or more other positions, persons that have a "functional currency" other than the U.S. Dollar and persons that own or are treated as owning 10% or more of our voting shares (including CPOs), nor does it address the tax treatment of holders of Notes who did not acquire the Notes at their issue price as part of their initial distribution. Holders of Notes, CPOs or GDSs should consult their own tax advisors as to the United States federal, Mexican or other tax consequences of the purchase, ownership and disposition of Notes, CPOs or GDSs, including, in particular, the effect of any foreign, state or local tax laws. As used herein, the term "United States Holder" means the beneficial owner of Notes, CPOs or GDSs that is, for United States income tax purposes, (i) an individual citizen or resident of the United States, (ii) a United States domestic corporation or (iii) otherwise subject to United States federal income tax on a net income basis in respect of Notes, CPOs or GDSs. As used herein, the term "Foreign Holder" means a holder that is not a resident of Mexico and that will not hold Notes, CPOs or GDSs or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment in Mexico. For purposes of Mexican taxation, an individual is a resident of Mexico if he has established his domicile in Mexico, unless he has resided in another country for more than 183 calendar days, whether consecutive or not, (except for public officers or governmental employees) in any one calendar year and can demonstrate that he has become a resident of that country for tax purposes, and a legal entity is a resident of Mexico if it is incorporated under Mexican law or if it has its principal place of business or its place of effective management in Mexico. A Mexican citizen pursuant to Mexican law is presumed to be a resident of Mexico for tax purposes unless such person or entity can demonstrate otherwise. If a person has a permanent establishment or fixed base in Mexico, such permanent establishment or fixed base shall be required to pay taxes in Mexico on income attributable to such permanent establishment or fixed base in accordance with relevant tax provisions. In general, for United States federal income tax purposes, holders of GDSs or CPOs will be treated as the beneficial owners of the Series B Shares and Series L Shares represented by those GDSs or CPOs. Tax Considerations Relating to the Notes Mexican Taxation Taxation of Interest and Principal As of January 1, 2001, under Mexico's Income Tax law, payments of interest made by us in respect of the Notes (including payments of principal in excess of the issue price of such Notes, which, under Mexican law, are deemed to be interest) to a non-resident holder will generally be subject to a Mexican withholding tax 93 assessed at a rate of 4.9% if (i) the relevant Notes are registered with the Special Section of the National Registry of Securities and Intermediaries maintained by the National Banking and Securities Commission, (ii) the Notes are placed, through banks or brokerage houses, in a country which has entered into a treaty to avoid double taxation with Mexico, and (iii) no party related to us (defined under the applicable law as parties that are (x) shareholders of our company that own, directly or indirectly, individually or collectively, with related persons (within the meaning of the applicable law) more than ten percent (10%) of our voting stock or (y) corporations more than twenty percent (20%) of the stock of which is owned, directly or indirectly, individually or collectively, with related persons of our company), directly or indirectly, is the effective beneficiary of five percent (5%) or more of the aggregate amount of each such interest payment. Apart from the Mexican income tax law discussed in the preceding paragraph, other provisions reducing the rate of Mexican withholding taxes may also apply. Under the Tax Treaty, the rate would be 4.9% for certain holders that are residents of the United States (within the meaning of the Tax Treaty). Notwithstanding the foregoing, under Rule 3.25.15 of the General Rules issued by the Ministry of Finance published in the Diario Official de la Federacion on May 30, 2002, the tax rate applicable under tax treaties generally, including the Tax Treaty, will be applicable only if (i) the Notes continue to be registered in the Special Section of the RNVI, (ii) the Company timely files with the Ministry of Finance within the first 15 business days of July and October 2002, and January and April 2003, information regarding the amount of interest paid on the Notes and the date of such payment, and a statement representing that no party related to the Company (as such terms are defined in the Rules), jointly or individually, directly or indirectly, is the effective beneficiary of 5.0% or more of the aggregate amount of each such interest payment, and (iii) the Company maintains records which evidence compliance with items (i) and (ii) above. The Company expects that such conditions will be met during the effective time of such Rule. If the requirements under such rule are not complied with, withholding tax on the payment of interest on the Notes will be assessed at a rate of 10% for holders other than parties related to the Company as described in item (ii) above, in which case payments of interest will be assessed at a rate of 35%. The Rules, together with other tax regulations, are promulgated on an annual basis, and therefore, no assurances can be given that the Rules will be extended or that equivalent Rules will be enacted. Under the law, payments of interest made by us with respect to the Notes to non-Mexican pension or retirement funds will be exempt from Mexican withholding taxes, provided that the fund (i) is duly incorporated pursuant to the laws of its country of origin, (ii) is exempt from income tax in such country and (iii) is registered with the Ministry of Finance for that purpose, (iv) is the effective beneficiary of such payments of interest. We have agreed, subject to specified exceptions and limitations, to pay additional amounts to the holders of the Notes in respect of the Mexican withholding taxes mentioned above ("Additional Amounts"). If we pay Additional Amounts in respect of such Mexican withholding taxes, any refunds received with respect to such Additional Amounts will be for our account. Holders or beneficial owners of Notes may be requested to provide certain information or documentation necessary to enable us to establish the appropriate Mexican withholding tax rate applicable to such holders or beneficial owners. In the event that the specified information or documentation concerning the holder or beneficial owner, if requested, is not provided on a timely basis, our obligation to pay Additional Amounts will be limited. Under existing Mexican law and regulations, a Foreign Holder will not be subject to any Mexican taxes in respect of payments of principal made by us with respect to the Notes. 94 Taxation of Dispositions Capital gains resulting from the sale or other disposition of the Notes by a Foreign Holder will not be subject to Mexican income or other taxes. 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. United States Taxation Taxation of Interest and Additional Amounts A United States Holder will treat the gross amount of interest and Additional Amounts (i.e., without reduction for Mexican withholding taxes) received in respect of the Notes as ordinary interest income at the time such interest and Additional Amounts is received or accrued, in accordance with such Holder's method of accounting for United States federal income tax purposes. Mexican withholding taxes paid at the appropriate rate applicable to the United States Holder will be treated as foreign income taxes eligible for credit against such United States Holder's United States federal income tax liability, subject to generally applicable limitations and conditions, or, at the election of such United States Holder, for deduction in computing such United States Holder's taxable income. Interest and Additional Amounts will constitute income from sources without the United States for foreign tax credit purposes. Such income generally will constitute "passive income" or, in the case of certain United States Holders, "financial services income" for United States foreign tax credit purposes unless the Mexican withholding tax rate applicable to the United States Holder is imposed at a rate of at least 5%, in which case such income generally will constitute "high withholding tax interest." The calculation of foreign tax credits and, in the case of a United States Holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a United States Holder's particular circumstances. Under new rules enacted by Congress in 1997 and other guidance recently released by the United States Treasury, foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a United States Holder's expected economic profit is insubstantial. United States Holders should consult their own tax advisors regarding the availability of foreign tax credits and the treatment of Additional Amounts in light of their particular circumstances. A holder or beneficial owner of Notes that is, with respect to the United States, a foreign corporation or a nonresident alien individual (a "Non-United States Holder") generally will not be subject to United States federal income or withholding tax on interest income or Additional Amounts earned in respect of Notes, unless such income is effectively connected with the conduct by the Non-United States Holder of a trade or business in the United States. Taxation of Dispositions Upon the sale, exchange (other than an exchange for registered 2008 Notes as provided above), retirement (including a redemption by us) or other disposition of a Note, a United States Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption or other disposition (except to the extent such amount is attributable to accrued interest, which will be treated as such) and such Holder's adjusted tax basis in the Note. A United States Holder's adjusted tax basis in a Note generally will equal the cost of such Note to such holder. Such capital gain or loss will be long-term capital gain or loss if, at the time of the disposition, the United States Holder's holding period in the 95 Note is more than one year. The distinction between capital gain or loss and ordinary income or loss is important for purposes of the limitations on a United States Holder's ability to offset capital losses against ordinary income and because United States Holders that are individuals may be entitled to a preferential rate on long-term capital gains. Long-term capital gain realized by a United States Holder that is an individual generally is subject to a maximum rate of 20 percent in respect of property held for more than one year. A Non-United States Holder of Notes will not be subject to United States federal income or withholding tax on gain realized on the sale or other disposition of Notes unless (i) such gain is effectively connected with the conduct by the Non-United States Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-United States Holder, the Non-United States Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met. Tax Considerations Relating to CPOs or GDSs Taxation of Dividends Mexican Tax Considerations. Effective January 1, 2002, dividends paid to Foreign Holders with respect to CPOs or GDSs will not be subject to Mexican withholding tax. U.S. Tax Considerations Cash dividends paid with respect to the Shares represented by GDSs or CPOs, to the extent paid out of our current or accumulated earnings and profits, as determined for United States tax purposes, generally will be includible in the gross income of a United States Holder as ordinary income on the day on which the dividends are received by the CPO Trustee and will not be eligible for the dividends received deduction allowed to corporations. Dividends paid in pesos will be included in the income of a United States Holder in a U.S. dollar amount calculated in general by reference to the exchange rate in effect on the day they are received by the CPO Trustee. United States Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any pesos that are converted into U.S. dollars on a date subsequent to the date of receipt by the CPO Trustee. Dividends generally will constitute foreign source "passive income" or, in the case of certain United States Holders, "financial services income" for United States foreign tax credits purposes. Distributions to Holders of additional Shares with respect to their GDSs or CPOs that are made as part of a pro rata distribution to all of our shareholders generally will not be subject to United States federal income tax. A Non-United States Holder of CPOs or GDSs generally will not be subject to United States federal income or withholding tax on dividends received on CPOs or GDSs, unless such income is effectively connected with the conduct by the Non-United States Holder of a trade or business in the United States. Taxation of Capital Gains Mexican Tax Considerations Gain on the sale or other disposition of GDSs by Foreign Holders will not be subject to Mexican tax. Deposits of CPOs in exchange for GDSs and withdrawals of CPOs in exchange for GDSs will not give rise to any Mexican tax or transfer duties. 96 The sale of CPOs by a non-resident individual holder will not be subject to any Mexican tax if the transaction is carried out through the Mexican Stock Exchange or other securities markets approved by the Mexican Ministry of Finance. Sales or other dispositions of CPOs made in other circumstances generally would be subject to Mexican tax, regardless of the nationality or residence of the transferor. Non-resident legal entities are subject to a 5% withholding tax on the gross sales price received upon the sale of CPOs through the Mexican Stock Exchange or other securities markets approved by the Mexican Ministry of Finance. Alternatively, non-resident legal entities may elect to be subject to a 20% tax rate on their gains from the sale as calculated by the Mexican Income Tax Law provisions. In both cases, the financial institutions involved in the transfers must withhold the tax. On April 11, 2002, a general ruling was issued by the Mexican Ministry of Finance allowing non-resident legal entities to elect not to pay the tax discussed in the previous paragraph. On May 30, 2002 the Mexican Ministry of Finance extended the effect date of this ruling until February 28, 2003, but it should be noted that the Mexican Ministry of Finance may withdraw this tax benefit after such extension has expired. Certain restrictions will apply if the CPOs are transferred as a consequence of public offerings. Gain on sales or other dispositions of CPOs or Shares made in other circumstances generally would be subject to Mexican Tax, regardless of the nationality or residence of the transferor. However, under the Tax Treaty, a holder that is eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of CPOs or Shares in a transaction that is not carried out through the Mexican Stock Exchange or such other approved securities markets, so long as the holder did not own, directly or indirectly, 25% or more of the capital stock of the company (including ADSs) within the 12 month period proceeding such sale or other disposition. U.S. Tax Considerations Upon the sale, exchange or other disposition of GDSs or CPOs, a United States Holder generally will recognize gain or loss in an amount equal to the difference between the amount realized on the disposition of such GDSs or CPOs and such United States Holder's tax basis in the GDSs or CPOs. Such gain or loss recognized by such United States Holder generally will be long-term capital gain or loss if the United States Holder has held the GDS or CPO for more than one year at the time of the disposition. The distinction between capital gain or loss and ordinary income or loss is important for purposes of the limitations on a United States Holder's ability to offset capital losses against ordinary income and because United States Holders that are individuals may be entitled to a preferential tax rate on long-term capital gains. Long-term capital gain realized by a United States Holder that is an individual generally is subject to a maximum rate of 20 percent. Gain, if any, realized by a U.S. holder on the sale or other disposition of GDSs or CPOs will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently if a Mexican withholding tax is imposed on the sale or disposition of CPOs, a U.S. holder that does not receive significant foreign source income from other sources may not be able to derive effective U.S. foreign tax credit benefits in respect of these Mexican taxes. U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in, and disposition of CPOs. Deposits and withdrawals of CPOs by United States Holders in exchange for GDSs will not result in the realization of gain or loss for United States federal income tax purposes. A Non-United States Holder of CPOs or GDSs will not be subject to United States federal income or withholding tax on gain realized on the sale of CPOs or GDSs, unless (i) such gain is effectively connected with the conduct by the Non-United States Holder of a trade or business in the United States or (ii) in the case 97 of gain realized by an individual Non-U.S. Holder, the Non-United States Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met. United States Backup Withholding and Information Reporting A United States Holder of Notes, CPOs or GDSs may, under certain circumstances, be subject to "backup withholding" with respect to certain payments to such United States Holder, such as dividends or interest paid by us or the proceeds of a sale or disposition of Notes, CPOs or GDSs, unless such holder (i) is a corporation or comes within certain exempt categories, and demonstrates this fact when so required, or (ii) provides a correct taxpayer identification number, certifies that it is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be allowed as a refund or credit against the holder's United States federal income tax liability provided the required information is furnished to the Internal Revenue Service. While Non-United States Holders generally are exempt from backup withholding, a Non-United States Holder may, in certain circumstances, be required to comply with certain information and identification procedures in order to prove this exemption. Other Mexican Taxes There are no inheritance, gift, succession or value added taxes applicable to the ownership, transfer, exchange or disposition of GDSs or CPOs by Foreign Holders, although gratuitous transfers of CPOs may, in certain circumstances, cause a Mexican federal tax to be imposed upon the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of GDSs or CPOs. Commissions paid in brokerage transactions for the sale of CPOs on the Mexican Stock Exchange are subject to a value added tax of 15%. 98 DOCUMENTS ON DISPLAY We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the U.S. Securities and Exchange Commission. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied at the SEC's public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public reference room and their copy charges. 99 Item 11. Quantitative and Qualitative Disclosure about Market Risk We are exposed to market risk from changes in interest rates and foreign currency exchange rates. Additionally, as of December 31, 2001, we held derivative contracts, forward exchange and interest rate contracts to hedge a portion of our outstanding indebtedness and equity derivative contracts for investment purposes. Our risks and the potential gains and losses associated with these risks and instruments, are discussed below. Interest Rate Risk Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. At December 31, 2001, we had outstanding Ps.4,604.3 million (US$502.9 million) of indebtedness compared with Ps.4,294.5 million (US$469.0 million) in 2000, of which 61.4% bore interest at fixed interest rates in 2001, compared with 66.7% in 2000 and 38.6% bore interest at variable rates in 2001, compared with 33.3% in 2000. Of the total variable rate debt, 81.7% was denominated in United States dollars in 2001, compared with 56.1% in 2000, 18.3% was denominated in pesos in 2001, compared with 28.4% in 2000 and 0% was denominated in other currencies in 2001, compared with 15.5% in 2000. A hypothetical instantaneous 10% increase in the average interest rate applicable to our variable rate debt held at December 31, 2001, would have increased our interest expense for 2001 by approximately Ps.87.1 million. A hypothetical instantaneous 10% increase in the average interest rate applicable to our variable rate debt held at December 31, 2000 would have increased our interest expense in 2000 by approximately Ps.20.8 million. We manage our interest rate risk by entering into swaps and caps contracts that hedge our variable interest rate exposure. At December 31, 2001, we had caps and swaps interest rate contracts that hedge a monthly average amount of Ps.1,816.1 million. The last period covered matures on January 1, 2003. The estimated fair value of these contracts as of December 31, 2001 totaled Ps.49.5 million. The applicable TIIE was 8.22%. At December 31, 2000, we had entered into no hedging or derivative transactions with respect to our interest rate risk exposure. The potential gain or loss in the fair value contract position of our interest rate hedge instruments held at December 31, 2001 that would have resulted from a hypothetical instantaneous 10% change in the value of the interest rate would have been approximately Ps.0.7 million. Foreign Exchange Risk Our principal foreign currency exchange risk involves changes in the value of the peso relative to the United States dollar. Provided below is a summary of our net foreign currency exposure. U.S. dollar denominated assets represent principally cash and cash equivalents and accounts receivable. The U.S. dollar denominated liabilities represent primarily bank loans and long-term notes and amounts due to our suppliers.
At December 31, 2001 At December 31, 2000 ----------------------------- ----------------------------- (in millions of US dollars) (in millions of US dollars) U.S. dollar denominated assets ....... US$131.2 US$84.3 U.S. dollar denominated liabilities .. 497.9 413.6 Net liability position ............... 366.7 329.3
100 The cash flow required to service our liabilities is generated primarily in Mexican pesos. A hypothetical, instantaneous devaluation of the Mexican peso to Ps.10.50 from the December 31, 2001 Noon Buying Rate (Ps.9.156 per U.S. dollar) would have resulted in estimated exchange losses based on our net U.S. dollar liability position at December 31, 2001 of Ps.492.8 million. We manage our exchange rate risk on our net liability position by entering from time to time into forward exchange contracts and options to hedge a portion of our net liability position. At December 31, 2001, we had forward exchange contracts to purchase US$25 million at a cost of Ps.267.7 million. The contracts mature in January and April 2002. The estimated fair value of these contracts was determined using the current exchange rate as of December 31, 2001 of Ps.9.156, and totaled Ps.36.1 million. We also had a U.S. call Mexican Peso put option contract that give us the right to purchase on September 25, 2002 an amount of US$8.3 million at a strike price of 10.10. The potential gain or loss in the fair value contract positions of our foreign exchange hedge instruments held at December 31, 2001 that would have resulted from a hypothetical instantaneous 10% change in the value of the peso against the U.S. dollar would have been approximately Ps.15.9 million. The potential gain or loss in the fair value contract positions of our foreign exchange hedge instruments held at December 31, 2000 that would have resulted from a hypothetical instantaneous 10% change in the value of the peso against the U.S. dollar would have been approximately Ps.15.2 million Equity Swaps As of December 31, 2001, we had two U.S. dollar denominated equity swap agreements that are currently outstanding. We were authorized by our stockholders to repurchase up to Ps.350 million (nominal pesos as of 1996) of our own stock through a stock repurchase fund. In order to comply with corresponding tax and legal requirements, we regularly sell stock from the repurchase fund. Our way of doing this is by selling the stock thus repurchased, and engaging in limited equity swap transactions whereby we transfer to the swap counterparty a number of shares against payment of a notional amount, established on the basis of the market price of the shares transferred. Over the term of the swap contract (which may vary from a couple of months to up to three years), we pay interest, or interest accrues on the notional amount, typically at a floating rate. Upon expiration of the transaction, a cash settlement payment is made equal to the difference between the notional amount (plus, as the case may be, accreted interest, minus dividends) and the end-date market value of the underlying stock, from Grupo Elektra to the counterparty if positive, and from the counterparty to us, if negative. In both transactions, a collar feature is included so that our upside or downside risk of increases or decreases in our share price is limited to the specified floor and cap. Our maximum market risk under our equity swap portfolio is equal to the initial market value of the underlying shares, subject to the cap provided under the embedded collar. In both dollar-denominated transactions, we also bear the currency risk of the devaluation of the peso. Set forth below is our maximum market risk exposure under our equity swap portfolio at December 31, 2001.
At December 31, 2001 - ------------------------------------------------------------------------------------------------------------------- Maximum Initial risk scenario Maximum market Underlying shares Price Notional amount price risk exposure Fair Value - ------------------------------------------------------------------------------------------------------------------- 6,822,600 Elektra CPOs US$ 0.68 US$4.6 million 0.41 US$1.9 million US$(0.3) million 14,400,000 Elektra CPOs US$ 0.93 US$13.3 million 0.65 US$4 million US$(4.0) million
101 The potential gain or loss in the fair value of our equity derivative instruments held at December 31, 2001 that would have resulted from a hypothetical instantaneous 10% change in the stock market price of our CPOs would have been approximately US $0 of loss in case of a decrease in the price (as the price of the underlying shares was below the floor strike price) and US$1.2 million of gain in case of an increase in the price. Set forth below is our maximum market risk exposure under our equity swap portfolio at December 31, 2000.
At December 31, 2000 - ------------------------------------------------------------------------------------------------------------------- Maximum Initial risk scenario Maximum market Underlying shares Price Notional amount price risk exposure Fair Value - ------------------------------------------------------------------------------------------------------------------- 6,822,600 Elektra CPOs US$ 0.68 US$4.6 million 0.41 US$1.9 million US$(0.9) million 12,878,712 Elektra CPOs Ps. 9.15 Ps.117.9 million 0.00 Ps.117.9 million Ps.(16.9) million
The potential gain or loss in the fair value of our equity derivative instruments held at December 31, 2000 that would have resulted from a hypothetical instantaneous 10% change in the stock market price of our CPOs would have been approximately Ps.16.1 million. 102 Items 12-17. Not Applicable Item 18. Financial Statements Reference is made to Item 19(a) for a list of all financial statements filed as part of this Annual Report. Item 19. Financial Statements and Exhibits (a) List of Financial Statements Consolidated Financial Statements for Grupo Elektra, S.A. de C.V. and Subsidiaries
Page ---- Report of Independent Accountants 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 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 2000 and 2001 F-5 Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 1998, 1999, 2000 and 2001 F-6 Notes to Consolidated Financial Statements F-7 Financial Statements for Compania Operadora de Teatros, S.A. de C.V. (subsidiary of Grupo Elektra, S.A. de C.V.) Page ---- Report of Independent Accountants F-74 and F-75 Balance Sheets as of December 31, 1999,2000 and 2001 F-76 Statements of Income (Loss) for the Years Ended December 31, 1998, 1999, 2000 and 2001 F-77 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1999, 2000 and 2001 F-78 Statements of Changes in Financial Position for the Years Ended December 31, 1998, 1999, 2000 and 2001 F-79 Notes to the Financial Statements F-80
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. 103 (b) List of Exhibits Exhibit No: Description - ----------- ----------- Exhibit 1.1 Public Instrument of Merger, including the English translation of the Amended and Restated Bylaws of Grupo Elektra, S.A. de C.V.* Exhibit 2.1 Indenture, dated as of March 22, 2000, between Grupo Elektra, the Guarantors, and The Bank of New York, as Trustee.** Exhibit 3.1 English translation of Amendment to form of CPO Trust Deed.*** Exhibit 4.1 Option Agreement between Grupo Elektra and CASA, dated September 1, 2000, together with English translation.* Exhibit 4.2 English translation of Current Option Plan for Grupo Elektra employees.*** Exhibit 4.3 List of Grupo Elektra's Significant Subsidiaries. - ---------------------------- * Incorporated by reference to Grupo Elektra's Annual Report on Form 20-F filed on July 2, 2001 (File No. 1-13200) ** Incorporated by reference to Grupo Elektra's Registration Statement on Form F-4 filed on September 15, 2000 (File No. 333-12536). *** Incorporated by reference to Grupo Elektra's Annual Report on Form 20-F filed on June 27, 2000 (File No. 1-13200). 104 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 2001 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 2001 INDEX Contents Page Report of independent accountants F-2 Consolidated financial statements: Balance sheets F-3 Statements of income F-4 Statements of changes in stockholders' equity F-5 Statements of changes in financial position F-6 Notes to the consolidated financial statements F-7 F-1 REPORT OF INDEPENDENT ACCOUNTANTS Mexico City, February 28, 2002, except for Note 15, as to which the date is April 4, 2002. To the Stockholders of Grupo Elektra, S. A. de C. V. and subsidiaries: We have audited the consolidated balance sheets of Grupo Elektra, S. A. de C. V. and subsidiaries (collectively the "Company") as of December 31, 2000 and 2001, and the related consolidated statements of income, of changes in stockholders' equity and of changes in financial position for each of the three years in the period ended December 31, 2001, all expressed in constant pesos of December 31, 2001 purchasing power. These financial statements have been prepared in accordance with accounting principles generally accepted in Mexico and are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States 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 provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of Grupo Elektra, S. A. de C. V. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations, the changes in their stockholders' equity and 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. Accounting principles generally accepted in Mexico vary in certain significant respects from generally accepted accounting principles in the United States of America. The application of generally accepted accounting principles in the United States of America would have affected the determination of consolidated net income, for each of the three years in the period ended December 31, 2001 and the determination of consolidated stockholders' equity as of December 31, 2000 and 2001 to the extent summarized in Note 17 to the consolidated financial statements. As mentioned in Note 3k. to the financial statements, commencing January 1, 2000 the Company adopted the provisions of Statement D-4, "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing". PricewaterhouseCoopers /s/ Ruben Rivera Rodriguez - -------------------------- Ruben Rivera Rodriguez F-2 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES (Note 1) CONSOLIDATED BALANCE SHEETS Thousands of Mexican pesos of December 31, 2001 purchasing power
December 31, ---------------------------------------------------------------- 2000 2001 ---- ---------------------------------------- Thousands of Assets US dollars (*) - ------ -------------- CURRENT ASSETS: Cash and cash equivalents Ps 800,348 Ps 1,913,761 US$ 208,698 --------------- --------------- ---------------- Accounts receivable: Customers - Net (Note 5) 3,853,671 3,387,136 369,371 Amounts due from related parties - Net (Note 9) 180,428 262,784 28,657 Other receivables 431,780 353,053 38,501 --------------- --------------- ---------------- 4,465,879 4,002,973 436,529 --------------- --------------- ---------------- Prepaid expenses 39,948 56,912 6,206 --------------- --------------- ---------------- Inventories (Note 6) 2,987,301 2,881,457 314,226 --------------- --------------- ---------------- Total current assets 8,293,476 8,855,103 965,659 PROPERTY, FURNITURE, EQUIPMENT AND INVESTMENT IN STORES - Net (Note 7) 3,837,198 3,657,123 398,814 GOODWILL, less accumulated amortization of Ps554,099 in 2000 and Ps647,879 in 2001 1,321,143 1,366,525 149,021 INVESTMENT IN SHARES (Note 8) 864,999 1,031,889 112,529 OTHER ASSETS 434,665 447,824 48,836 DEFERRED TAXES (Note 13) 47,695 --------------- --------------- ---------------- Ps 14,799,176 Ps 15,358,464 US$ 1,674,859 =============== =============== ================ Liabilities and Stockholders' Equity CURRENT LIABILITES WITH FINANCIAL COST: Debt and derivative financial instruments (Note 10) Ps 1,538,299 Ps 890,479 US$ 97,108 Capitalized lease obligations (Note 11) 106,693 148,674 16,213 --------------- --------------- ---------------- 1,644,992 1,039,153 113,321 --------------- --------------- ---------------- CURRENT LIABILITIES WITHOUT FINANCIAL COST: Accounts payable to suppliers 2,612,196 2,428,692 264,851 Accrued expenses and taxes payable 1,075,638 1,007,755 109,897 --------------- --------------- ---------------- 3,687,834 3,436,447 374,748 --------------- --------------- ---------------- Total current liabilities 5,332,826 4,475,600 488,069 --------------- --------------- ---------------- LONG-TERM LIABILITIES WITH FINANCIAL COST: Debt and other financing (Note 10) 2,756,160 3,713,850 405,000 Capitalized lease obligations (Note 11) 149,848 54,277 5,919 --------------- --------------- ---------------- 2,906,008 3,768,127 410,919 --------------- --------------- ---------------- LONG-TERM LIABILITIES WITHOUT FINANCIAL COST: Deferred taxes (Note 13) - 213,145 23,244 Other liabilities 84,088 88,701 9,673 --------------- --------------- ---------------- 84,088 301,846 32,917 --------------- --------------- ---------------- DEFERRED CREDITS: Unearned income from extended warranties 659,316 652,727 71,181 Negative goodwill (Note 2a.) 112,519 77,901 8,495 --------------- --------------- ---------------- 771,835 730,628 79,676 --------------- --------------- ---------------- Total liabilities 9,094,757 9,276,201 1,011,581 --------------- --------------- ---------------- STOCKHOLDERS' EQUITY (Note 12): Capital stock 629,423 619,772 67,587 Paid-in capital 1,668,253 1,320,864 144,042 Retained earnings 5,386,982 6,366,625 694,288 Legal reserve 96,874 96,874 10,564 Reserve for repurchase of shares 475,536 676,040 73,723 Effect of translation of foreign subsidiaries 13,576 (2,568) (280) Loss from holding nonmonetary assets (2,703,671) (3,120,875) (340,335) --------------- --------------- ---------------- Majority stockholders 5,566,973 5,956,732 649,589 Minority stockholders 137,446 125,531 13,689 --------------- --------------- ---------------- Total stockholders' equity 5,704,419 6,082,263 663,278 SUBSEQUENT EVENT (Note 15) COMMITMENT (Note 16) --------------- --------------- ---------------- Ps 14,799,176 Ps 15,358,464 US$ 1,674,859 =============== =============== ================
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31, 2001 translated at the exchange rate of December 31, 2001 of Ps9.17 per U.S. dollar and are unaudited. The accompanying eighteen notes are an integral part of these consolidated financial statements. F-3 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES (Note 1) CONSOLIDATED STATEMENTS OF INCOME Thousands of Mexican pesos of December 31, 2001 purchasing power (except per share amounts)
Year ended December 31, ----------------------------------------------------------- 1999 2000 2001 ---- ---- ----------------- Merchandise, services and other revenues (Note 3b.) Ps 13,044,408 Ps 15,373,282 Ps 15,608,432 Cost of merchandise sold and of services (Note 3b.) 7,716,141 8,807,592 8,977,093 ---------------- --------------- ---------------- Gross profit 5,328,267 6,565,690 6,631,339 ---------------- --------------- ---------------- Administrative and selling expenses 3,352,222 4,203,712 4,065,760 Depreciation and amortization 549,612 631,663 707,399 ---------------- --------------- ---------------- 3,901,834 4,835,375 4,773,159 ---------------- --------------- ---------------- Operating income 1,426,433 1,730,315 1,858,180 ---------------- --------------- ---------------- Comprehensive financing cost: Interest income 179,031 204,717 131,294 Interest expense (809,431) (685,441) (781,261) Foreign exchange gain (loss) - Net 26,114 (114,059) (8,561) Gain on net monetary position 292,280 297,119 170,655 Other - Net (Note 8) 135,501 ---------------- --------------- ---------------- (312,006) (297,664) (352,372) ---------------- --------------- ---------------- Income before taxes and employees' statutory profit sharing and equity in the results of affiliate 1,114,427 1,432,651 1,505,808 Taxes and employees' statutory profit sharing (Note 13) (109,867) (216,278) (543,112) ---------------- --------------- ---------------- Income before equity in the results of affiliate 1,004,560 1,216,373 962,696 Equity in the results of Comunicaciones Avanzadas, S. A. de C. V. - Net (Note 3i.) (92,386) (23,262) 186,969 ---------------- --------------- ---------------- Consolidated net income Ps 912,174 Ps 1,193,111 Ps 1,149,665 ================ =============== ================ Income of minority stockholders Ps 24,861 Ps 21,256 Ps 12,963 ================ =============== ================ Income of majority stockholders Ps 887,313 Ps 1,171,855 Ps 1,136,702 ================ =============== ================ Basic and diluted earnings per share (Note 3o.) Ps 0.258 Ps 0.320 Ps 0.309 ================ =============== ================ Year ended December 31, ----------------------- 2001 ------------------- Thousands of US dollars (*) Merchandise, services and other revenues (Note 3b.) US$ 1,702,119 Cost of merchandise sold and of services (Note 3b.) 978,963 ----------------- Gross profit 723,156 ----------------- Administrative and selling expenses 443,376 Depreciation and amortization 77,143 ----------------- 520,519 ----------------- Operating income 202,637 ----------------- Comprehensive financing cost: Interest income 14,318 Interest expense (85,197) Foreign exchange gain (loss) - Net (934) Gain on net monetary position 18,610 Other - Net (Note 8) 14,777 ----------------- (38,426) ----------------- Income before taxes and employees' statutory profit sharing and equity in the results of affiliate 164,211 Taxes and employees' statutory profit sharing (Note 13) (59,227) ----------------- Income before equity in the results of affiliate 104,984 Equity in the results of Comunicaciones Avanzadas, S. A. de C. V. - Net (Note 3i.) 20,389 ----------------- Consolidated net income US$ 125,373 ================= Income of minority stockholders US$ 1,415 ================= Income of majority stockholders US$ 123,958 ================= Basic and diluted earnings per share (Note 3o.) US$ 0.034 =================
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31, 2001 translated at the exchange rate of December 31, 2001 of Ps9.17 per U.S. dollar and are unaudited. The accompanying eighteen notes are an integral part of these consolidated financial statements. F-4 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES (Notes 1 and 12) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 Thousands of Mexican pesos of December 31, 2001 purchasing power (except per share amounts)
Number of Authorized but common shares Capital unsubscribed Paid-in Retained outstanding stock stock Total capital earnings ----------- ----- ----- ----- ------- -------- Balances at January 1, 1999 3,565,921,779 Ps 700,572 (Ps 79,886) Ps 620,686 Ps 2,016,815 Ps 3,362,278 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (196,612) (196,612) Issuance of capital stock 11,526,831 446 446 11,120 Payment of dividends (141,058) Sale of repurchased shares - Net 84,439,560 (205,370) Gain on derivative transactions 58,178 Increase in minority interest as a result of the acquisition of Grupo SyR and Cotsa Comprehensive income 887,313 -------------- ----------- --------- ----------- ------------ ------------ Balances at December 31, 1999 3,661,888,170 700,572 (79,440) 621,132 1,684,131 4,108,533 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (142,318) Issuance of capital stock 17,103,036 626 626 16,753 Payment of dividends (146,128) Repurchased shares - Net (62,690,864) Comprehensive income 1,429,539 (1) Gain on derivative transactions 101,982 Increase in equity accounts as a result of merger 4,613,065 7,665 7,665 7,705 (4,962) -------------- ----------- --------- ----------- ------------ ------------ Balances at December 31, 2000 3,620,913,407 708,237 (78,814) 629,423 1,668,253 5,386,982 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (130,214) Issuance of capital stock 24,283,401 820 820 11,454 Payment of dividends (157,059) Cancellation of repurchased shares (61,882,461) (10,471) (10,471) (154,086) Sale of repurchased shares 62,488,280 (8,635) Loss on derivative transactions (65,908) Comprehensive income 1,136,702 -------------- ----------- --------- ----------- ------------ ------------ Balances at December 31, 2001 3,645,802,627 Ps 708,237 (Ps 88,465) Ps 619,772 Ps 1,320,864 Ps 6,366,625 ============== =========== ========= =========== ============ ============ Loss Effect of Reserve for from holding translation Legal repurchase nonmonetary of foreign Minority reserve of shares assets subsidiaries stockholders Total ------- --------- ------ ------------ ------------ ----- Balances at January 1, 1999 Ps 96,846 Ps 330,112 (Ps 1,767,355) Ps 7,467 Ps 109,593 Ps 4,776,442 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (196,612) Issuance of capital stock 11,566 Payment of dividends (141,058) Sale of repurchased shares - Net 359,792 154,422 Gain on derivative transactions 58,178 Increase in minority interest as a result of the acquisition of Grupo SyR and Cotsa 159,790 159,790 Comprehensive income (283,417) (13,266) (81,553) 509,077 --------- ----------- ------------- --------- ---------- ------------ Balances at December 31, 1999 96,846 689,904 (2,050,772) (5,799) 187,830 5,331,805 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (142,318) Issuance of capital stock 17,379 Payment of dividends (146,128) Repurchased shares - Net (214,441) (214,441) Comprehensive income (647,566) 19,375 (50,384) (1) 750,964 Gain on derivative transactions 101,982 Increase in equity accounts as a result of merger 28 73 (5,333) 5,176 --------- ----------- ------------- --------- ---------- ------------ Balances at December 31, 2000 96,874 475,536 (2,703,671) 13,576 137,446 5,704,419 Reduction of paid-in capital resulting from repurchase of shares of subsidiaries (130,214) Issuance of capital stock 12,274 Payment of dividends (157,059) Cancellation of repurchased shares 164,557 Sale of repurchased shares 35,947 27,312 Loss on derivative transactions (65,908) Comprehensive income (417,204) (16,144) (11,915) 691,439 --------- ----------- ------------- --------- ---------- ------------ Balances at December 31, 2001 Ps 96,874 Ps 676,040 (Ps 3,120,875) (Ps 2,568) Ps 125,531 Ps 6,082,263 ========= =========== ============= ========= ========== ============
Year ended December 31, 1999 2000 2001 ---- ---- ---- Current year net (loss) income: Parent company (Ps 41,004) Ps 43,228 (Ps 307,471) Subsidiaries 928,317 1,128,627 1,444,173 ----------- ------------ ------------ Ps 887,313 Ps 1,171,855 Ps 1,136,702 =========== ============ ============
The accompanying eighteen notes are an integral part of these consolidated financial statements. (1) Includes Ps257,684 and Ps5,258, respectively of accumulated effect of deferred taxes. F-5 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES (Note 1) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, --------------------------------------------------------- 1999 2000 2001 ---- ---- --------------- Operations: - ---------- Consolidated net income Ps 912,174 Ps 1,193,111 Ps 1,149,665 Charges (credits) to income not affecting resources: Depreciation and amortization 549,612 631,663 707,399 Allowance for doubtful accounts 482,538 599,659 654,764 Accruals for seniority premiums and pension plan 7,461 9,517 7,582 Equity in the results of Comunicaciones Avanzadas, S. A. de C. V. - Net 92,386 23,262 (186,969) Provision for deferred taxes 215,248 260,840 Other provisions 29,710 49,015 62,104 Provision for derivative transactions 34,622 84,282 Net change in accounts receivable, inventories, other assets, accounts payable, related parties and unearned income from extended warranties (507,736) (2,337,135) (873,297) -------------- -------------- -------------- Resources provided by operations 1,566,145 418,962 1,866,370 -------------- -------------- -------------- Financing: - --------- Paid-in capital (own and subsidiaries' shares) (196,612) (142,318) (130,214) Bank loans and other debt - Net (223,571) 185,778 260,209 Capitalized lease obligations 245,452 (53,590) Increase in capital stock accounts as a result of merger with Grupo SyR 5,176 Issuance of capital stock 11,565 17,379 12,274 Payment of dividends (141,058) (146,128) (157,059) Gain (loss) on derivative transactions 58,178 101,982 (65,908) Sale (repurchase) of shares - Net 154,421 (214,441) 27,312 Debt issuance and receivable securitization costs (112,665) (35,971) -------------- -------------- --------------- Resources used in financing activities (337,077) (59,785) (142,947) -------------- -------------- -------------- Investing: - --------- Acquisition of property, furniture, equipment and investment in stores - Net (520,831) (461,130) (557,050) Acquisition of Mericolor, S. A. de C. V. (Note 2c.) (52,960) Acquisition of Grupo SyR, S. A. de C. V., net of assets acquired (Note 2a.) (991,240) Acquisition of Compania Operadora de Teatros, S. A. de C. V., net of assets acquired (Note 2b.) (526,187) Increase in minority stockholders as a result of the acquisition of Grupo SyR and Cotsa 181,136 -------------- -------------- -------------- Resources used in investing activities (1,857,122) (461,130) (610,010) -------------- -------------- -------------- (Decrease) increase in cash and cash equivalents (628,054) (101,953) 1,113,413 Cash and cash equivalents at beginning of year 1,530,355 902,301 800,348 -------------- -------------- -------------- Cash and cash equivalents at end of year Ps 902,301 Ps 800,348 Ps 1,913,761 ============== ============== ============== Year ended December 31, --------------------- 2001 --------------------- Thousands of Operations: US dollars (*) - ---------- -------------- Consolidated net income US$ 125,372 Charges (credits) to income not affecting resources: Depreciation and amortization 77,143 Allowance for doubtful accounts 71,403 Accruals for seniority premiums and pension plan 827 Equity in the results of Comunicaciones Avanzadas, S. A. de C. V. - Net (20,389) Provision for deferred taxes 28,445 Other provisions 6,773 Provision for derivative transactions 9,191 Net change in accounts receivable, inventories, other assets, accounts payable, related parties and unearned income from extended warranties (95,235) -------------- Resources provided by operations 203,530 -------------- Financing: - --------- Paid-in capital (own and subsidiaries' shares) (14,200) Bank loans and other debt - Net 28,376 Capitalized lease obligations (5,844) Increase in capital stock accounts as a result of merger with Grupo SyR Issuance of capital stock 1,338 Payment of dividends (17,127) Gain (loss) on derivative transactions (7,187) Sale (repurchase) of shares - Net 2,978 Debt issuance and receivable securitization costs (3,923). ---------------- Resources used in financing activities (15,589) -------------- Investing: - --------- Acquisition of property, furniture, equipment and investment in stores - Net (60,747) Acquisition of Mericolor, S. A. de C. V. (Note 2c.) (5,775) Acquisition of Grupo SyR, S. A. de C. V., net of assets acquired (Note 2a.) Acquisition of Compania Operadora de Teatros, S. A. de C. V., net of assets acquired (Note 2b.) Increase in minority stockholders as a result of the acquisition of Grupo SyR and Cotsa -------------- Resources used in investing activities (66,522) -------------- (Decrease) increase in cash and cash equivalents 121,419 Cash and cash equivalents at beginning of year 87,279 -------------- Cash and cash equivalents at end of year US$ 208,698 ==============
(*) The U.S. dollar figures represent the Mexican pesos amounts of December 31, 2001 translated at the exchange rate of December 31, 2001 of Ps9.17 per U.S. dollar and are unaudited. The accompanying eighteen notes are an integral part of these consolidated financial statements. F-6 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000 AND 2001 (Monetary figures expressed in thousands of Mexican pesos of December 31, 2001 purchasing power, except foreign currency figures, exchange rates in Note 4 and per share amounts mentioned in Note 12) NOTE 1 - COMPANY OPERATIONS: The main activities of Grupo Elektra, S. A. de C. V. ("Grupo Elektra") and its subsidiaries (collectively the "Company") are the purchase and sale, distribution, importation and exportation of consumer electronics, major appliances, household furniture and clothing. A significant portion of the Company's revenues arises from installment sales. Additionally, the Company offers a series of complementary products and services, the most important of which are money transfer services from the United States to Mexico and within Mexico, and extended warranty services for electronics and appliances. The Company operates the following stores: December 31, ------------ 2000 2001 ---- ---- Elektra Mexico 598 629 Elektra Latin America 102 101 Salinas y Rocha 89 90 The One 134 130 Hecali 27 3 ----- ----- 950 953 ===== ===== At December 31, 2001, the Company's main subsidiaries and affiliates are the following:
Company Percentage ------- of equity (%) ------------- Elektra del Milenio, S. A. de C. V. (Elektra) (see Note 3b.) 99.5 Elektrafin Comercial, S. A. de C. V. (Elektrafin) (see Note 3b.) 99.1 Salinas y Rocha, S. A. de C. V. (SyR) 100.0 Inmuebles Ardoma, S. A. de C. V. and subsidiaries (Ardoma) 100.0 Comunicaciones Avanzadas, S. A. de C. V. (CASA) 35.8
F-7 NOTE 2 - ACQUISITION OF SUBSIDIARIES AND INTERCOMPANY REORGANIZATION: a. Acquisition of Grupo SyR, S. A. de C. V. (Grupo SyR) - On April 8, 1999, Grupo Elektra acquired the rights to Grupo SyR's debt and 94.3% of the outstanding shares of Grupo SyR for US$77.7 million (Ps793 million nominal). Grupo SyR is a specialty retailer in Mexico and its main activities are the purchase and sale of consumer electronics, major appliances, household furniture and clothing. At the date of acquisition, Grupo SyR operated 97 stores, of which 86 were traditional stores and 11 were department stores. The Grupo SyR acquisition was recorded under the purchase method of accounting. Net Grupo SyR assets acquired were as follows: Working capital, other than cash acquired Ps 208,843 Property, furniture and equipment 1,102,233 Excess of net assets acquired over the purchase price (negative goodwill) (408,662) ----------- 902,414 Expenses related to the acquisition 88,827 ----------- Net cash used to acquire Grupo SyR Ps 991,241 ===========
In June 1999, the Company sold certain assets and leasing rights of certain department stores owned by Grupo SyR. The Company recorded a Ps229,752 loss on the sale against the negative goodwill. The consolidated financial statements of the Company as of and for the year ended December 31, 1999 include the assets, liabilities and results of operations of Grupo SyR from the acquisition date through December 31, 1999. However, for comparative purposes, the following unaudited pro forma information presents the combined results of operations of the Company and Grupo SyR as if the acquisition of Grupo SyR had occurred on January 1, 1999. F-8
Year ended December 31, ------------ 1999 ---- Merchandise, services and other revenues Ps 13,379,884 Costs and expenses 11,964,532 ------------- Operating income 1,415,352 Comprehensive financing cost (241,742) Taxes and statutory profit sharing (119,946) Equity in the results of Comunicaciones Avanzadas, S. A. de C. V. - Net (92,386) ------------- Consolidated net income Ps 961,278 .(*) =============
(*) This pro forma information does not purport to be indicative of the results of operations which would have actually been realized had the acquisition occurred on January 1, 1999. b. Acquisition of Compania Operadora de Teatros, S. A. de C. V. ("Cotsa") - On September 30, 1999, Inmuebles Ardoma, S. A. de C. V. (a wholly-owned subsidiary of Grupo SyR) acquired 90% of the capital stock of Compania Operadora de Teatros, S. A. de C. V. (a former wholly-owned subsidiary of Grupo Cotsa, S. A. de C. V.), a company controlled by certain stockholders of Grupo Elektra, through the capitalization of Ps369,640 in receivables due the Company. Cotsa's main assets were represented by 86 buildings and related land. The buildings have been used to open Elektra and The One stores. The accompanying consolidated financial statements include the assets, liabilities and results of operations of Cotsa beginning October 1, 1999. At the date of acquisition, the book value of the assets acquired was Ps526,187. c. Acquisition of Mericolor, S. A. de C. V. - On July 10, 2001, the Company acquired all the outstanding shares of Mericolor, S. A. de C. V. (Mericolor) for US$5.4 million. Mericolor operated 35 La Curacao stores located in Mexico which were converted into Elektra, The One and Salinas y Rocha stores. No unaudited pro forma information presenting the combined results of operations of the Company and Mericolor as if the acquisition of Mericolor had occurred on January 1, 2001 is included due to the immateriality of the acquisition. d. Intercompany reorganization - In 1999, the Company initiated an intercompany reorganization as follows: i. On July 30, 1999, Salinas y Rocha, S. A. de C. V. spun-off its assets into three operating subsidiaries: Salinas y Rocha, Elektra Comercial and Elektrafin Comercial. F-9 ii. On November 12, 1999, Corporacion Diprofin, S. A. de C. V. and Articulos Domesticos al Mayoreo, S. A. de C. V., former subsidiaries of Grupo Elektra, merged with and into Grupo SyR with Grupo SyR as the surviving entity. iii. On December 8, 1999, Elektra, S. A. de C. V. and Elektrafin, S. A. de C. V., former subsidiaries of Corporacion Diprofin, S. A. de C. V., merged with and into the newly created subsidiaries of SyR, Elektra Comercial and Elektrafin Comercial, respectively, with Elektra Comercial and Elektrafin Comercial as the surviving entities. In the following notes to the financial statements, all references to Elektra and Elektrafin are to Elektra Comercial and Elektrafin Comercial. iv. As a result of the above reorganization, Grupo Elektra increased its equity in Grupo SyR from 94.3% to 99.9%. As the final step of the intercompany reorganization described above, the stockholders approved the merger of Grupo Elektra into its subsidiary Grupo SyR (see Note 12a.). v. On December 26, 2001, Elektra Comercial merged with and into Elektra del Milenio (formerly Grupo Hecali, S. A. de C. V.), with Elektra del Milenio as the surviving entity. e. Hecali In 1999 and 2000, the Company converted 76 and 56 Hecali stores, respectively, to The One stores format. No Hecali stores were converted in 2001. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Following is a summary of the significant accounting policies, including the concepts, methods and criteria related to the recognition of the effects of inflation on the financial statements: a. Recognition of the effects of inflation The consolidated financial statements and the notes thereto are expressed in constant pesos of purchasing power as of December 31, 2001 and have been prepared in conformity with accounting principles generally accepted in Mexico, in accordance with the following policies: - - Investments in marketable securities are stated at market value. - - Inventory and cost of sales are restated by the replacement cost method. - - Property, furniture, equipment, investment in stores, goodwill and the components of stockholders' equity are restated by applying factors derived from the National Consumer Price Index (NCPI). - - The gain on net monetary position represents the effect of inflation, as measured by the NCPI, F-10 on the monthly net monetary liabilities and assets during the year, restated to pesos of purchasing power as of the end of the most recent period. - - The loss from holding nonmonetary assets represents the amount by which nonmonetary assets have increased less than the inflation rate measured in terms of the NCPI, and is included in stockholders' equity under the caption "loss from holding nonmonetary assets". - - The NCPI used to recognize the effects of inflation in the financial statements was 308.919, 336.596 and 351.418 as of December 31, 1999, 2000 and 2001, respectively. b. Presentation of the statement of income In order to allow for better matching of revenues with the costs needed to produce them, revenues include income resulting from the sale of merchandise and from the installment sales program (that is, accrued mark-up, stated interest and penalty interest, less the monetary loss on receivables). Cost of sales includes the cost of merchandise sold, the allowance for doubtful accounts and the cost of financing the installment sales program, less the monetary gain on financing of receivables. Following is an analysis of revenues and cost of sales:
Year ended December 31, --------------------------------------------------------------------------- Revenues: 1999 2000 2001 - -------- ---- ---- ---- Sales of merchandise Ps 10,110,937 Ps 11,704,212 Ps 11,681,352 Accrued income from extended warranties 99,030 163,266 208,105 Accrued mark-up 2,347,603 2,772,365 2,997,339 Penalty interest 369,105 373,686 367,704 Loss on monetary position from accounts receivable (277,652) (238,743) (152,719) Revenues from money transfer services (*) 395,385 598,496 506,651 -------------------- --------------------- -------------------- Ps 13,044,408 Ps 15,373,282 Ps 15,608,432 ==================== ===================== ==================== Costs: - ----- Cost of merchandise sold Ps 7,057,015 Ps 7,979,031 Ps 8,039,694 Other provisions 29,710 49,015 62,104 Interest expense on loans 310,619 320,816 308,551 Allowance for doubtful accounts 482,538 599,659 654,764 Interest on money transfer funding 16,732 14,257 11,248 Gain on monetary position on loans obtained to finance the installment sales program (180,473) (155,186) (99,268) --------------------- --------------------- -------------------- Ps 7,716,141 Ps 8,807,592 Ps 8,977,093 ==================== ===================== ====================
F-11 (*) In January 1996, Elektra entered into a ten-year Exclusive Services Agreement with Western Union for the transfer of money from the United States to Mexico, under which Elektra will receive US$14.2 million annually over ten years. For this purpose, Western Union deposited US$142 million into an escrow account, which in turn invested this amount by purchasing 2% of the shares of three consolidated subsidiaries of Grupo Elektra. Each year, the escrow sells a portion of the shares equivalent to US$14.2 million, which are paid annually to Elektra for the exclusive services. c. Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. d. Cash and cash equivalents The Company considers all highly liquid investments with original maturities of less than three months to be cash equivalents. e. Revenue recognition The Company recognizes revenue on the accrual basis when goods are delivered to customers. Interest and installment sales mark-up are credited to income on the straight-line basis over the life of the respective installment contracts (normally from 13 to 53 weeks). Revenues from money transfer services represent the commissions paid by Western Union to Elektra arising from money transfers collected in Elektra, SyR and The One/Hecali stores plus a share of foreign exchange gain, as well as commissions paid by Elektra's customers for money transfers within Mexico. Both types of commissions are recorded as services are provided. Revenues from extended warranty services are recorded as deferred income on the date the corresponding warranty certificates are sold, and are credited to income using the straight-line method over the terms of the extended warranties (from two to five years). Revenues from penalty interest are recorded as collected. f. Allowance for doubtful accounts The Company increases the allowance for doubtful accounts at the time of any installment sale by an amount equal to five percent of the cash price of the merchandise sold, plus the mark-up, less the down payment, if any. This method is based on the historical experience of the Company and represents management's best estimate of losses derived from accounts receivable. The Company follows the policy of writing-off all customer balances outstanding more than ninety days against the allowance for doubtful accounts. F-12 g. Inventories and cost of sales Inventories and cost of sales are originally determined by the average cost method and are restated as mentioned in Note 3a. Amounts of inventories so determined do not exceed current market value (see Note 6). h. Property, furniture, equipment and investment in stores Property, furniture and equipment are expressed at acquisition cost and are restated as explained in Note 3a. Investment in stores represents major improvements necessary for the opening of stores, and is restated as mentioned in Note 3a. At December 31, 1999, 2000 and 2001, the Company owned 79, 70 and 83 stores, and leased 867, 880 and 870 stores, respectively. Depreciation is calculated by the straight-line method, based on the estimated useful lives and the values of the Company's fixed assets. Amortization of investment in stores is calculated by the straight-line method over periods no longer than five years (see Note 7). i. Investments in shares The investment in Comunicaciones Avanzadas, S. A. de C. V. (CASA) is accounted for by the equity method. The equity in the results of CASA is shown net of the amortization of the related goodwill, in the consolidated statements of income. The amortization of CASA goodwill amounted to Ps58,450 in each of the years ended December 31, 1999, 2000, and 2001. Investments in marketable equity securities are recorded at market value with gains and losses recognized in earnings. Other investments in non-marketable equity securities in which the Company's interest is less than 10% are stated originally at cost, and restated as mentioned in Note 3a. The Company periodically reviews the carrying value of these investments, which are written down upon evidence of impairment. j. Goodwill and negative goodwill The excess of cost over the book value of the shares of subsidiaries and equity investees acquired (goodwill) and negative goodwill are amortized over twenty and five years, respectively, and are restated as mentioned in Note 3a. The related negative goodwill amortization for the years ended December 31, 1999, 2000 and 2001 amounted to Ps25,966, Ps34,618 and Ps34,618 respectively, and is included in the depreciation and amortization expense. k. Income tax and employees' statutory profit sharing Beginning on January 1, 2000 the Company adopted Statement D-4 "Accounting Treatment of F-13 Income Tax, Asset Tax and Employees' Profit Sharing". Under this statement, deferred taxes are initially recognized for all differences between book and tax values of assets and liabilities and for tax loss carryforwards and asset tax carryforwards that have a high probability of realization. The adoption of this statement resulted in an increase in stockholders' equity of Ps262,942, including Ps5,258 corresponding to minority interest. For the years ended December 31, 2000 and 2001, the Company recorded provisions for deferred income tax including the loss on monetary position amounting to Ps215,248 and Ps260,840, respectively. (See Note 13) Through December 31, 1999, deferred taxes were recognized for non-recurring timing differences between financial pretax income and taxable income, which were expected to reverse in an identifiable period. l. Labor obligations Seniority premiums to which employees are entitled upon termination of employment after 15 years of service, as well as benefits from the noncontributory retirement plans established by the Company's subsidiaries for their employees, are recognized as expenses of the years in which the services are rendered, based on actuarial studies. Plan benefits are primarily based on employees' years of service, which the Company estimates to be an average of 25 years, and on remuneration at retirement. At December 31, 2000 and 2001, the respective liability amounted to Ps49,180 and Ps56,762, respectively, and is included in other long-term liabilities. For the years ended December 31, 1999, 2000 and 2001 the net cost for the period charged to income amounted to Ps7,461, Ps9,517 and Ps7,582, respectively. Other severance compensation to which employees may be entitled in the event of dismissal or death, in accordance with the Mexican Federal Labor Law, is charged to income in the year in which it becomes payable. m. Impairment of long-lived assets The Company periodically evaluates the carrying value of its fixed assets, goodwill and other intangible assets to determine whether there are any impairment losses. If indicators of impairment were present, and future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss determined using discounted cash flows would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of material long-lived assets recorded in the accompanying consolidated financial statements. F-14 n. Transactions in foreign currencies and translation of foreign operations Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates they are entered into. Assets and liabilities denominated in these currencies are stated at the Mexican peso equivalents resulting from applying the year-end rates. Exchange differences arising from fluctuations in the exchange rates between the dates on which transactions are entered into and those on which they are settled, or the balance sheet dates, are charged or credited to income (see Note 4). The figures of the subsidiaries in Central and South America are translated by using the methodology established in Statement B-15 "Transactions in Foreign Currency and Translation of Financial Statements of Foreign Subsidiaries". In accordance with the provisions of that statement, the figures of those subsidiaries are restated by applying inflation factors of the country of origin. The resulting monetary and nonmonetary assets and liabilities, as well as the income and expenses, are translated at the exchange rate in effect on the balance sheet date. Differences arising from the translation of the subsidiaries' financial statements as of December 31, 1999, 2000 and 2001 amounted to (Ps13,266), Ps19,375 and (Ps16,144), respectively, and were recorded as part of stockholders' equity. o. Earnings per share Earnings per share is computed in accordance with Statement B-14, "Earnings per Share", by dividing the income of majority stockholders by the weighted average number of shares outstanding in 1999 (3,440,460,171), 2000 (3,662,810,268) and 2001 (3,682,898,252). Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the entity. The effect of stock options granted to the Company's employees on earnings per share did not have a material effect on the calculation of diluted earnings per share. p. Derivative financial instruments Effective on January 1, 2001, the Company adopted the guidelines of amended Statement C-2, "Financial Instruments" ("Statement C-2") . Statement C-2 states that instruments used for hedging purposes, be recorded in the balance sheet and valued using the same valuation criteria used to value the hedged asset or liability. Furthermore, Statement C-2 requires for instruments not designated as a hedge, the recognition of asset or liability derived from the acquisition cost and fair value of these instruments. Subsequent fair value adjustments are reflected in the statement of income. (See Note 10). Derivative financial instruments are used by the Company primarily to manage its (i) foreign exchange rate risk and (ii) interest rate risk. Realized and unrealized gains and losses on forward currency contracts are recognized in income of the period and are included in comprehensive financing cost. For the years ended December 31, 1999, 2000 and 2001, these operations generated losses of Ps66,920, Ps134,154 and Ps51,102, respectively. Realized gains and losses F-15 on options and interest-rate swaps designated as a hedge are recognized in income of the period and are included in comprehensive financing cost. At the end of the period, these financial instruments are valued with the same valuation criteria applied to the assets and liabilities being covered. In addition, the Company entered into transactions involving instruments indexed to the Company's stock. Through December 31, 2000, gains and losses on instruments indexed to the Company's stock were recognized in the financial statements when realized. Beginning on January 1, 2001, unrealized gains and losses are recognized in the balance sheet as either assets or liabilities. Any resulting gain or loss is recorded in paid-in capital because these transactions are carried out with the Company's own shares. Interest expense on the transactions, as well as dividends pertaining to these shares, are recorded in the results of the year in which they accrue. For the years ended December 31, 1999, 2000 and 2001, the Company credited or (charged) to equity Ps58,178, Ps101,882 and (Ps65,908), respectively. Counterparties to derivative transactions are normally major financial institutions, which also participate in the Company's bank credit facilities. Credit loss from counterparty non-performance is not anticipated. q. Comprehensive income In 2001, the Company adopted Statement B-4 "Comprehensive Income". This statement establishes new standards for reporting and displaying comprehensive income and its components in the statement of stockholders' equity. Under this statement, comprehensive income means the net income of the year plus any items which according to other statements are required to be recorded directly in stockholders' equity and are not capital contributions, reductions or disbursements (see Note 12). r. Description of leasing arrangements The Company conducts a major part of its operations from leased facilities, which include 870 stores, seven warehouses and the building housing the Company's headquarters. These facilities are under operating leases that expire over the next ten years. Most of the operating leases are renewable for periods of three to five years. Some of the rental payments on store facilities are based on a minimum rental or a percentage of the store's sales (contingent rentals). In most cases, management expects leases to be renewed or replaced by other assets. s. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. F-16 t. Reclassifications Certain reclassifications have been made to prior period amounts for them to conform to the current presentation. u. Recently issued accounting standards In November 2001, the Mexican Institute of Public Accountants (MIPA) issued revised Statement C-9, "Liabilities, Provisions, Contingent Assets and Liabilities and Commitments" ("Statement C-9"), which supersedes existing Statement C-9, "Liabilities" and Bulletin C-12, "Contingencies and Commitments". Statement C-9 establishes a methodology for valuation, presentation and disclosure of liabilities and provisions, as well as for valuation and disclosure of contingent assets and liabilities, and for disclosure of commitments. Among other things, Statement C-9 establishes guidelines for the recognition of liabilities and non-recognition of liabilities in the event of extinguishments, restructurings or conversion to equity. In addition, in the case of provisions, it introduces the concept of discounting long-term provisions. With respect to contingent liabilities, Statement C-9 states that all contingent liabilities that have a probable realization must be accounted for and disclosed in the financial statements, contingent liabilities that have a possible realization cannot be accounted for in the financial statements, but must be disclosed, and contingent liabilities that have a remote realization cannot be accounted for in the financial statements and are not required to be disclosed. Statement C-9 requires disclosure of committed amounts when they represent significant fixed asset additions, contracted services and goods that exceed the Company's immediate needs or if the commitment is considered a contracted obligation. The provisions of Statement C-9 are required to be applied beginning on January 1, 2003, although early adoption is recommended. Management is currently evaluating the impact that the adoption of Statement C-9 will have on its consolidated financial statements. In December 2001, the MIPA issued Statement C-8, "Intangible Assets" ("Statement C-8"), which defines intangible assets as costs incurred and rights or privileges acquired that will generate a future economic benefit. Statement C-8 provides a clear definition of research and development costs, requiring that only development costs may be deferred to a future period. Furthermore, Statement C-8 states that preoperating costs should be expensed as a period cost, unless they could be classified as development costs. Statement C-8 requires that goodwill and intangible assets, including previously existing goodwill and intangible assets, with indefinite useful lives should not be amortized, but should be tested for impairment annually. Goodwill and intangible assets with finite useful lives should be amortized over its useful life. The provisions of Statement C-8 are required to be applied beginning on January 1, 2003, although early adoption is recommended. Management is currently evaluating the impact that the adoption of Statement C-8 will have on its consolidated financial statements. NOTE 4 - FOREIGN CURRENCY POSITION: The following information is expressed in thousands of U.S. dollars, since this is the currency in F-17 which most of the Company's foreign currency transactions are carried out. The Company had the following foreign currency monetary assets and liabilities:
(Thousands of US dollars) December 31, 2000 ----------------------------------------------- Central and South Mexico America (*) Total ------ ----------- ----- Assets US$ 84,343 US$43,458 US$127,801 Liabilities (413,687) (48,831) (462,518) ---------- --------- ---------- Net short position (US$329,344) (US$ 5,373) (US$334,717) ========== ========= ========== December 31, 2001 ----------------------------------------------- Central and South Mexico America (*) Total ------ ----------- ----- Assets US$131,159 US$39,287 US$170,446 Liabilities (497,880) (16,637) (514,517) ---------- --------- ---------- Net (short) long position (US$366,721) US$22,650 (US$344,071) ========== ========= ==========
(*) Denominated in various currencies, which were translated to US dollars at the exchange rates in effect on December 31, 2000 and 2001. At December 31, 2001, the exchange rate was Ps9.17 to the U.S. dollar (Ps9.60 at December 31, 2000). At April 4, 2002, date of issuance of the consolidated financial statements, the exchange rate was Ps9.04 to the U.S. dollar. At December 31, 2000 and 2001, the Company had entered into forward currency exchange contracts to hedge the amount borrowed from the Euro Commercial Paper Program as mentioned in Note 10. F-18 Below is a summary of the principal foreign currency transactions carried out by the Company's subsidiaries in 1999, 2000 and 2001:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Revenues from money transfer services US$ 27,140 US$ 46,667 US$ 37,885 Sale of merchandise 82,911 88,434 104,381 Imported merchandise (66,766) (94,121) (24,485) Interest expense (33,229) (49,096) (50,235) Fees (25,192) (15,733) (5,784) Other (10,437) (27,986) (23,594) ---------- ---------- ---------- Net (US$ 25,573) (US$ 51,835) US$ 38,168 ========== ========== ==========
NOTE 5 - NET BALANCES DUE FROM CUSTOMERS AND SECURITIZATION OF RECEIVABLES: Customer account balances at December 31, 2000 and 2001 were as follows:
December 31, ------------ 2000 2001 ---- ---- Retail receivables - Net of securitization Ps 2,967,156 Ps 2,969,093 Less: Past due receivables written - off in the year (558,536) (667,428) ------------ ------------ Net retail receivables 2,408,620 2,301,665 Wholesale receivables 5,238 5,380 ------------ ------------ Total 2,413,858 2,307,045 Less - Allowance for doubtful accounts (136,886) (124,222) ------------ ------------ 2,276,972 2,182,823 Deposits on securitized receivables - Net 1,576,699 1,204,313 ------------ ------------ Ps 3,853,671 Ps 3,387,136 ============ ============
Accounts receivable from retail customers are shown net of the unearned installment sales mark-up. The unearned installment sales mark-up was Ps465,140 and Ps630,958 at December 31, 2000 and 2001, respectively. F-19 The movement of the allowance for doubtful accounts is as follows: Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Beginning balance Ps105,235 Ps 95,763 Ps136,886 Provisions 482,538 599,659 654,764 Write-offs (492,010) (558,536) (667,428) --------- --------- --------- Ending balance Ps 95,763 Ps136,886 Ps124,222 ========= ========= ========= Securitization of receivables Elektrafin has established a revolving securitization program to securitize its receivables through the transfer of a portion of its receivable collection rights to a trust fund in exchange for cash resources obtained from the public offering of "Ordinary and Amortizable Participation Certificates" ("CPOs"). The public offering is effected by the issuance of preferred and subordinated CPOs acquired by public investors and Elektrafin, respectively. In each public offering, the Company is required to transfer an additional portion of its portfolio to guarantee the issue, which is represented by the subordinated CPOs owned by Elektrafin. The subordinated CPOs are referred to as deposits on securitized receivables and are included in customer account balances. At December 31, 2001, the following issues were outstanding:
Amount of Date of Maturity the issue Interest Fitch Issue issuance date at nominal value rate (**) Mexico grade - ------ -------- ---- ---------------- --------- ------------ 99-1 September 1999 August 2002 Ps 200,000 IICR + 1.5 AA + 00-1U April 2000 April 2004 388,020 (*) 8.35% AAA 01-1 March 2001 March 2004 650,000 IICR + 2.0 AAA 01-2 July 2001 June 2005 550,000 IICR + 0.7 AAA
(*) Equivalent to 127 million Unidades de Inversion (UDIs). UDIs are a unit of measurement which considers the effects of inflation. (**) Interbank Interest Compensation Rate (IIRC). F-20 On February 14, 2002, Elektrafin completed its most recent securitization of receivable through the public issuance of CPOs amounting to Ps750,000 payable in four years, which was graded AAA by Fitch Mexico, S. A. de C. V. The applicable interest rate will be IICR plus 0.65%. In December 2001, Elektrafin settled the 98-1 issue which originally matured in April 2002. In March 2002, Elektrafin settled the 99-1 issue with original maturity date of August 2002. Elektrafin collects the securitized receivables on behalf of the trust and deposits such collections in the trust fund, which periodically pays interest to the holders of the preferred CPOs. Over the term of the issue, Elektrafin makes revolving transfers of receivables in exchange for cash from the collections previously deposited in the trust. When the maturity of the issue approaches, Elektrafin is not allowed to continue making revolving transfers of receivables, because the trust needs to accumulate the proceeds from the collections to repay the preferred CPO holders and to pay the remaining funds to Elektrafin, the subordinated CPOs holder. The preferred CPOs are repaid at their nominal value, and the subordinated CPOs at their adjusted value, arrived at by dividing the remaining cash held by the trust by the number of subordinated CPOs outstanding. NOTE 6 - INVENTORIES:
December 31, ------------ 2000 2001 ---- ---- Brand name merchandise Ps2,713,114 Ps2,733,346 Elektra brand name merchandise 54,815 41,792 Other merchandise 38,009 6,641 Merchandise in transit 21,018 9,818 ----------- ----------- 2,826,956 2,791,597 Less - Allowance for obsolete inventories (23,440) (1,840) ----------- ----------- 2,803,516 2,789,757 Advances to suppliers 183,785 91,700 ----------- ----------- Ps2,987,301 Ps2,881,457 =========== ===========
F-21 NOTE 7 - PROPERTY, FURNITURE, EQUIPMENT AND INVESTMENT IN STORES:
Average annual December 31, depreciation ------------ and amortization 2000 2001 rate (%) ---- ---- -------- Buildings Ps 2,195,479 Ps 2,184,992 3 Computer equipment 1,355,990 1,394,155 30 Communication equipment 360,980 369,435 10 Transportation equipment 397,751 366,091 23 Furniture and fixtures 610,409 655,598 14 Machinery and equipment 375,447 391,661 10 ------------ ----------- 5,296,056 5,361,932 Less - Accumulated depreciation (2,943,368) (3,337,486) ------------ ------------ 2,352,688 2,024,446 Land 918,938 916,855 ------------ ------------ 3,271,626 2,941,301 Investment in stores - Net 565,572 715,822 20 ------------ ------------ Ps 3,837,198 Ps 3,657,123 ============ ============
NOTE 8 - INVESTMENT IN SHARES:
December 31, Percentage --------------------------------- of 2000 2001 equity ---- ---- ------ Comunicaciones Avanzadas, S. A. de C. V. (CASA) Ps625,971 Ps 796,087 35.8% Other 239,028 235,802 --------- ----------- Ps864,999 Ps1,031,889 ========= ===========
On March 26, 1996, the Company purchased 35.8% of the capital stock of CASA, through the capitalization of accounts receivable amounting to US$45.4 million and a cash payment amounting to US$62.2 million. CASA is a holding company which owns 90% of the equity of Azteca Holdings, S. A. de C. V. ("AH"), which in turn owns 56.7% of the equity of TV Azteca and 26.2% of the equity of Grupo Cotsa, S. A. de C. V. The Company has the right to exchange all or a portion of its shares of CASA at any time before March 26, 2006, for the 226.4 million CPOs of TV Azteca owned by AH. This exchange right allows the Company to acquire up to F-22 approximately 7.6% of the capital stock of TV Azteca. Through the Company's indirect investment in TV Azteca, the Company indirectly owns 9.1% of Todito.com., S. A. de C. V. and 9.1% of Operadora Unefon, S. A. de C. V. (see Note 9). In July 2000, the Company's Board of Directors' Committee on Related Party Transactions approved an agreement granting CASA or its assignee, a call option to acquire the Company's 35.8% interest in CASA, or a portion thereof (not less than 50%), at any time prior to October 13, 2001 for a total cash payment of approximately US$316.4 million. In connection with the requirements of section 4.14 of the Indenture governing the issuance of the US$275 million 12% Senior Notes due 2008 mentioned in Note 10, the Company obtained a written opinion from a recognized United States investment banking firm certifying that the financial terms of the option were fair from a financial point of view to Grupo Elektra. Due to the fact that CASA and its assignee did not exercise the option, the Company received US$15.8 million, which was recorded as other in comprehensive financing cost in 2001. Included below is the summarized financial information of CASA: December 31, ------------ 2000 2001 ---- ---- Current assets Ps 6,867,235 Ps 7,171,603 Non-current assets 13,889,737 14,496,216 ------------ ------------ Ps20,756,972 Ps21,667,819 ============ ============ Current liabilities Ps 1,879,509 Ps 2,371,695 Long term liabilities 16,048,536 15,271,567 ------------ ------------ 17,928,045 17,643,262 ------------ ------------ Majority stockholders 1,748,522 2,223,707 Minority stockholders 1,080,405 1,800,850 ------------ ------------ Total stockholders' equity 2,828,927 4,024,557 ------------ ------------ Ps20,756,972 Ps21,667,819 ============ ============ F-23 Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Net revenue Ps4,770,929 Ps5,669,517 Ps5,769,640 Operating (loss) income (576) 1,242,218 1,681,108 Net (loss) income (181,004) 209,011 1,274,089 NOTE 9 - ACCOUNTS RECEIVABLE (PAYABLE) AND SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES:
December 31, ------------ 2000 2001 ---- ---- Azteca Holdings, S. A. de C. V. and subsidiaries Ps 44,949 Ps 51,150 Biper, S. A. de C. V. and subsidiaries ("Biper") 27,886 55,780 Mobil Digital, S. A. de C. V. and subsidiaries 20,516 35,283 Unefon, S. A. de C. V. and subsidiaries - Net (18,992) 43,919 Other 106,069 76,652 --------- --------- Ps180,428 Ps262,784 ========= =========
The principal transactions with related parties are as follows: Merchandise sales Revenues from sales of electronic devices and equipment to related parties amounted to Ps79,530 Ps125,198 and Ps48,467 for the years ended December 31, 1999, 2000 and 2001, respectively. Advertising agreements signed with Azteca Holdings, S. A. de C. V. and subsidiaries In March 1996 the Company entered into a ten-year agreement with TV Azteca whereby Elektra will purchase at least 5,200 minutes per year of advertising time from TV Azteca, to be aired during otherwise unsold time. The price is a minimum of US$1.5 million per year for ten years. For the years ended December 31, 1999, 2000 and 2001, the Company recorded advertising expenses of Ps11,049, Ps15,396 and Ps17,142, respectively, under this arrangement. In 1998, Elektra and TV Azteca entered into a separate five-year agreement pursuant to which TV Azteca will air commercial spots for Elektra at commercial rates based on the gross rating points assigned during premium airtime, i.e., from 7:00 p.m. to 12:00 a.m. Under the 1998 agreement, Elektra determines each year how much airtime to purchase from TV Azteca for that particular year. In 1999, Elektra purchased Ps20,880 of airtime under the 1998 agreement. Elektra did not purchase any airtime in 2000 and 2001 under this agreement. F-24 On February 17, 2000, Elektra and TV Azteca entered into an additional advertising agreement, pursuant to which TV Azteca will air commercial spots for Elektra at rates based on the rating points assigned per schedule. In 2000 Elektra purchased airtime amounting to Ps53,237 under this contract. Elektra did not purchase any airtime in 2001 under this agreement. On May 2, 2001, Elektra del Milenio entered into another advertising agreement with TV Azteca for Ps54,500. Pursuant to the agreement, Elektra del Milenio has the right to air advertising spots on Channels 13 and 7 and their national networks from May 2, 2001 through December 31, 2001. At the end of the period, any remaining advertising balance will be forfeited and TV Azteca will have no further obligations to Elektra del Milenio. Agreements signed with Biper, S. A. de C. V. and subsidiaries (Biper) The Company's relationship with Biper is governed by two separate agreements dated March 31, 1996, and March 15, 1997, pursuant to which Elektra acts as Biper's agent to promote Biper's paging and message delivery services, sign up Biper subscribers, provide customer support and carry out collections. The Company's income for the years ended December 31, 1999, 2000 and 2001, corresponding to the aforementioned services amounted to Ps56,873, Ps26,439 and Ps4,691, respectively. Agreement signed with Operadora Unefon, S.A. de C.V. (Unefon) At the August 31, 2000 meeting of the Company's Board of Directors' Committee on Related Party Transactions, it was agreed to terminate the agreement with Unefon dated October 15, 1999, and to sign a new agreement with a mandatory ten-year duration for both parties, beginning January 1, 2000. In accordance with this new agreement, Elektra, SyR, The One and Hecali are required to: i. Promote among their customers the telephone services provided by Unefon, ii. Sell, for credit or cash, the telephones acquired by the companies from Unefon. iii. Allow Unefon to install towers, antennas, shelters, or other transmission equipment at each of the stores of the companies. For the year ended December 31, 2001, revenues corresponding to this contract were Ps31,069, while during 2000 were not significant. The liability as of December 31, 2000 represents the purchase of telephones from Unefon. Option on Unefon shares On October 19, 2000, TV Azteca granted, on a pro rata basis to certain of its shareholders, including Azteca Holdings, rights to acquire all of the shares of Unefon owned by TV Azteca. The rights to acquire the Unefon shares were subject to the receipt of consents from the Holders F-25 of the TV Azteca and Azteca Holdings Senior Secured Notes 2002, which were obtained on March 27, 2001, the receipt of regulatory approvals and third parties approvals, including the approval of Nortel. In addition, the Rights are subject to the effectiveness of a registration statement filed with the U.S. Securities and Exchange Commission that registers the Unefon shares underlying the rights Of the 601,042,247 Series A shares of Unefon that Azteca Holdings may acquire pursuant to the rights, as a shareholder of TV Azteca, 511,743,120 shares are subject to a right to purchase granted in favor of Ricardo B. Salinas Pliego and Elisa Salinas Gomez, Mr. Salinas Pliego's aunt. Mr. Salinas and Mrs. Salinas Gomez paid a US$6.65 million non-refundable premium to Azteca Holding for these purchase rights. However, in order to exercise these purchase rights, Mr. Salinas Pliego and/or his affiliates must first have directly or indirectly acquired the CASA shares or all of our outstanding capital stock, or the Company must have exercised its right to exchange all of the shares of CASA for 226,492,629 CPOs of TV Azteca pursuant to the terms of the share exchange agreement dated March 26,1996 between Grupo Elektra and Azteca Holdings. If Mr. Salinas Pliego and Mrs. Salinas Gomez have not so acquired the CASA shares, and the Company has not exercised its share exchange right, then Grupo Elektra will have the right, in lieu of Mr. Salinas Pliego and Mrs. Salinas Gomez, to exercise up to 34% of Azteca Holdings rights to acquire Unefon shares. If the Company or Mr. Salinas Pliego and Mrs. Salinas Gomez, if applicable, exercise the purchase right and acquire the Unefon shares, such shares, together with any cash proceeds or securities received upon the sale of such shares or acquired with such cash proceeds, will be pledged as collateral to secure the senior notes issued by Azteca Holdings amounting to US$255 million that mature in 2003 and 2005. The rights are exercisable only on December 11, 2002, unless the time of exercise is extended by TV Azteca or an acceleration event occurs. Any rights that are not exercised on the exercise date will expire and TV Azteca will retain ownership of the shares underlying the rights. At December 31, 2001, the grant of the rights are still subject to the effectiveness of a registration statement of Unefon with the U.S. Securities and Exchange Commission. Agreement signed with Todito.com, S. A. de C. V. (Todito) At the May 3, 2000 meeting of the Company's Board of Directors' Committee on Related Party Transactions, it was agreed to enter into an agreement with Todito dated May 9, 2000 with a duration of five years from the date the agreement was signed. In accordance with this agreement, the Company is to rent space in its stores to Todito. Todito will install sales modules and offer its services consisting of sales through the www.todito.com Internet portal. The Company will also provide Todito with space on its Web pages (www.elektra.com.mx, www.salinasyrocha.com.mx) to place a fixed icon with the Todito logo. In return, Todito will provide the Company with space on its portal to place a fixed icon, which will work as a link to the Company's Web pages. The Company can receive at its stores all payments pertaining to sales made through the Todito Internet portal, and will be paid a commission on collections made. The Company will deposit the amounts collected in a Todito account within three days following the collection. F-26 In 2000 and 2001, the amounts derived from this agreement were not significant. Interest income During the year ended December 31, 1999, the Company extended short-term loans to Biper and Radiocel, S. A. de C. V. (subsidiary of Mobil Digital, S. A. de C. V.). Interest income under these arrangements amounted to Ps15,970 and Ps11,360, respectively. No additional loans were made in 2000 and 2001. NOTE 10 - DEBT AND DERIVATIVE FINANCIAL INSTRUMENTS:
December 31, ------------ 2000 2001 ---- ---- 12.0% Senior Notes US$275 million due 2008 Ps2,756,160 Ps2,521,750 Syndicated Loan for US$130 million 1,192,100 Euro Commercial Paper 651,456 233,835 Unsecured loans in Mexican pesos 385,758 316,273 Unsecured loans in U.S. dollars 141,391 139,366 Loans in other currencies 217,510 Derivative financial instruments 34,622 84,282 Interest 107,562 116,723 ----------- ----------- 4,294,459 4,604,329 Less current portion 1,538,299 890,479 ----------- ----------- Long-term debt Ps2,756,160 Ps3,713,850 =========== ===========
US$100 million 12.75% Senior Notes due 2001 In May 1996, Grupo Elektra issued Senior Notes for US$100 million on international markets, payable in May 2001, subject to interest at 12.75% per annum, payable semiannually, and guaranteed by Elektra and Elektrafin. The indenture governing these Senior Notes includes certain financial covenants, the most significant of which are "Consolidated Cash Flow Coverage Ratio" and "Consolidated Operating Cash Flow". At December 31, 2000, US$100 million of these Senior Notes have been considered extinguished through defeasance. On May 15, 2001, the Company repaid these Senior Notes. US$275 million 12.0% Senior Notes due 2008 On March 22, 2000, Grupo Elektra completed a private placement of US$275 million in Senior Notes due 2008, resulting in net proceeds of US$268.1 million. The Senior Notes were subsequently publicly registered in the United States of America. Interest on the Notes are F-27 payable semi-annually on April 1 and October 1, commencing on October 1, 2000. A portion of the proceeds was used to prepay the US$120 million outstanding balance on the syndicated guaranteed revolving credit facility and to purchase commercial paper and certificates of deposits of US$110.9 million, which were placed in an irrevocable trust and were used to pay the scheduled interest and principal at maturity on the US$100 million 12.75% Senior Notes due May 2001. The Indenture governing the Senior Notes imposes significant operating and financial restrictions on the Company. Such restrictions affect, and in many respects limit or prohibit, among other things, the Company's ability to pay dividends, incur indebtedness, create liens, enter into transactions with affiliates and consummate certain asset sales. The notes are guaranteed by all of the Company's subsidiaries. Syndicated loan for US$130 million On July 25, 2001, the Company entered into a five-year US$130 million credit agreement with a syndicate of financial institutions and with Citibank, N.A. as agent. The loan is divided in two Tranches of US$65 million each. During the first year of the loan Tranche "A" bears interest at LIBOR plus 2.75% and Tranche "B" at LIBOR plus 3.25%. Thereafter the applicable margin will be determined based on the results of the "Interest Coverage Ratio". This loan is guaranteed by Elektra, Elektrafin and SyR, and includes certain financial covenants with which the Company complied at December 31, 2001, the most significant of which being "Interest Coverage Ratio", "Leverage Ratio", "Current Assets Ratio" and "Fixed Charge Coverage Ratio". For the year ended December 31, 2001 the average interest rate was 6.88%. This loan is payable as follows: Date Thousands of U.S. dollars ---- ------------------------- January 30, 2003 US$ 24,375 July 30, 2003 24,375 January 30, 2004 24,375 July 30, 2004 24,375 January 30, 2005 8,125 July 30, 2005 8,125 January 30, 2006 8,125 July 30, 2006 8,125 ---------- US$130,000 ========== F-28 Euro Commercial Paper Program Grupo Elektra and Elektra have a Euro Commercial Paper Program which provides for unsecured short-term borrowings up to an aggregate of US$150 million or its equivalent in alternative currencies. The Euro Commercial Paper Program is unconditionally and irrevocably guaranteed by Grupo Elektra, Elektra, Elektrafin, SyR, Hecali and Ardoma. At December 31, 2001, the Company has drawn down US$25.5 million (US$65 million at December 31, 2000), payable in the year 2002. For the years ended December 31, 2000 and 2001, the average interest rates were 10.18% and 8.95%, respectively. Loans in other currencies These loans are as follows: Average December 31, interest rate 2000 2000 ---- ---- Quetzales (Guatemala) Ps 79,662 21.0 Lempiras (Honduras) 29,270 21.3 Colones (El Salvador) 31,215 17.5 Pesos Dominicanos (Dominican Republic) 36,991 27.7 Soles (Peru) 40,372 18.4 --------- Ps217,510 Derivative financial instruments a. Transactions with derivative financial instruments indexed to the Company's own stock Grupo Elektra has entered into certain derivative operations under which it swapped the future appreciation of its shares and CPO's for floating interest payments. At December 31, 2001, the liability for these transactions amounted to Ps41,285. b. Forward currency exchange contracts Grupo Elektra and Elektra have entered into short-term forward currency exchange contracts to protect themselves from changes in the exchange rate between the Mexican peso and the U.S. F-29 dollar. At December 31, 2000 and 2001, the Company has hedged liabilities from the Euro Commercial Paper with forward currency exchange contracts amounting to US$50 million and US$25 million, respectively. At December 31, 2000 and 2001, the related liability amounted to Ps34,622 and Ps38,415, respectively. F-30 c. Interest rate swaps and options Certain loans require the Company to pay interest at variable rates, while the Company provides credit to its customers at fixed rates. As a result, in 2001, Grupo Elektra and Elektrafin entered into interest rate swaps and options to protect themselves from changes in interest rates, mainly the 28-day IICR. These transactions resulted in losses of Ps59,460. At December 31, 2001, the liability for these transactions amounted to Ps4,582. NOTE 11 - OPERATING AND FINANCIAL LEASES: Following is a schedule of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2001: Year ending December 31: ------------------------ 2002 Ps 309,513 2003 274,827 2004 244,804 2005 214,592 2006 and thereafter 466,481 ----------- Total minimum payments required Ps1,510,217 =========== The following schedule shows the composition of total rental expense for all operating leases: Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Minimum rentals Ps336,036 Ps321,816 Ps314,117 Contingent rentals 32,821 23,894 21,759 --------- --------- --------- Ps368,857 Ps345,710 Ps335,876 ========= ========= ========= F-31 The Company has acquired computer equipment amounting to Ps387,565 under capital leases in U.S. dollars with purchase options after two to three years. At December 31, 2000 and 2001 the accumulated depreciation of that equipment amounted to Ps70,161 and Ps164,268, respectively. The liabilities under these capital lease contracts have the following maturities: Year - ---- 2002 Ps152,768 2003 61,454 2004 8,852 --------- Total liability 223,074 Less amount representing interest 20,123 --------- Net liability 202,951 Less current portion 148,674 --------- Long-term portion Ps 54,277 ========= NOTE 12 - STOCKHOLDERS' EQUITY: a. Company merger At the Extraordinary Meeting held on August 28, 2000, the stockholders approved the merger of Grupo Elektra into its subsidiary Grupo SyR, whose name was subsequently changed to Grupo Elektra, S. A. de C. V. The merger was effected through the exchange of shares in Grupo Elektra for equivalent shares in Grupo SyR. As a result of the merger, the Company recorded a net increase in equity of Ps5,176. For accounting purposes, the merger has been accounted for as a recapitalization of Grupo Elektra. b. Capital structure The Company's by-laws provide that all series of shares are without par value and unrestricted as to ownership. Common shares are divided into Series "A" shares, Series "B" shares, and Series "L" shares. Series "L" shares have restricted voting rights. No variable capital has been subscribed at December 31, 2001. For trading purposes in the Mexican and U.S. stock exchanges, the Company has issued Ordinary Participation Certificates (CPOs) comprising two Series "B" shares and ones Series "L" share and "American Depositary Receipts" ("ADRs") comprising ten CPOs. F-32 The fixed minimum capital stock was represented as follows:
December 31, ------------ 1999 2000 2001 ---- ---- ---- Series "A" Shares Ps 49,834 Ps 51,718 Ps 51,718 Series "B" Shares 78,080 81,190 81,190 Series "L" Shares 16,247 16,861 16,861 ---------- --------- --------- Fixed minimum capital stock 144,161 149,769 149,769 Subscribed but unpaid capital stock (21,210) (21,548) (21,894) ---------- --------- --------- Capital stock expressed in nominal pesos 122,951 128,221 127,875 Effect of restatement 498,181 501,202 491,897 ---------- --------- --------- Capital stock expressed in Mexican pesos of December 31, 2001 purchasing power Ps 621,132 Ps629,423 Ps619,772 ========== ========= =========
The capital stock is represented as shown below:
December 31, ------------ Authorized shares: 2000 2001 ---- ---- Series "A" Shares 1,495,024,470 1,495,024,470 Series "B" Shares 2,347,018,555 2,347,018,555 Series "L" Shares 487,416,030 487,416,030 -------------- -------------- 4,329,459,055 4,329,459,055 -------------- -------------- Less: authorized but unsubscribed and/or unpaid shares: Series "A" Shares (220,279,440) (220,279,440) Series "B" Shares (309,658,336) (334,724,376) Series "L" Shares (89,267,588) (101,800,608) -------------- -------------- (619,205,364) (656,804,424) Repurchased shares (89,340,284) (26,852,004) -------------- -------------- (708,545,648) (683,656,428) -------------- -------------- Net authorized shares subscribed and paid 3,620,913,407 3,645,802,627 ============== ==============
F-33 In the event that dividends are paid from retained earnings not arising from the Net Taxed Profit Account (CUFIN) a 35% tax will be paid on the amount exceeding the balance of the CUFIN multiplied by a factor of 1.5385. The applicable tax will be payable by the Company, and it may be credited against income tax owed by the Company in the following three years. Additionally, dividends paid to individuals or to parties resident abroad are subject to a maximum tax withholding equivalent to 7.69%, regardless of any previous taxation of such dividends. Capital stock reductions in excess of the sum of the balances of the capital contribution accounts, net taxed profit and reinvested net taxed profit, inflation-indexed in accordance with the procedures established by the Income Tax Law, are accorded the same tax treatment as dividends. At December 31, 2001, the balance of previously taxed retained earnings and the capital contribution accounts, determined in accordance with the tax regulations in effect, was Ps168,134 and Ps4,176,356, respectively. In the years ended December 31, 1999, 2000 and 2001 the Company paid dividends for Ps141,058 (Ps0.125 per CPO), Ps146,128 (Ps0.113 per CPO) and Ps157,059 (Ps0.121 per CPO), respectively. c. Stock option plans In February 1994, the Company and its stockholders approved the creation of the Partner 2000 Stock Option Plan ("the Plan") for key employees of the Company and its subsidiaries. Under the Plan, the Company may grant employees options to acquire up to 70 million CPOs of the Company at a price of Ps2.5, Ps3.25 or Ps4.0 (nominal) per CPO. Options granted under the Plan vest ratably over a five-year period from the date of grant, if the Company achieves annual established performance goals, mainly related to net income increase. If the annual established performance goals are not achieved, the vesting of the options may be postponed or limited, but not beyond February 28, 2004. The option price per CPO was determined based on each employee's employment date. At December 31, 2001, 62,961,187 CPOs had been assigned, of which 45,678,828 had been exercised as follows: Stock options under the plan Number of CPOs - ---------------------------- -------------- Outstanding on December 31, 1998 34,870,115 Exercised (3,842,277) ----------- Outstanding on December 31, 1999 31,027,838 Granted 50,000 Exercised (5,701,012) ----------- Outstanding on December 31, 2000 25,376,826 Exercised (8,094,467) ----------- Outstanding on December 31, 2001 17,282,359 =========== Exercisable at December 31, 2001 14,983,736 =========== F-34 The following table summarizes information concerning stock options outstanding and exercisable at December 31, 2001: Number of Options exercisable Exercise price outstanding options -------------- ----------- ------- 2.50 15,755,581 14,245,315 3.25 888,441 455,064 4.00 638,337 283,357 ----------- ----------- 17,282,359 14,983,736 =========== =========== In October 2000, the Board of Directors approved a new Stock Option Plan pursuant to which, the Company will grant options to acquire up to 5.4 million ADRs of Grupo Elektra to 120 employees eligible at the beginning of the plan, and new participants. As a result, the Company's Compensation Committee approved a 4.5% total dilution. The grant price of the option will be the average stock price for the last 30 trading days of the ADR preceding the date of grant. The strike price will be denominated in U.S. dollars. Options granted under the New Option Plan will vest over a seven-year period. At December 31, 2001, no options had been granted under this plan, since it is in process of being implemented. d. Restricted earnings of CASA At December 31, 2001, retained earnings include Ps471,610 corresponding to retained earnings of CASA. In order for Grupo Elektra to pay a dividend from profits derived from CASA earnings, the earnings must be previously declared as dividends by CASA. e. Comprehensive income Comprehensive income is analyzed as follows (See Note 3q.):
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Income of majority stockholders Ps 887,313 Ps1,171,855 Ps1,136,702 Initial recognition of deferred taxes (Note 3k.) 257,684 Effect of translation of foreign subsidiaries (13,266) 19,375 (16,144) Effects of minority interest (81,553) (50,384) (11,915) Loss from holding nonmonetary assets (283,417) (647,566) (417,204) ---------- ----------- ----------- Ps 509,077 Ps 750,964 Ps 691,439 ========== =========== ===========
F-35 NOTE 13 - INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING: Income tax and employees' statutory profit sharing charged to income are as follows:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Income tax Ps109,867 Ps278,227 Deferred income tax Ps215,248 260,840 Employees' statutory profit sharing 1,030 4,045 --------- --------- --------- Ps109,867 Ps216,278 Ps543,112 ========= ========= =========
For the years ended December 31, 1999, 2000 and 2001, the differences between taxable and financial income are mainly due to the effect of the deduction of inventory purchases for tax purposes, offset by the non-allowable deduction of cost of sales, to the difference between the effect of the inflationary component determined for book and tax purposes, to installment sales revenues for tax purposes and to nondeductible expenses. Effective January 1, 1999, the corporate income tax rate was increased from 34% to 35%. In accordance with the tax law amendments in effect as from January 1, 2002, the corporate income tax rate will be gradually reduced by 1% per annum beginning in the year 2003 until it reaches 32% in 2005. Consequently, this gradual decrease in the income tax rate will reduce the related income tax liability. At December 31, 2001, the Company had tax loss carryforwards that expire as shown below: Year of expiration Amount ---------- ------ 2005 Ps 120,005 2006 327,221 2007 283,226 2008 61,895 2009 32,556 2010 413,028 2011 747,175 ----------- Ps1,985,106 =========== F-36 The tax loss carryforwards are restated by applying factors derived from the NCPI until they are utilized. The Company prepares a consolidated income tax return, including all its subsidiaries. Additionally the Company's subsidiaries file individual income tax returns. As from 1999, the Mexican Income Tax Law limits the tax consolidation to 60% of the parent's equity interest (previously 100%). At December 31, 2001, the Company had Ps361,633 (restated) of recoverable asset tax, for which a refund can be requested if income tax determined in any of the following ten years exceeds asset tax for those years. Recoverable asset tax expires as shown below: Year of expiration Amount ---------- ------ 2004 Ps117,812 2005 106,033 2006 80,416 2007 35,305 2008 22,067 --------- Ps361,633 ========= Significant items comprising the Company's net deferred tax assets and liabilities at December 31, 2001, are as follows:
December 31, ------------ Deferred income tax liabilities: 2000 2001 - ------------------------------- ---- ---- Inventories (Ps 962,355) (Ps 901,930) Property, furniture, equipment and investment in stores (144,532) (101,663) Prepaid expenses (97,992) (99,457) Installment sales (224,096) Other (5,491) (6,016) ------------ ------------ (1,210,370) (1,333,162) ------------ ------------ Deferred income tax assets: - -------------------------- Operating loss carryforwards 827,215 694,787 Asset tax carryforwards 361,633 361,633 Allowance for doubtful accounts 47,088 38,422 Other 22,129 25,175 ------------ ------------ 1,258,065 1,120,017 ------------ ------------ Net deferred income tax assets (liabilities) Ps 47,695 (Ps 213,145) ============ ============
F-37 NOTE 14 - SEGMENT INFORMATION: Following is a summary of financial information by segments in which the Company carried out business at December 31, 1999, 2000 and 2001:
As of and for the year ended Commercial Credit International CASA Other Consolidated - ---------------------------- ---------- ------ ------------- ---- ----- ------------ December 31, 1999 Revenues from external customers Ps 8,680,309 Ps2,191,069 Ps 895,042 Ps 1,277,988 Ps13,044,408 Depreciation and amortization 37,630 17,401 85,569 409,012 549,612 Operating income (loss) 1,125,105 1,227,850 (27,839) (898,683) 1,426,433 Total assets 2,600,196 1,574,632 1,103,824 Ps 719,996 7,444,373 13,443,021 As of and for the year ended December 31, 2000 Revenues from external customers Ps10,271,930 Ps2,725,675 Ps 881,706 Ps 1,493,971 Ps15,373,282 Depreciation and amortization 37,100 19,791 91,682 483,090 631,663 Operating income (loss) 1,409,208 1,588,803 (99,331) (1,168,365) 1,730,315 Total assets 2,494,378 3,570,474 1,081,126 Ps 625,971 7,027,227 14,799,176 As of and for the year ended December 31, 2001 Revenues from external customers Ps10,429,651 Ps2,973,120 Ps 957,177 Ps 1,248,484 Ps15,608,432 Depreciation and amortization 124,755 21,157 84,962 476,525 707,399 Operating income (loss) 1,615,692 1,863,423 (53,391) (1,567,544) 1,858,180 Total assets 3,913,412 3,156,253 637,390 Ps 796,087 6,855,322 15,358,464
The Company is reporting segment sales and services and operating income in the same format reviewed by the Company's management. An operating segment is defined as a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and concerning which separate financial information is regularly evaluated by the Company's management in deciding how to allocate resources. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Certain assets and expenses, such as property, furniture and equipment and other assets, corporate overhead, depreciation, intangible amortization, interest expense and income taxes are not allocated to the segments and have been included in the Other column. The Company evaluates segment performance based upon income or loss before the aforementioned expenses. All the Company's operations are located in Mexico, except for the Latin American operations, which are located in Guatemala, El Salvador, Dominican Republic, Honduras and Peru. The Commercial Business Unit includes sales of a wide variety of brand name consumer electronics, major appliances and household furniture in Mexico. The Credit Business Unit consists of expenses incurred to finance the Company's installment sales program and to administer the installment sales operations, as well as the mark-up and stated or penalty interest earned by the Company. F-38 The International Business Unit represents the Company's electronics, appliance and furniture retail operations in five countries of Latin America: Guatemala, El Salvador, Honduras, Dominican Republic and Peru. The CASA Business Unit includes the Company's investment in CASA stated by the equity method net of the corresponding goodwill amortization. The Company's other operating segment includes a chain of clothing stores (Hecali and The One) that offer a broad range of basic and sports apparel and sport shoes for men, ladies and children; Money Transfer Services from abroad, primarily the United States, to Mexico, and within Mexico; Extended Warranties and Photo Products and Processing Services. NOTE 15 - SUBSEQUENT EVENT: - -------------------------- On April 4, 2002, the Mexican Ministry of Finance awarded Grupo Elektra a bank license. The bank, will be a subsidiary of the Company and its initial capital stock will amount to Ps227,500. NOTE 16 - COMMITMENT: At December 31, 2001, Grupo Elektra and Elektrafin have entered into interest rate swap contracts and options as follows:
Notional Notional Fixed amount Strike amount interest Month options price (%) swaps rate (%) January 2002 Ps 577,000 13.50 Ps 1,224,000 13.29 February 2002 610,000 13.50 1,158,000 13.27 March 2002 627,000 13.50 1,005,000 13.22 April 2002 697,000 13.50 977,000 13.19 May 2002 787,000 13.50 1,067,000 13.17 June 2002 803,000 13.50 1,083,000 13.17 July 2002 822,000 13.50 1,102,000 13.17 August 2002 827,000 13.50 1,107,000 13.17 September 2002 820,000 13.50 1,100,000 13.17 October 2002 825,000 13.50 825,000 13.00 November 2002 825,000 13.50 825,000 13.00 December 2002 850,000 13.50 850,000 13.00 January 2003 1,108,000 13.50 1,108,000 13.00
At December 31, 2001 and at April 4, 2002, date of issuance of the consolidated financial statements, the IICR was 7.9% and 7.43%, respectively. F-39 NOTE 17 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP): The Company's consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. The Mexican GAAP consolidated financial statements include the effects of inflation as provided for under Statement B-10 "Recognition of the Effects of Inflation on Financial Information". The application of this statement represents a comprehensive measure of the effects of price level changes in the Mexican economy, which for many years was hyperinflationary, and is considered to result in a more meaningful presentation than historical cost-based financial reporting for both Mexican and U.S. accounting purposes. Therefore the following reconciliations to U.S. GAAP do not include the reversal of such inflationary effects. The principal differences between Mexican GAAP and U.S. GAAP are summarized below with an explanation, where appropriate, of the effects on consolidated net income and stockholders' equity. The various reconciling items are presented net of any price level gain (loss): a. Reconciliation of consolidated net income:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Net income related to majority stockholders under Mexican GAAP Ps 887,313 Ps1,171,855 Ps1,136,702 Deferred income tax effects (101,358) (14,180) (20,449) Amortization of goodwill relating to other subsidiaries acquisitions 24,588 24,588 24,588 Amortization of goodwill relating to CASA acquisition 58,450 58,450 58,450 Difference in equity in earnings of CASA 77,683 (118,060) (225,172) Capitalized exchange losses and interest expense 4,121 4,121 4,121 Stock options granted to employees (84,264) (3,019) (146) Reversal of depreciation of property, furniture and equipment acquired in the Grupo SyR acquisition 44,817 59,756 59,756 Additional amortization of negative goodwill from the Grupo SyR acquisition 117,986 158,325 158,325 Net gain (loss) on instruments indexed to the Company's stock 145,997 5,852 (57,596) Net loss on interest rate swaps and options (44,875) Effect on minority stockholders of U.S. GAAP adjustments (733) (82) (82) ----------- ----------- ----------- Net income under U.S. GAAP Ps1,174,600 Ps1,347,606 Ps1,093,622 =========== =========== =========== Basic and diluted earnings per share (in pesos) Ps 0.34 Ps 0.37 Ps 0.30 =========== =========== =========== Basic weighted average number of common shares outstanding (in millions) 3,440.50 3,662.80 3,682.90 =========== =========== ===========
F-40 b. Reconciliation of consolidated stockholders' equity:
December 31, ------------ 2000 2001 ---- ---- Majority stockholders' equity under Mexican GAAP Ps 5,566,973 Ps 5,956,732 Deferred income tax effects 322,222 301,773 Negative goodwill resulting from the recognition of deferred tax benefits acquired from Grupo SyR (1,540,517) (1,382,192) Participation in net equity of CASA (136,546) (356,848) Goodwill relating to CASA acquisition (899,069) (840,619) Goodwill relating to other subsidiaries acquisitions (233,750) (209,162) Capitalized exchange losses and interest expense (16,317) (12,196) Deferred income (1,162,420) (1,032,206) Net loss on instruments indexed to the Company's stock (8,312) Net loss on interest rate swaps and options (44,875) Reversal of depreciation of property, furniture and equipment acquired in the Grupo SyR acquisition 104,573 164,329 Effect on minority stockholders of U.S. GAAP adjustments 27,560 27,478 ------------ ------------ Stockholders' equity under U.S. GAAP Ps 2,024,397 Ps 2,572,214 ============ ============
An analysis of the changes in consolidated stockholders' equity under U.S. GAAP is shown below:
1999 2000 2001 ---- ---- ---- Balance at beginning of year Ps 392,136 Ps1,402,135 Ps2,024,397 Net income 1,174,600 1,347,606 1,093,622 Loss from holding nonmonetary assets (260,529) (409,724) (412,334) Repurchase and sale of Grupo Elektra shares 154,422 (214,441) 27,312 Payment of dividends (141,058) (146,128) (157,059) Exercise of stock options 11,566 17,379 12,274 Stock options granted to employees 84,264 3,019 146 Increase in equity as a result of the merger with Grupo SyR 5,176 Effect of translation of foreign subsidiaries (13,266) 19,375 (16,144) ----------- ----------- ----------- Balance at end of year Ps1,402,135 Ps2,024,397 Ps2,572,214 =========== =========== ===========
F-41 c. Significant differences between U.S. GAAP and Mexican GAAP: i. Acquisition of subsidiaries and affiliates: 1. CASA As mentioned in Note 8, the Company acquired a 35.8% interest in CASA in 1996. For U.S. GAAP purposes, this acquisition is considered to be of a company under common control and was accounted for at recorded amounts in a manner similar to a pooling of interest. Consequently no goodwill would be reflected under U.S. GAAP. For Mexican GAAP purposes, the acquisition has been accounted for as a purchase of shares generating goodwill of Ps1,169,472 amortized on a straight line basis over 20 years. The reconciliations of net income and stockholders' equity also include adjustments in order to reconcile the equity in the income of CASA under Mexican GAAP to U.S. GAAP. The principal reconciling items between the equity in the income of CASA under Mexican GAAP and U.S. GAAP are: (i) the deferred tax effects, (2) the compensation cost from stock options, and (3) the effect of fifth amendment to Statement "B-10". Also in the Mexican GAAP financial statements the equity in the income (loss) of CASA is presented net of the related goodwill amortization. 2. Other subsidiaries In 1991, the Company acquired various companies controlled by the principal stockholders, and under Mexican GAAP recorded goodwill amounting to Ps491,760 for the excess of the amounts paid over the book value of the companies acquired. Under U.S. GAAP these acquisitions would have been recorded as combinations of companies under common control and no goodwill would have been recorded. 3. Acquisition of Grupo SyR On April 8, 1999, the Company acquired 94.3% of the capital stock of Grupo SyR and replaced the syndicate of banks as creditor on Grupo SyR's bank loans for an aggregate payment of US$77.7 million (approximately Ps966 million) plus transaction costs of Ps89 million. For U.S. GAAP purposes, the Company recorded the transaction using the purchase method of accounting. The total purchase cost of Ps1,055 million was initially allocated to the assets acquired (including tax loss carryforwards of Ps4,157,638 and recoverable asset tax of Ps361,633) and liabilities assumed based on their estimated fair values at the acquisition date and to the recognition of the acquired deferred tax assets that became realizable as a result of the acquisition and planned reorganization of the Company. The initial purchase price allocation resulted in the generation of negative goodwill, a portion of which was allocated to reduce the F-42 noncurrent assets (other than the deferred tax assets and the assets sold to Liverpool and other third parties) to zero. The assets sold to Liverpool and other third parties were recorded at their sale price. The remaining excess negative goodwill will be amortized over five years. The final purchase price allocation at the acquisition date is as follows: Purchase price Ps 1,055,377 ============== Allocated to: Current assets 675,731 Property, furniture and equipment 193,070 Deferred tax assets 1,816,827 Negative goodwill (965,487) --------------- Total assets 1,720,141 Liabilities (664,764) --------------- Net assets acquired Ps 1,055,377 ============== The reconciliation to U.S. GAAP net income and stockholders' equity as of and for the year ended December 31, 1999, 2000 and 2001 include: 1) a net adjustment to reflect the differences in basis between Mexican and U.S. GAAP; 2) an adjustment to the negative goodwill amortization as a result of the basis difference; and 3) an adjustment to reverse the depreciation expense recorded on the property, plant and equipment that were allocated a reduced or zero value. ii. Employees' profit sharing Under U.S. GAAP, employees' profit sharing would be considered an operating expense. iii. Deferred income tax and employees' profit sharing As stated in Note 3k., through December 31, 1999 income tax and employees' profit sharing were recorded under Mexican GAAP following interperiod allocation procedures under the partial liability method. Under this method, deferred tax and profit sharing were recognized only in respect of nonrecurring timing differences between taxable and book income which were expected to reverse at a definite future date. This substantially eliminated all deferred taxes under Mexican GAAP. Also, under Mexican GAAP the benefit from utilizing tax loss carryforwards and asset tax credits were not recognized until utilized, at which time it was presented as an extraordinary item. Commencing January 1, 2000, the Company adopted Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing". Under this statement, deferred tax assets or liabilities are initially recognized for all differences between book and tax value of assets and liabilities and for tax loss carryforwards and asset tax carryforwards that have a high probability of realization. The cumulative effect of F-43 adopting Statement D-4 as of January 1, 2000 was to record a deferred tax asset of Ps262,942, increase majority stockholders' equity by Ps257,684 and minority stockholders' equity by Ps5,258. U.S. GAAP Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS No. 109"), requires an asset and liability approach for financial accounting and reporting for income tax under the following basic principles: (a) a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year, (b) a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards, (c) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated, and (d) the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Under this method, deferred tax and profit sharing are recognized in respect of all temporary differences, and the benefit from utilizing tax loss carryforwards and asset tax credits is recognized in the year in which the loss or credits arise (subject to a valuation allowance in respect of any tax benefits not expected to be realized). The subsequent realization of this benefit does not affect income. Consequently, they do not represent extraordinary items for U.S. GAAP purposes. The temporary differences under FAS No. 109 are determined based on the difference between the indexed tax-basis amount of the asset or liability and the related stated amount reported in the financial statements. Except as indicated in the following paragraph, the deferred tax expense or benefit is calculated as the difference between: (a) the deferred tax assets and liabilities at the end of the current period determined as indicated above, and (b) the deferred tax assets and liabilities reported at the end of the prior period remeasured to units of current general purchasing power at the end of the current period. The deferred profit sharing expense or benefit is calculated similarly. Gains and losses from holding non-monetary assets are recorded in stockholders' equity. It is the Company's policy to reflect the deferred income taxes and profit sharing that arise as a result of such gains (losses) from assets or liabilities which do not currently affect income in the results of operations. The significant components of income tax expense under U.S. GAAP are as follows: Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Current Ps109,867 Ps278,227 Deferred 102,115 Ps230,387 281,289 --------- --------- --------- Ps211,982 Ps230,387 Ps559,516 ========= ========= ========= F-44 The following items represent the principal differences between income tax computed under U.S. GAAP at the statutory tax rate and the Company's provision for income tax in each year: Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Statutory income tax rate 35% 35% 35% Effects of inflation (9%) (11%) (6%) Non deductible expenses (5%) (8%) 2% Other (6%) (2%) 3% ------ ------ ------- Effective income tax rate 15% 14% 34% ====== ====== ====== The tax and profit sharing effects of significant items comprising the Company's net deferred tax and profit sharing assets and liabilities under U.S. GAAP are shown below:
Year ended December 31, ----------------------- 2000 2001 ---- ---- Deferred income tax liabilities: - ------------------------------- Inventories (Ps 962,355) (Ps 901,930) Property, furniture, equipment and investment in stores 177,690 200,110 Prepaid expenses (97,992) (99,457) Installment sales (224,096) Other (5,491) (6,016) ----------- ------------ (888,148) (1,031,389) ----------- ------------ Deferred income tax assets: - -------------------------- Operating loss carryforwards 827,215 694,787 Asset tax carryforwards 361,633 361,633 Allowance for doubtful accounts 47,088 38,422 Other 22,129 25,175 ----------- ------------ 1,258,065 1,120,017 ----------- ------------ Net deferred income tax assets under U.S. GAAP Ps 369,917 Ps 88,628 =========== ============
F-45 iv. Revenue recognition Under Mexican GAAP the mark-up on installment sales is deferred and amortized over the life of the installment sales contracts for all years, and is included as part of merchandise, services and other revenues since it is included in the sales price. Under Mexican GAAP any stated and penalty interest is also included in merchandise, services and other revenues. Under U.S. GAAP the installment sales mark-up earned along with stated and penalty interest would be classified as interest earned from consumer credit operations. During the years ended December 31, 1999, 2000 and 2001 the amount of installment sales mark-up earned for U.S. GAAP purposes was Ps2,347,603, Ps2,772,365 and Ps2,997,339, respectively. Under Mexican GAAP the loss on monetary position from accounts receivable is included in merchandise, services and other revenues since such accounts receivable relate to the installment sales contracts. Under U.S. GAAP the loss on monetary position from accounts receivable would not be part of operating income, but would be classified as other financing expense. For the years ended December 31, 1999, 2000, and 2001 the loss on monetary position from accounts receivable was Ps277,652, Ps238,743 and Ps152,719, respectively. v. Consumer credit operations The results of the Company's consumer credit operations which are included in the consolidated results of operations are as follows:
Year ended December 31, ----------------------- Consumer credit income: 1999 2000 2001 - ---------------------- ---- ---- ---- Mark-up from installment sales Ps2,347,603 Ps2,772,365 Ps2,997,339 Finance charges 369,105 373,686 367,704 ----------- ----------- ----------- 2,716,708 3,146,051 3,365,043 ----------- ----------- ----------- Consumer credit expenses: - ------------------------ Interest 310,619 320,816 308,551 Payroll 298,598 358,940 273,172 Provision for doubtful accounts 482,538 599,659 654,764 Other credit and collection expenses 149,868 104,688 93,714 ----------- ----------- ----------- Total operating expenses 1,241,623 1,384,103 1,330,201 ----------- ----------- ----------- Earnings from consumer credit operations Ps1,475,085 Ps1,761,948 Ps2,034,842 =========== =========== ===========
F-46 vi. Deferred income As described in Note 3b., the Company received US$142 million in 1996 relating to the Company's revised contractual agreements with Western Union, which was deposited in an escrow fund and subsequently (at the direction of the Company) transferred to the Company via purchase, by the escrow account, of shares of various consolidated subsidiaries. Under Mexican GAAP, the escrow fund is treated as an independent, unconsolidated entity and the US$142 million relating to the shares purchased by the escrow fund is accounted for as minority interest (US$5.6 million) and the remainder (US$136.4 million) is treated as additional paid-in capital which are both components of consolidated stockholders' equity. The minority interest and additional paid-in capital will be reduced annually by an aggregate of US$14.2 million with a corresponding credit to revenue, as escrowed amounts are released to the Company under terms of the escrow agreement. Income tax expense will be recorded at the time of revenue recognition. Under U.S. GAAP, the escrow arrangement would be treated as a special purpose consolidated entity, with the US$142 million accounted for as deferred income to be recognized as revenue over periods up to ten years in accordance with the contractual agreements. Income taxes will be recorded, as appropriate, under FAS No. 109. vii. Securitization of receivables Under Mexican GAAP the Company accounted for the 1999, 2000 and 2001 securitizations of receivables as sales of the receivables and derecognized from its balance sheets the receivables transferred under the programs against the proceeds received. Under U.S. GAAP, the transfer of the receivables in the 1999, 2000 and 2001 securitization programs have been accounted for as secured borrowings in accordance with Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" and No.140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of SFAS No. 125". Consequently, under U.S. GAAP the Company reestablished on its balance sheets as of December 31, 2000 and 2001, receivables of Ps1,238,437 and Ps1,410,208 respectively. The Company also recorded as of December 31, 2000 and 2001 liabilities of Ps1,422,411 and Ps1,622,476, respectively. viii. Capitalized interest The Company capitalized exchange losses and interest incurred from borrowings obtained for construction projects in 1994. For the years ended December 31, 1999, 2000 and 2001 the Company did not capitalize exchange losses or interest. Under U.S. GAAP exchange losses are not capitalized and interest is capitalized by applying the weighted average interest rate paid by the Company to the capitalized costs related to the construction projects. F-47 Amount capitalized under Mexican GAAP: Interest (net of monetary gain) Ps 7,355 Exchange losses 46,505 --------- 53,860 Amount capitalizable under U.S. GAAP (12,657) --------- Difference 41,203 Accumulated depreciation (29,007) --------- Ps 12,196 The depreciation of this item amounted to Ps4,121 in each of the years ended December 31, 1999, 2000 and 2001. ix. Employee stock option plan The Company's stock option plan under U.S. GAAP would be considered a variable plan since the number of shares exercisable is contingent on the Company achieving its performance goals. Once the Company has determined the number of options to be exercisable in a particular year compensation expense is determined as the difference between the quoted market price and the option exercise price times the number of shares exercisable during the year. Compensation expense relating to the Employee Stock Option Plan determined under Accounting Principles Board Opinion No. 25 for the years ended December 31, 1999, 2000, and 2001 was Ps84,264, Ps3,019, and Ps146, respectively. Had compensation cost for the Company's Employee Stock Option Plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("FAS No. 123"), the Company's compensation expense for the years ended December 31, 1999, 2000 and 2001 would have been Ps18,690, Ps49,545, and Ps53,501 respectively, and the net income per share would have been reduced or increased to the pro forma amounts as follows:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Net income as reported Ps1,174,600 Ps1,347,606 Ps1,093,622 =========== =========== =========== Net income proforma Ps1,240,174 Ps1,301,080 Ps1,040,267 =========== =========== ===========
F-48
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Basic and diluted earnings per share as reported Ps 0.34 Ps 0.37 Ps 0.30 ================= =================== =============== Basic and diluted earnings per share proforma Ps 0.36 Ps 0.36 Ps 0.28 ================= =================== ===============
The effect on net income and net income per share is not expected to be indicative of the effects in future years. The fair value of each option grant is estimated on the date of grant using the weighted average Black-Scholes option pricing model and simple binomial model with the assumptions presented below: Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Expected volatility 0.5137 0.5749 0.5107 Risk-free interest rate 18.67% 17.01% 9.60% Expected life of options in years 1.00 1.00 1.00 Expected dividend yield 15% 15% 15% The Black-Scholes option valuation model and simple binomial model were developed for use in estimating the fair value of traded options. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. For Mexican GAAP purposes stock options granted to employees are given effect when exercised by crediting to paid-in capital stock the exercise price. Under Mexican GAAP the granting of the options has no effect on the Company's results of operations, cash flow or financial condition. x. Concentration of credit risk The Company is a retailer of consumer electronics, major appliances, household furniture and other products with 852 stores in Mexico and 101 Elektra stores in several Latin American countries at December 31, 2001. The Company regularly makes installment sales to its customers and credit operations are managed by each store based on established credit policies developed by the Company. Due to the significant number of installment sales customers and store locations the Company believes that it is not dependent on any geographical area or customer base and therefore has no significant concentration of credit risk. F-49 The Company currently has a network of approximately 170 suppliers for its electronics, appliances and furniture products and directly imports approximately 5% of these products. Three of the Company's suppliers together accounted for more than 45% of its aggregate purchases of merchandise in the year ended December 31, 2001. xi. Fair value information The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("FAS No. 107"). The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is a reasonable estimate of their fair value. The carrying value of commercial paper and certificates of deposit held in escrow approximate fair value. The carrying value of loans to related parties at December 31, 2000 and 2001 is a reasonable estimate of their fair value based on the interest rates that are currently available to the related parties for issuance of notes with similar terms and remaining maturities. The Company's bank loans, secured borrowings from the securitization of receivables, and other debt bear interest at variable rates and their terms are generally representative of those which were available to the Company at December 31, 2000 and 2001 for the issuance of debt with similar terms and remaining maturities, and therefore the carrying values of these loans and other debt are a reasonable estimate of their fair value. The carrying amount of Euro Commercial Paper approximated its fair value as of December 31, 2000 and 2001. The fair value of Euro Commercial Paper was estimated based on quoted market rates for instruments with similar terms and remaining maturities. The fair value of the Company's long-term notes is based on quoted market prices. The estimated fair value of these instruments are as follows: December 31, ------------ 2000 2001 ---- ---- Carrying value US$ 100,000,000 Fair value US$ 103,500,000 Carrying value US$ 275,000,000 US$ 275,000,000 Fair value US$ 252,450,000 US$ 276,375,000 F-50 The long-term notes are thinly-traded financial instruments accordingly, their market price at any balance sheet date may not be representative of the price which would be derived from a more active market. Forwards exchange contracts As of December 31, 2000, the estimated fair value of forward exchange contracts to purchase US$50 million at a cost of Ps534.7 million, was determined using the current exchange rate as of December 31, 2000 of Ps9.60 and totaled Ps33.6 million. The contracts mature in February 2001, May 2001, October 2001 and January 2002. As of December 31, 2001, the estimated fair value of forward exchange contracts to purchase US$25.5 million at a cost of Ps267.7 million, was determined by independent financial institutions and totaled Ps36.1. The contracts mature in January 2002 and April 2002. Instruments indexed to the Company's stock As of December 31, 2000 and 2001, Grupo Elektra had entered into equity swap agreements. Set forth below is the fair value of the Company's equity swap portfolio at December 31, 2000 and 2001:
Initial Notional Year Underlying shares price Amount Fair value - ---- ----------------- ----- ------ ---------- 2000 6,822,660 Elektra CPOs US$ 0.68 US$ 4.6 million US$ 0.9 million 12,878,712 Elektra CPOs Ps 9.15 Ps 117.9 million (Ps 16.9) million 2001 6,822,660 Elektra CPOs US$ 0.68 US$ 4.6 million (US$ 0.3) million 14,400,000 Elektra CPOs US$ 0.93 US$ 13.3 million (US$ 4.0) million
Interest rate swaps and options As of December 31, 2001, the estimated fair value of interest rate swaps and options was determined by independent financial institutions and totaled Ps49,457. The contracts mature monthly from January 2002 through January 2003. xii. Derivative financial instruments As mentioned in Note 3p., the Company entered derivative financial instruments primarily to manage its (i) foreign exchange rate risk and (ii) interest rate risk. In addition, the Company entered into transactions involving instruments indexed to the Company's stock. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, F-51 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS 137, "Deferral of the Effective Date of SFAS No. 133" and SFAS 138, "Accounting for Derivative Instruments and Hedging Activities - an amendment of SFAS 133." Under SFAS 133 as amended, derivatives that are not designated as hedges must be adjusted to fair value through income. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Formal documentation designating the relationship between the hedging instrument and the hedged underlying transaction must be in place at inception, and hedge effectiveness must be reassessed regularly. The derivative instruments indexed to the Company's stock and the option issued to CASA (see Note 8) are outside the scope of SFAS 133. Forward foreign currency exchange contracts Under Mexican GAAP, the Company has recorded in earnings the gains and losses on forward foreign currency exchange contracts resulting from the differences in fair value as of December 31, 1999, 2000 and 2001. In 1999, the Company also granted to a third party the option to enter into a forward foreign currency contract at pre-established exchange rates. No amounts were recorded in the financial statements for this option. Prior to the adoption of SFAS 133, under U.S. GAAP, the differences between the forward peso rates and the spot rates on the dates the forward foreign currency exchange contracts were entered into (premium or discount) were amortized to earnings over the contract term. In addition, gains and losses were recognized in earnings for the gain or loss resulting from the differences between the forward peso rates and the peso spot rate as of December 31, 1999 and 2000. These differences did not result in a material reconciling item as of December 31, 1999 and 2000. Also, under U.S. GAAP in 1999, the Company recognized a liability and a loss of Ps41,634 for the difference between the option contract forward rate and spot rate on December 31, 1999. This loss was recorded under Mexican GAAP when realized in 2000. In 2001, there is no reconciling difference between Mexican GAAP and U.S. GAAP for the Company's forward foreign currency exchange contracts and options. Instruments indexed to the Company's stock Under Mexican GAAP through December 31, 2000, gains or losses on instruments indexed to the Company's stock were recognized in the financial statements when realized. Under U.S. GAAP, contracts that are indexed to a Company's stock that require settlement in cash are reflected in earnings. An asset or liability with a corresponding gain or loss would be recorded for the difference between the market price of Grupo Elektra stock and the contract price (as defined) as of December 31, 1999, 2000 and 2001. The Company recorded a receivable of Ps129,453 at December 31, 1999 and a liability of Ps35,782 at December 31, 2000 on these F-52 contracts. In addition, for U.S. GAAP purposes, the payment received in partial settlements of one of the contracts of Ps58,178 in 1999 was recorded in earnings. The settlement payment received in 2000 amounted to Ps101,982 and was recorded in the December 31, 1999 receivable and earnings for the period. Under Mexican GAAP, beginning on January 1, 2001, unrealized gains and losses on instruments indexed to the Company's stock are recognized on the balance sheet as either assets or liabilities. Any resulting gain or loss is recorded in stockholders' equity. As mentioned above, under U.S. GAAP, these unrealized gains and losses are reclassified and reflected in earnings. The following table illustrates the differences between Mexican and U.S. GAAP in the method of accounting for the instruments indexed to the Company's stock for the year ended December 31, 2001: Loss on derivative transactions recognized in stockholders' equity under Mexican GAAP (Ps 65,908) Settlement of net liabilities previously recognized under U.S. GAAP 8,312 ------ Loss recognized in earnings under U.S. GAAP (Ps 57,596) ========= Interest rate swaps and options Interest rate swaps and options are used to reduce the Company's exposure to interest rate fluctuations. While the Company provides credit to its customers on a fixed rate basis, some of the Company's obligations are provided at variable interest rates. Under Mexican GAAP, these instruments are classified as hedging instruments and are valued by applying the same valuation criteria that is used for the respective assets and liabilities for which these instruments cover. However, the Company's obligations related to these instruments are not carried at their fair value, and therefore, the instruments were not valued at year-end. Under U.S. GAAP, these derivative instruments do not qualify for hedge accounting. As a result, for the year ended December 31, 2001, the Company recognized the change in fair value of these derivative instruments as a charge to earnings of Ps44,875 with a corresponding credit to derivative financial instruments liability. xiii. Defeasance of the US$100 million 12.75% Senior Notes As mentioned in Note 10, under Mexican GAAP the US$100 million 12.75% Senior Notes have been considered extinguished through defeasance, and consequently the Senior Notes and the investments held in escrow were removed from the Company's balance sheet. Under U.S. GAAP the US$100 million 12.75% Senior Notes and the investments purchased by F-53 the Company are presented gross on the balance sheet and have not been defeased for accounting purposes. F-54 xiv. Advances to suppliers Under U.S. GAAP, advances to suppliers would be classified as prepayments. At December 31, 2000 and 2001, the Company had advances of Ps183,785 and Ps91,700, respectively. xv. Recently issued accounting standards In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB No. 125", ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, but it carries over most of the provisions of SFAS 125 without change. SFAS 140 is effective for transfers of financial assets occurring after March 31, 2001. The adoption of SFAS 140 did not change the U.S. GAAP accounting of the Company's current securitization program. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") which supersedes APB Opinion No. 16, "Business Combinations" and amends or supersedes a number of related interpretations of APB 16. The statement is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS 141 addresses financial accounting and reporting for business combinations, eliminates the pooling-of-interests method of accounting for business combinations, and prescribes the initial recognition and measurement of goodwill and other intangible assets, accounting for negative goodwill and the required disclosures in respect of business combinations. The adoption of SFAS 141 did not have a material impact on the Company's consolidated financial statements. Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business acquisition) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 discontinues the amortization of both existing and future acquired goodwill and negative goodwill. Furthermore, negative goodwill will be reflected as a one-time extraordinary gain. In addition, SFAS 142 states that upon adoption, any remaining negative goodwill will be written off as a change in accounting principle. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Management is currently evaluating the impact that the adoption of SFAS 142 will have on its consolidated financial statements. As of December 31, 2001, intangible assets under US GAAP consisted of Ps331,010 of goodwill and Ps496,234 of negative goodwill. F-55 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires the recognition of a liability for the legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction and (or) normal operation of the asset. The liability is recognized at fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. A corresponding asset retirement cost is added to the carrying value of the long-lived asset and is depreciated to expense using a systematic and rational method over its useful life. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Upon initial adoption, a liability is recognized for existing asset retirement obligations and the associated asset retirement cost is capitalized as an increase to the carrying value of the asset. The recognized liability and asset are adjusted for cumulative accretion and accumulated depreciation, respectively, from the time period when the asset retirement obligation would have originally been recognized had this statement been in effect to the date of initial adoption. The cumulative effect of initial adoption of SFAS 143 is recorded as a change in accounting principle. Management estimates that the adoption of SFAS 143 will not have a material impact on the consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used, but resolves a number of implementation issues and establishes a single accounting model for assets to be disposed of. SFAS 144 also retains the requirements to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonment or distribution to owners or is classified as held for sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and their interim periods. The provisions of SFAS 144 for long-lived assets to be disposed of by sale or otherwise are effective for disposal activities initiated after the effective date of SFAS 144 or after its initial application. Management is currently evaluating the impact that the adoption of SFAS 144 will have on the consolidated financial statements. xvi. Condensed balance sheets and income statements under U.S. GAAP The following condensed balance sheets and statements of income reflect the effects of the principal differences between Mexican GAAP and U.S. GAAP. F-56 CONDENSED BALANCE SHEETS
December 31, ------------ 2000 2001 ---- ---- Cash and cash equivalents Ps 800,348 Ps 1,913,761 Restricted investments 1,040,866 Accounts receivable due from customers - Net 5,084,014 4,797,344 Related parties 180,428 262,784 Inventories 2,803,516 2,789,757 Other current assets 872,848 713,933 ------------ ------------ Total current assets 10,782,020 10,477,579 Property, furniture and equipment - Net 2,961,595 2,845,397 Deferred income tax 1,383,177 1,051,593 Other assets 871,347 1,000,370 Investment in CASA 489,425 439,239 Negative goodwill (689,177) (496,234) ------------ ------------ Total assets Ps15,798,387 Ps15,317,944 ============ ============ Short-term debt Ps 2,612,610 Ps 1,118,484 Deferred income - Current portion 193,737 206,441 Suppliers 2,612,196 2,428,692 Deferred income tax 1,013,259 962,965 Other current liabilities 1,191,793 1,007,755 ------------ ------------ Total current liabilities 7,623,595 5,724,337 Long-term debt 4,328,420 5,356,147 Other long-term liabilities 743,403 741,428 Deferred income 968,684 825,765 ------------ ------------ Total liabilities 13,664,102 12,647,677 ------------ ------------ Minority interest 109,888 98,053 ------------ ------------ Majority stockholders 2,024,397 2,572,214 ------------ ------------ Total liabilities and stockholders' equity Ps15,798,387 Ps15,317,944 ============ ============
F-57 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Revenues: Sales of merchandise Ps 10,169,026 Ps 11,809,645 Ps 11,681,352 Money transfer and other services 436,326 656,329 714,756 Interest earned from consumer credit operations 2,716,708 3,146,051 3,365,043 ------------- ------------- ------------- 13,322,060 15,612,025 15,761,151 ------------- ------------- ------------- Costs and expenses: Cost of sales (7,085,968) (8,028,118) (8,101,798) Selling, general and administrative (3,794,588) (4,591,604) (4,530,560) Allowance for doubtful accounts (482,538) (599,659) (654,764) ------------- ------------- ------------- (11,363,094) (13,219,381) (13,287,122) ------------- ------------- ------------- Operating income 1,958,966 2,392,644 2,474,029 Interest paid for consumer credit operations (310,619) (320,816) (308,551) Other financing expense (279,920) (389,625) (519,542) ------------- ------------- ------------- Income before taxes, equity in earnings and minority interest 1,368,427 1,682,203 1,645,936 Income tax (211,982) (230,387) (559,516) ------------- ------------- ------------- Income before equity in earnings and minority interest 1,156,445 1,451,816 1,086,420 Equity in income (loss) of CASA 43,750 (82,872) 20,247 ------------- ------------- ------------- Income before minority interest 1,200,195 1,368,944 1,106,667 Minority interest (25,594) (21,338) (13,045) ------------- ------------- ------------- Net income of majority stockholders 1,174,601 1,347,606 1,093,622 Effect of translation of foreign subsidiaries (13,266) 19,375 (16,144) Loss from holding non-monetary assets (157,999) (627,655) (584,094) ------------- ------------- ------------- Comprehensive income Ps 1,003,336 Ps 739,326 Ps 493,384 ============= ============= =============
The Company has not separately presented costs of money transfer and other services as these costs cannot be separately distinguished from other costs in operating the Company's stores. Management does not believe these costs to be material. F-58 xviii. Cash flow information Under US GAAP a statement of cash flow is prepared based on provisions of Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows" ("FAS No. 95"). This statement does not provide guidance for the preparation of cash flow statements for price level adjusted financial statements. F-59 Presented below are statements of cash flow for the years ended December 31, 1999, 2000 and 2001 prepared after considering the impact of U.S. GAAP adjustments. The cash flow statements present nominal cash flow during the periods, adjusted to pesos of December 31, 2001, purchasing power.
Year ended December 31, ----------------------- Cash flows from operating activities: 1999 2000 2001 - ------------------------------------ ---- ---- ---- Net income Ps 1,174,601 Ps 1,347,606 Ps 1,093,622 ------------ ------------- ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 476,086 543,197 460,609 Amortization of negative goodwill (117,986) (158,325) (158,325) Allowance for doubtful accounts 482,538 599,659 654,764 Equity in (income) loss of CASA (43,750) 82,872 (20,247) Other provisions 29,710 49,015 62,104 Minority stockholders 25,594 21,338 13,045 Accrual for seniority premiums 7,461 9,517 7,582 Monetary gain from financing activities (195,101) (213,562) (117,204) Deferred income tax and employees' profit sharing 101,357 229,427 281,289 Compensation expense from stock options granted to employees 84,264 3,019 146 Recognition of deferred income from Western Union agreement (153,292) (142,318) (130,214) Unrealized exchange loss (gain) - Net (158,857) 103,356 (110,281) Unrealized net (gain) loss on derivative and hedging transactions (87,818) (5,852) 92,555 Unearned income from extended warranties 264,162 315,334 21,198 Net changes in working capital (1,349,826) (2,124,777) (205,996) ------------ ------------- ------------ Net cash provided by operating activities 539,143 659,506 1,944,647 ------------ ------------- ------------ Cash flows from financing activities: Short-term and long-term loans received 5,449,208 13,137,075 5,814,853 Repayment of short-term and long-term debt (5,437,406) (14,207,676) (7,313,881) Proceeds from issuance of US$275 million Senior Notes - 2,664,288 - Repayment of Syndicated Loan - (1,162,598) - Euro Commercial Paper - 651,456 (390,165) Proceeds from securitization of receivables 220,790 385,719 1,200,000 Repayment of securitization of receivables - (208,800) (260,013) Issuance of capital stock 11,566 17,379 12,274 Repurchase and sale of Grupo Elektra shares 154,422 (214,441) 27,312 Payment of dividends (141,058) (146,128) (157,059) Gain (loss) on instruments indexed to the Company's stock 58,178 101,982 (22,810) Debt issuance costs - (112,664) (35,971). ------------ ------------- -------------- Net cash provided by (used in) financing activities 315,700 905,592 (1,125,460) ------------ ------------- ------------- Cash flows from investing activities: Acquisition of property, furniture, equipment and investment in stores (498,639) (218,873) (533,573) Acquisition of Mericolor, S. A. de C. V. - - (50,728) Restricted investments - (1,040,865) 1,095,021 Proceeds from disposal of assets 527,057 - - Acquisition of Grupo SyR, net of cash acquired (1,004,635) - - ------------ ------------- ------------ Net cash used in investing activities (976,217) (1,259,738) (510,720) ------------ ------------- ------------ Effects of inflation and exchange rate changes on cash (506,680) (407,313) (216,494) ------------ ------------- ------------ (Decrease) increase in cash and cash equivalents (628,054) (101,953) 1,113,413 Cash and cash equivalents at beginning of year 1,530,355 902,301 800,348 ------------ ------------- ------------ Cash and cash equivalents at end of year Ps 902,301 Ps 800,348 Ps 1,913,761 ============ ============= ============
F-60
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Supplemental disclosure: Cash paid during the year for: Interest Ps 613,256 Ps 794,722 Ps 1,053,091 =========== =========== ============= Income and asset tax Ps 138,659 Ps 120,658 Ps 105,392 =========== =========== =============
Non cash transactions: The Company recorded capital lease obligations of Ps224,766 in 2000, related to the acquisition of property. In the year ended December 31, 1999, the Company acquired 90% of the capital stock of Cotsa through the capitalization of Ps369,640 in receivables due to the Company. NOTE 18 - SUPPLEMENTAL GUARANTOR INFORMATION: The Senior Notes are fully and unconditionally guaranteed, by each of the Company's subsidiaries. Each of the guarantor subsidiaries was a wholly owned subsidiary except for Grupo SyR, Elmex Superior, S. A. de C. V. (Elmex), and Cotsa as of and for the year ended December 31, 1999. As of and for the years ended December 31, 2000 and 2001 only Cotsa remains a non-wholly owned guarantor subsidiary. The financial statements of Cotsa are presented separately. The following condensed consolidating financial data presents the separate condensed financial data of the Guarantor Subsidiaries and the Parent Company. It is management's opinion that separate complete financial statements of the respective Guarantors (other than Cotsa) would not provide material information to the investor and thus are not presented. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are therefore reflected in Parent Company's investment account and earnings. The principal elimination entries eliminate the Parent Company's investment in subsidiaries and intercompany balances and transactions. Reconciliations of net income and stockholders' equity from Mexican GAAP to U.S. GAAP are also included after the condensed financial statements. F-61 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000 Thousands of Mexican pesos of December 31, 2001 purchasing power
Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Cash and cash equivalents Ps 383,904 Ps 416,444 Ps 800,348 Accounts receivable 130,615 7,011,379 (Ps 2,676,115) 4,465,879 Other Prepaid Expenses 39,948 39,948 Inventories 2,987,301 2,987,301 ------------ ------------ ------------ ------------ Total current assets 514,519 10,455,072 (2,676,115) 8,293,476 Property, furniture, equipment and investment in stores 1,151,182 2,686,016 3,837,198 Goodwill 1,173,625 147,518 1,321,143 Investment in shares 8,489,673 (7,624,674) 864,999 Other assets 539,917 584,997 (642,554) 482,360 ------------ ------------ ------------ ------------ Ps11,868,916 Ps13,873,603 (Ps10,943,343) Ps14,799,176 ============ ============ ============ ============ Bank loans and other short-term debt Ps 324,525 Ps 1,320,467 Ps 1,644,992 Other current liabilities 2,756,312 3,607,637 (Ps 2,676,115) 3,687,834 ------------ ------------ ------------ ------------ Total current liabilities 3,080,837 4,928,104 (2,676,115) 5,332,826 Long-term notes and other long-term debt 2,823,951 82,057 2,906,008 Other long-term liabilities 284,636 84,088 (284,636) 84,088 Deferred credits 112,519 659,316 771,835 Stockholders' equity 5,566,973 8,120,038 (7,982,592) 5,704,419 ------------ ------------ ------------ ------------ Ps11,868,916 Ps13,873,603 (Ps10,943,343) Ps14,799,176 ============ ============ ============ ============
F-62 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2001 Thousands of Mexican pesos of December 31, 2001 purchasing power
Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Cash and cash equivalents Ps 483,323 Ps 1,430,438 Ps 1,913,761 Accounts receivable 66,201 6,788,855 (Ps 2,852,083) 4,002,973 Other Prepaid Expenses 56,912 56,912 Inventories 2,881,457 2,881,457 ------------ ------------ ------------ ------------ Total current assets 549,524 11,157,662 (2,852,083) 8,855,103 Property, furniture, equipment and investment in stores 1,043,835 2,613,288 3,657,123 Goodwill 1,088,210 278,315 1,366,525 Investment in shares 9,812,912 94,734 (Ps 8,875,757) 1,031,889 Other assets 577,555 470,085 (599,816) 447,824 ------------ ------------ ------------ ------------ Ps13,072,036 Ps14,614,084 (Ps12,327,656) Ps15,358,464 ============ ============ ============ ============ Bank loans and other short-term debt Ps 282,786 Ps 756,367 Ps 1,039,153 Other current liabilities 2,910,553 3,377,977 (Ps 2,852,083) 3,436,447 ------------ ------------ ------------ ------------ Total current liabilities 3,193,339 4,134,344 (2,852,083) 4,475,600 Long-term notes and other long-term debt 3,713,850 54,277 3,768,127 Other long-term liabilities 130,214 301,846 (130,214) 301,846 Deferred credits 77,901 652,727 730,628 Stockholders' equity 5,956,732 9,470,890 (9,345,359) 6,082,263 ------------ ------------ ------------ ------------ Ps13,072,036 Ps14,614,084 (Ps12,327,656) Ps15,358,464 ============ ============ ============ ============
F-63 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 1999 ---------------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Merchandise, services and other revenues Ps 13,044,408 Ps13,044,408 Cost of merchandise sold and of services 7,716,141 7,716,141 ------------- ------------ Gross profit 5,328,267 5,328,267 Operating expenses Ps 119,666 3,782,168 3,901,834 ---------- ------------- ------------ Operating (loss) income (119,666) 1,546,099 1,426,433 Comprehensive financing cost 90,852 (402,858) (312,006) Taxes and employees' statutory profit sharing (38,157) (71,710) (109,867) ---------- ------------- ------------ Income before equity in the results of subsidiaries and affiliated companies (66,971) 1,071,531 1,004,560 Equity in the results of subsidiaries and affiliated companies 954,284 (Ps1,046,670) (92,386) Income of minority stockholders (24,861) (24,861) ---------- ------------- ------------ ------------ Income of majority stockholders Ps 887,313 Ps 1,046,670 (Ps1,046,670) Ps 887,313 ========== ============= =========== ============
F-64 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 2000 ---------------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Merchandise, services and other revenues Ps 432,462 Ps 15,373,282 (Ps 432,462) Ps15,373,282 Cost of merchandise sold and of services 8,807,592 8,807,592 ------------ ------------- ------------ ------------ Gross profit 432,462 6,565,690 (432,462) 6,565,690 Operating expenses 331,934 4,935,903 (432,462) 4,835,375 ------------ ------------- ------------ ------------ Operating (loss) income 100,528 1,629,787 1,730,315 Comprehensive financing cost (108,603) (189,061) (297,664) Taxes and employees' statutory profit sharing 109,754 (326,032) (216,278) ------------ ------------- ------------ ------------ (Loss) income before equity in the results of subsidiaries and affiliated companies 101,679 1,114,694 1,216,373 Equity in the results of subsidiaries and affiliated companies 1,070,176 (1,093,438) (23,262) Income of minority stockholders (21,256) (21,256) ------------ ------------- ------------ ------------ Income of majority stockholders Ps 1,171,855 Ps 1,114,694 (Ps 1,114,694) Ps 1,171,855 ============ ============= ============ ============
F-65 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 2001 ---------------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Merchandise, services and other revenues Ps 102,804 Ps15,608,432 (Ps 102,804) Ps15,608,432 Cost of merchandise sold and of services 8,977,093 8,977,093 ----------- ------------ ------------ ------------ Gross profit 102,804 6,631,339 (102,804) 6,631,339 Operating expenses 395,765 4,480,198 (102,804) 4,773,159 ----------- ------------ ------------ ------------ Operating (loss) income (292,961) 2,151,141 1,858,180 Comprehensive financing cost (19,212) (333,160) (352,372) Taxes and employees' statutory profit sharing 63,152 (606,264) (543,112) ----------- ------------ ------------ ------------ (Loss) income before equity in the results of subsidiaries and affiliated companies (249,021) 1,211,717 962,696 Equity in income of subsidiaries and affiliated companies 1,385,723 (151,399) (1,047,355) 186,969 Income of minority stockholders (12,963) (12,963) ----------- ------------ ------------ ------------ Income of majority stockholders Ps1,136,702 Ps 1,060,318 (Ps 1,060,318) Ps 1,136,702 =========== ============ ============ ============
F-66 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CHANGES IN FINANCIAL POSITION Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 1999 --------------------------------------------------------------------------- Parent Guarantor Operations: Company Issuer Subsidiaries Eliminations Consolidated - ---------- -------------- ------------ ------------ ------------ Net income Ps 887,313 Ps 1,046,670 (Ps1,046,670) Ps 887,313 Charges (credits) to income not affecting resources: Depreciation and amortization 56,742 492,870 549,612 Allowance for doubtful accounts 482,538 482,538 Accruals for seniority premiums and pension plan 7,461 7,461 Income of minority stockholders 24,861 24,861 Equity in the results of subsidiaries and affiliated company (954,284) 1,046,670 92,386 Other provisions 29,710 29,710 Net changes in working capital 223,474 (731,210) (507,736) ---------- ------------ ------------ ------------ Resources provided by operations 213,245 1,352,900 1,566,145 ---------- ------------ ------------ ------------ Financing: - --------- Paid-in capital (own and subsidiaries' shares) (196,612) (196,612) Bank loans and other debt - Net 377,835 (601,406) (223,571) Loans collected from (granted) to affiliated companies 458,311 (458,311) Issuance of capital stock 11,565 11,565 Payment of dividends (141,058) (141,058) Dividends received from (paid to) affiliated companies 56,529 (56,529) Gain derivative transactions 58,178 58,178 Sale of repurchased shares 154,421 154,421 ---------- ------------ ------------ ------------ Resources (used in) provided by financing activities 779,169 (1,116,246) (337,077) ---------- ------------ ------------ ------------ Investing: - --------- Acquisition of property, furniture, equipment and investment in stores - Net (520,831) (520,831) Acquisition of Grupo SyR, S. A. de C. V., net of cash acquired (991,240) (991,240) Acquisition of Compania Operadora de Teatros, S. A. de C. V., net of cash acquired (526,187) (526,187) Increase in minority stockholders as a result of the acquisition of Grupo SyR and Cotsa 181,136 181,136 ---------- ------------ ------------ ------------ Resources used in investing activities (991,240) (865,882) (1,857,122) ---------- ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents 1,174 (629,228) (628,054) Cash and cash equivalents at beginning of year 204,980 1,325,375 1,530,355 ---------- ------------ ------------ ------------ Cash and cash equivalents at end of year Ps 206,154 Ps 696,147 Ps Ps 902,301 ========== ============ =========== ============
F-67 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CHANGES IN FINANCIAL POSITION Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 2000 --------------------------------------------------------------------------- Parent Guarantor Operations: Company Issuer Subsidiaries Eliminations Consolidated - ---------- -------------- ------------ ------------ ------------ Net income Ps 1,171,855 Ps 1,114,694 (Ps 1,114,694) Ps 1,171,855 Charges (credits) to income not affecting resources: Depreciation and amortization 216,504 415,159 631,663 Allowance for doubtful accounts 599,659 599,659 Accruals for seniority premiums and pension plan 9,517 9,517 Income of minority stockholders 21,256 21,256 Equity in the results of subsidiaries and affiliated company (1,070,176) 1,093,438 23,262 Provision for deferred taxes (109,754) 325,002 215,248 Other provisions 49,015 49,015 Provision for derivative transactions 34,622 34,622 Net changes in working capital 521,559 (2,858,694) (2,337,135) ------------- ------------- ------------ -------------- Resources provided by operations 729,988 (311,026) 418,962 ------------- ------------- ------------ -------------- Financing: - --------- Paid-in capital (own and subsidiaries' shares) (142,318) (142,318) Bank loans and other debt - Net 651,532 (465,754) 185,778 Capitalized lease obligations 100,997 144,455 245,452 Issuance of capital stock 17,379 17,379 Payment of dividends (146,128) (146,128) Gain on derivative transactions 101,982 101,982 Dividends received from (paid to) affiliated companies 146,128 (146,128) Sale of repurchased shares (214,441) (214,441) Debt issuance cost (112,665) (112,665) Other 5,176 5,176 ------------- ------------- ------------ -------------- Resources provided by (used in) financing activities 407,642 (467,427) (59,785) ------------- ------------- ------------- -------------- Investing: - --------- Acquisition of property, furniture, equipment and investment in stores - Net (275,143) (185,987) (461,130) Capital stock increased in subsidiaries (received by parent company) (684,737) 684,737 - ------------- ------------- ------------- ------------- Resources (used in) provided by investing activities (959,880) 498,750 (461,130) ------------ ------------- ------------- -------------- Decrease in cash and cash equivalents 177,750 (279,703) (101,953) Cash and cash equivalents at beginning of year 206,153 696,148 902,301 ------------ ------------- ------------- -------------- Cash and cash equivalents at end of year Ps 383,903 Ps 416,445 Ps Ps 800,348 ============ ============= ============ ==============
F-68 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CHANGES IN FINANCIAL POSITION Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, 2001 --------------------------------------------------------------------------- Parent Guarantor Operations: Company Issuer Subsidiaries Eliminations Consolidated - ---------- -------------- ------------ ------------ ------------ Net income Ps 1,136,702 Ps 1,060,318 (Ps 1,060,318) Ps 1,136,702 Charges (credits) to income not affecting resources: Depreciation and amortization 308,563 398,836 707,399 Allowance for doubtful accounts 654,764 654,764 Accruals for seniority premiums and pension plan 7,582 7,582 Income of minority stockholders 12,963 12,963 Equity in the results of subsidiaries and affiliated company (1,385,723) 151,399 1,047,355 (186,969) Provision for deferred taxes (63,989) 324,829 260,840 Other provisions 62,104 62,104 Provision for derivative transactions 43,603 40,679 84,282 Net changes in working capital (479,994) (429,274) (909,268) ------------- ------------ -------------- ------------ Resources (used in) provided by operations (440,838) 2,271,237 1,830,399 ------------- ------------ -------------- ------------ Financing: - --------- Paid-in capital (own and subsidiaries' shares) (130,214) (130,214) Bank loans and other debt - Net 848,160 (587,951) 260,209 Capitalized lease obligations 21,454 (75,044) (53,590) Issuance of capital stock 12,274 12,274 Payment of dividends (157,059) (157,059) Loss on derivative transactions (65,908) (65,908) Dividends received from (paid to) affiliated companies 157,059 (157,059) Sale of repurchased shares 27,312 27,312 -------------- ------------ -------------- ------------ Resources provided by (used in) financing activities 713,078 (820,054) (106,976) ------------- ------------ -------------- ------------ Investing: - --------- Acquisition of property, furniture, equipment and investment in stores - Net (172,821) (384,229) (557,050) Acquisition of Mericolor, S. A. de C. V. (Note 2c.) (52,960) (52,960) ------------- ------------- -------------- ------------- Resources used in investing activities (172,821) (437,189) (610,010) ------------- ------------ -------------- ------------ Decrease in cash and cash equivalents 99,419 1,013,994 1,113,413 Cash and cash equivalents at beginning of year 383,904 416,444 800,348 ------------- ------------ -------------- ------------ Cash and cash equivalents at end of year Ps 483,323 Ps 1,430,438 Ps Ps 1,913,761 ============= ============ ============== ============
F-69 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING RECONCILIATION BETWEEN MEXICAN GAAP AND U.S. GAAP Thousands of Mexican pesos of December 31, 2001 purchasing power
For the year ended December 31, 1999 ----------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Net income related to majority stockholders under Mexican GAAP Ps 887,313 Ps1,046,670 (Ps1,046,670) Ps 887,313 ----------- ----------- ----------- ----------- Deferred income tax effects (5,208) (96,150) (101,358) Amortization of goodwill relating to other subsidiaries acquisitions 23,343 1,245 24,588 Amortization of goodwill relating to CASA acquisition 58,450 58,450 Difference in equity in earnings of CASA 77,683 77,683 Capitalized exchange losses and interest expense 4,121 4,121 Stock options granted to employees (84,264) (84,264) Reversal of depreciation of property, furniture and equipment acquired in the Grupo SyR acquisition 44,817 44,817 Additional amortization of negative goodwill from the Grupo SyR acquisition 117,986 117,986 Net gain on derivative and hedging transactions 145,997 145,997 Effect on minority stockholders of U.S. GAAP adjustments (733) (733) Equity in income of subsidiaries and affiliated companies (45,967) 45,967 ------------ ----------- ----------- ----------- 287,287 (45,967) 45,967 287,287 ------------ ----------- ----------- ----------- Net income under U.S. GAAP Ps1,174,600 Ps1,000,703 (Ps1,000,703) Ps1,174,600 =========== ============ =========== ===========
F-70 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING RECONCILIATION BETWEEN MEXICAN GAAP AND U.S. GAAP Thousands of Mexican pesos of December 31, 2001 purchasing power
As of and for the year ended December 31, 2000 ---------------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Net income related to majority stockholders under Mexican GAAP Ps 1,171,855 Ps1,114,694 (Ps1,114,694) Ps 1,171,855 ------------ ----------- ----------- ------------ Deferred income tax effects 24,252 (38,432) (14,180) Amortization of goodwill relating to other subsidiaries acquisitions 24,588 24,588 Amortization of goodwill relating to CASA acquisition 58,450 58,450 Difference in equity in earnings of CASA (118,060) (118,060) Capitalized exchange losses and interest expense 4,121 4,121 Stock options granted to employees (3,019) (3,019) Reversal of depreciation of property, furniture and equipment acquired in the Grupo SyR acquisition 59,756 59,756 Additional amortization of negative goodwill from the Grupo SyR acquisition 158,325 158,325 Net gain on derivative and hedging transactions 5,852 5,852 Effect on minority stockholders of U.S. GAAP adjustments (82) (82) Equity in income of subsidiaries and affiliated companies (34,393) 34,393 ------------ ----------- ----------- ------------ 175,751 (34,393) 34,393 175,751 ------------ ----------- ----------- ------------ Net income under U.S. GAAP Ps 1,347,606 Ps1,080,301 (Ps1,080,301) Ps 1,347,606 ============ =========== =========== ============ Majority stockholders' equity under Mexican GAAP Ps 5,566,973 Ps7,982,592 (Ps7,982,592) Ps 5,566,973 Deferred income tax effects 322,222 322,222 Negative goodwill resulting from the recognition of deferred tax benefits acquired from Grupo SyR (1,540,517) (1,540,517) Participation in net equity of CASA (136,546) (136,546) Goodwill relating to CASA acquisition (899,069) (899,069) Goodwill relating to other subsidiaries acquisition (233,750) (233,750) Capitalized exchange losses and interest expense (16,317) (16,317) Deferred income (1,162,420) (1,162,420) Net gain on derivative and hedging transactions (8,312) (8,312) Reversal of depreciation of property, furniture and equipment acquired in the Grupo SyR acquisition 104,573 104,573 Effect on minority stockholders of U.S. GAAP adjustments 27,560 27,560 Effect of U.S. GAAP adjustments in subsidiaries 11,243 (11,243) ------------ ----------- ----------- ------------ Stockholders' equity under U.S. GAAP Ps 2,024,397 Ps7,993,835 (Ps7,993,835) Ps 2,024,397 ============ =========== =========== ============
F-71 GRUPO ELEKTRA, S. A. DE C. V. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING RECONCILIATION BETWEEN MEXICAN GAAP AND U.S. GAAP Thousands of Mexican pesos of December 31, 2001 purchasing power
As of and for the year ended December 31, 2001 ---------------------------------------------------------------------- Parent Guarantor Company Issuer Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Net income related to majority stockholders under Mexican GAAP Ps 1,136,702 Ps1,030,318 (Ps1,030,318) Ps 1,136,702 ------------ ----------- ----------- ------------ Deferred income tax effects (20,913) 464 (20,449) Amortization of goodwill relating to other subsidiaries acquisitions 24,588 24,588 Amortization of goodwill relating to CASA acquisition 58,450 58,450 Difference in equity in earnings of CASA (225,172) (225,172) Capitalized exchange losses and interest expense 4,121 4,121 Stock options granted to employees (146) (146) Reversal of depreciation of property, plant and equipment acquired in the Grupo SyR acquisition 59,756 59,756 Additional amortization of negative goodwill from the Grupo SyR acquisition 158,325 158,325 Net loss on instruments indexed on the Company's stock (57,596) (57,596) Net loss on interest rate swaps and options (6,964) (37,911) (44,875) Effect on minority stockholders of U.S. GAAP adjustments (82) (82) Equity in income of subsidiaries and affiliated companies (33,408) 33,408 ------------- ----------- ------------ ------------ (43,080) (33,408) 33,408 (43,080) ------------- ------------ ------------ ------------- Net income under U.S. GAAP Ps 1,093,622 Ps 996,910 (Ps 996,910) Ps 1,093,622 ============ =========== ============ ============ Majority stockholders' equity under Mexican GAAP Ps 5,956,732 Ps9,345,359 (Ps9,345,359) Ps 5,956,732 Deferred income tax effects 301,307 466 301,773 Negative goodwill resulting from the recognition of deferred tax benefits acquired from Grupo SyR (1,382,192) (1,382,192) Participation in net equity of CASA (356,848) (356,848) Goodwill relating to CASA acquisition (840,619) (840,619) Goodwill relating to other subsidiaries acquisition (209,162) (209,162) Capitalized exchange losses and interest expense (12,196) (12,196) Deferred income (1,032,206) (1,032,206) Net loss on interest rate swaps and options (6,964) (37,911) (44,875) Reversal of depreciation of property, plant and equipment acquired in the Grupo SyR acquisition 164,329 164,329 Effect on minority stockholders of U.S. GAAP adjustments 27,478 27,478 Effect of U.S. GAAP adjustments in subsidiaries (22,163) 22,163 ------------- ----------- ------------ ------------ Stockholders' equity under U.S. GAAP Ps 2,572,214 Ps9,323,196 (Ps9,323,196) Ps 2,572,214 ============ =========== ============ ============
F-72 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 2001 INDEX Contents Page Report of Independent Accountants F-74 and F-75 Financial Statements: Balance sheets F-76 Statements of loss F-77 Statements of changes in stockholders' equity F-78 Statements of changes in financial position F-79 Notes to financial statements F-80 F-73 REPORT OF INDEPENDENT ACCOUNTANTS Mexico City, June 3, 2002 To the Stockholders of Compania Operadora de Teatros, S. A. de C. V. We have audited the accompanying balance sheets of Compania Operadora de Teatros, S. A. de C. V. (the Company) as of December 31, 2000 and 2001 and the related statements of loss, changes in stockholders' equity and of changes in financial position for each of the three years in the period ended December 31, 2001 all expressed in constant pesos of December 31, 2001 purchasing power. These financial statements have been prepared in accordance with accounting principles generally accepted in Mexico and are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States 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 provide a reasonable basis for our opinion. In our opinion, the aforementioned financial statements present fairly, in all material respects, the financial position of Compania Operadora de Teatros, S. A. de C. V. as of December 31, 2000 and 2001, and the results of its operations, changes in stockholders' equity and changes in its financial position for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in Mexico. F-74 Accounting principles generally accepted in Mexico vary in certain significant respects from generally accepted accounting principles in the United States of America. The application of generally accepted accounting principles in the United States of America would have affected the determination of net loss, for each of the three years in the period ended December 31, 2001 and the determination of stockholders' equity as of December 31, 2000 and 2001 to the extent summarized in Note 8 to the financial statements. As discussed in Note 8, the U. S. GAAP stockholders' equity and net income amounts as of and for the year ended December 31, 1999 have been restated. As mentioned in Note 2c. to the financial statements, commencing January 1, 2000 the Company adopted the provisions of Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing". PricewaterhouseCoopers /s/ Ruben Rivera Rodriguez - -------------------------- Ruben Rivera Rodriguez F-75 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. (Notes 1 and 2) BALANCE SHEETS Thousands of Mexican pesos of December 31, 2001 purchasing power
December 31, ------------ Assets 2000 2001 - ------ ---- ---- Current assets: Cash Ps 1,896 Ps 453 Customers and other accounts receivable 3,279 2,613 Recoverable taxes 8,683 10,481 Amounts due from related parties (Note 4) 35,857 46,506 ---------- ---------- Total current assets 49,715 60,053 Property and equipment - Net (Note 3) 466,654 439,303 ---------- ---------- Ps 516,369 Ps 499,356 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses Ps 4,017 Ps 1,447 Amounts due to related parties (Note 4) 23,987 29,557 ---------- ---------- Total current liabilities 28,004 31,004 Deferred income tax (Note 6) 15,977 21,282 ---------- ---------- Total liabilities 43,981 52,286 ---------- ---------- Stockholders' equity (Note 5): Capital stock 623,100 623,100 Accumulated deficit (889,030) (914,348) Cumulative effect of deferred income tax (21,721) (21,721) Excess in the restatement of capital 760,039 760,039 ---------- ---------- Total stockholders' equity 472,388 447,070 COMMITMENT (Note 7) ---------- ---------- Ps 516,369 Ps 499,356 ========== ==========
The accompanying notes are an integral part of these financial statements. F-76 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. STATEMENTS OF LOSS Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, ---------------------------------------- 1999 2000 2001 ---- ---- ---- Revenues: Rentals Ps 33,839 Ps 12,598 Ps 13,109 Other 2,566 --------- --------- --------- 36,405 12,598 13,109 Operating expenses: Administrative expenses 50,886 15,608 7,336 Depreciation 62,335 25,036 25,036 --------- --------- --------- Operating loss 76,816 28,046 19,263 --------- --------- --------- Other expenses (4,016) (6,496) (2,653) Other income 6,496 1,237 2,889 --------- --------- --------- 2,480 (5,259) 236 --------- --------- --------- Comprehensive financing result (cost): Interest expense (5,721) (16) (11) Interest income 19,430 16 6 Foreign exchange loss - net (1,410) Gain (loss) on monetary position 10,423 543 (803) --------- --------- --------- 22,722 543 (808) --------- --------- --------- Loss before equity in earnings of joint venture and taxes (51,614) (32,762) (19,835) Deferred income tax benefit (expense) 4,873 (5,483) --------- --------- --------- Loss before equity in earnings of joint venture (51,614) (27,889) (25,318) Equity in joint venture (Note 1) (22,179) --------- --------- --------- Net loss for the year Ps 73,793) (Ps 27,889) (Ps 25,318) ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-77 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY Thousands of Mexican pesos of December 31, 2001 purchasing power
Cumulative effect of Excess in the Total Capital Accumulated deferred restatement stockholders' stock deficit income tax of capital equity ----- ------- ---------- ---------- ------ Balances at January 1, 1999 Ps 798,703 (Ps2,346,258) Ps 2,257,294 Ps 709,739 Effect of assets and liabilities transfers on equity (Note 5) (530,576) 1,558,910 (1,497,255) (468,921) Increase in capital stock through the capitalization of liabilities 354,973 354,973 ---------- ------------ ----------- ----------- ---------- Comprehensive loss (Note 2e.) (73,793) (73,793) ---------- ------------ ----------- ----------- ---------- Balances at December 31, 1999 623,100 (861,141) 760,039 521,998 Comprehensive loss (Note 2e.) (27,889) (Ps21,721) (49,610) ---------- ------------ ----------- ----------- ---------- Balances at December 31, 2000 623,100 (889,030) (21,721) 760,039 472,388 Comprehensive loss (Note 2e.) (25,318) (25,318) ---------- ------------ ----------- ----------- ---------- Balances at December 31, 2001 Ps 623,100 (Ps 914,348) (Ps 21,721) Ps 760,039 Ps 447,070 ---------- ------------ ----------- ----------- ----------
The accompanying notes are an integral part of these financial statements. F-78 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. STATEMENTS OF CHANGES IN FINANCIAL POSITION Thousands of Mexican pesos of December 31, 2001 purchasing power
Year ended December 31, ----------------------------------------- Operation: 1999 2000 2001 - --------- ---- ---- ---- Net loss (Ps 73,793) (Ps 27,889) (Ps25,318) Charges (credits) to results not affecting resources: Depreciation 62,335 25,036 25,036 Equity in joint venture 22,179 Deferred income tax (benefit) expense (4,873) 5,483 Net change in accounts receivable, other assets, related parties, accounts payable and accrued expenses (25,637) (15,674) (8,959) ----------- ---------- --------- Resources used in operations (14,916) (23,400) (3,758) ----------- ---------- --------- Financing: - --------- Payments of promissory notes (27,836) (47) Increase in capital stock 354,973 ----------- ---------- --------- Resources provided by (used in) financing activities 327,137 (47) ----------- ---------- --------- Investment: - ---------- Sale of property and equipment - Net 156,664 25,162 2,315 Effect of assets and liabilities transfers on equity (468,921) ----------- ---------- --------- Resources (used in) generated by investment activities (312,257) 25,162 2,315 ----------- ---------- --------- (Decrease) increase in cash (36) 1,715 (1,443) Cash at beginning of year 217 181 1,896 ----------- ---------- --------- Cash at end of year Ps 181 Ps 1,896 Ps 453 =========== ========== =========
The accompanying notes are an integral part of these financial statements. F-79 COMPANIA OPERADORA DE TEATROS, S. A. DE C. V. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000 AND 2001 (amounts in thousands of Mexican pesos of purchasing power of December 31, 2001) NOTE 1 - DESCRIPTION OF BUSINESS: The main business of Compania Operadora de Teatros, S. A. de C. V. ("Cotsa" or the "Company") is property leasing, primarily to affiliates including Grupo Elektra, S. A. de C. V. ("Grupo Elektra") and its operating companies. Cotsa does not have employees, and all administrative and operating services are rendered by related parties. (See Note 4). Through December 31, 1998 the Company earned revenues from three joint ventures with related parties. The three joint venture agreements were cancelled on December 31, 1998 and not renewed in 1999. This cancellation resulted in a charge to income amounting to Ps22,179 which is shown in the statement of loss. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Following is a summary of the significant accounting policies including the concepts, methods and criteria related to the recognition of the effects of inflation on the financial statements: a. Recognition of the effects of inflation The financial statements and the notes thereto are expressed in constant pesos of purchasing power as of December 31, 2001 and have been prepared in conformity with accounting principles generally accepted in Mexico, in accordance with the following policies: - - Property and equipment, and the components of stockholders' equity are restated by applying factors derived from the National Consumer Price Index ("NCPI"). - - The gain (loss) on net monetary position represents the effect of inflation, as measured by the NCPI, on the monthly net monetary liabilities and assets during the year, restated to pesos of purchasing power as of the end of the most recent period. - - The NCPI used to recognize of the effects of inflation in the financial statements were 308.919, 336.596 and 351.418 as of December 31, 1999, 2000 and 2001, respectively. F-80 b. Income from rentals Income from rentals is recognized ratably over the period of the related contract. c. Income tax Beginning on January 1, 2000, the Company adopted Statement D-4, "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing". Under this statement, deferred taxes are initially recognized for all differences between book and tax values of assets and liabilities and for tax loss carryforwards and asset tax carryforwards that have a high probability of realization. The adoption of this statement resulted in a net decrease in stockholders' equity of Ps21,721. For the years ended December 31, 2000 and 2001, the Company recorded provisions for deferred income tax, including the loss on monetary position, amounting to Ps4,873 and (Ps5,483), respectively. (See Note 6). Through December 31, 1999, deferred taxes were recognized for non-recurring timing differences between financial pretax income and taxable income, which were expected to reverse in an identifiable period. d. Property and equipment Property and equipment are recorded at acquisition cost and are restated as explained in Note 2a. Depreciation is calculated by the straight-line method, based on the useful lives of assets and the assets restated values. The annual depreciation rate for building and construction is 2.1%. e. Comprehensive income (loss) In 2001, the Company adopted Statement B-4 "Comprehensive Income". This statement establishes new standards for reporting and displaying comprehensive income and its components in the statement of stockholders' equity. Under this statement, comprehensive income consists of the net income of the year plus any items which, according to other statements, are required to be recorded directly in stockholders' equity and are not capital contributions, reductions or disbursements (see Note 5). F-81 f. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. g. Reclassifications Certain reclassifications have been made to prior period amounts for them to conform to the current presentation. NOTE 3 - PROPERTY AND EQUIPMENT: December 31, ------------ 2000 2001 ---- ---- Buildings and constructions Ps 1,192,187 Ps 1,191,562 Accumulated depreciation (1,121,629) (1,146,665) ------------ ------------ 70,558 44,897 Land 396,096 394,406 ------------ ------------ Ps 466,654 Ps 439,303 ============ ============ NOTE 4 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES: Cotsa has the following balances receivable and payable with related parties: December 31, ------------ Receivables: 2000 2001 - ----------- ---- ---- Alternativas Cotsa, S. A. de C. V. Ps35,356 Ps45,299 Other 501 1,207 -------- -------- Ps35,857 Ps46,506 ======== ======== Payables: - -------- Elektra del Milenio, S. A. de C. V. Ps16,951 Ps22,131 Other 7,036 7,426 -------- -------- Ps23,987 Ps29,557 ======== ======== F-82 Transactions carried out with related parties are listed below: Year ended December 31, ------------ 1999 2000 2001 ---- ---- ---- Administrative service expenses (1) Ps 7,505 Ps 1,214 Ps 301 Rental expenses(2) 1,031 988 946 Interest earned (3) 15,410 Interest paid (3) 3,929 (1) As mentioned in Note 1, Cotsa does not have employees, consequently administrative and operating services are rendered by related parties. (2) Since January 1999, a related party's building is rented for Cotsa's offices. (3) The interest earned and paid correspond to several short-term borrowings and loans to related parties during 1999, mainly with Corporacion de Medios de Comunicacion, S. A. de C. V., Corporacion RBS, S. A. de C. V., Elektra del Milenio, S. A. de C. V. and Grupo Elektra, S. A. de C. V. The average interest rate was 25% annually for the year ended December 31, 1999. The short-term borrowings from Elektra del Milenio, S. A. de C. V. and Grupo Elektra, S. A. de C. V. were transferred to Inmuebles Ardoma, S. A. de C. V. (Ardoma) and subsequently capitalized. For the year ended December 31, 2000 and 2001, the Company did not paid or collected interest from related parties. NOTE 5 - STOCKHOLDERS' EQUITY: At a stockholders' meeting held on October 1, 1999, Cotsa's stockholders decided to increase the variable portion of common stock by Ps354,973 (Ps311,463 nominal thousands of Mexican pesos), through the capitalization of liabilities with Ardoma, a subsidiary of Grupo Elektra. As a result of this transaction, Grupo Elektra, through Ardoma, has a 91% interest in the Cotsa's capital stock. F-83 The common stock of Cotsa at December 31, 2000 and 2001 is represented by 342,658,270 common nominative shares, with a par value of one Mexican peso each, comprised as follows:
Shares Description Amount ------ ----------- ------ 50,000 Represent the fixed portion of the capital Ps 50 342,608,270 Represent the variable portion of the capital 342,608 ----------- ---------- 342,658,270 342,658 =========== Restatement increase 280,442 ---------- Capital stock in Mexican pesos as of December 31, 2001 purchasing power Ps 623,100
Under Mexican Corporate Law, interested third parties can request the dissolution of Cotsa if accumulated losses exceeded two-thirds of capital stock. At December 31, 2001, Cotsa's accumulated losses exceeded its capital stock. Although Cotsa believes it is unlikely such actions will occur, Cotsa obtained from its shareholders a commitment to provide financial support to the Company for a period of one year from the balance sheet date, in proportion to their respective ownership interests, if required, to avoid such action. Capital stock reductions in excess of the sum of the balances of the capital contribution accounts, net taxed profit and reinvested net taxed profit, inflation indexed in accordance with the procedures established by the Income Tax Law, are accorded the same tax treatment as dividends. Comprehensive income is analyzed as follows (see Note 2e.):
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Net loss (Ps73,793) (Ps 27,889) (Ps25,318) Initial recognition of deferred taxes (21,721) -------- ---------- -------- (Ps73,793) (Ps 49,610) (Ps25,318) ======== ========= ========
Effective October 1, 1999, certain assets and liabilities of Cotsa were transferred to Inmobiliaria Cotsa, S. A. de C. V. and Alternativas Cotsa, S. A. de C. V., two newly created subsidiaries of Grupo Cotsa, S. A. de C. V., Cotsa's former parent company. F-84 The assets and liabilities transferred consisted of the following: Assets - ------ Cash Ps 8 Accounts receivable 470,744 Other assets 7,663 Land, buildings and furniture 144,853 --------- Total assets Ps623,268 ========= Liabilities and stockholders' equity - ------------------------------------ Liabilities Ps154,347 Stockholders' equity 468,921 --------- Total liabilities and stockholders' equity Ps623,268 ========= F-85 NOTE 6 - INCOME TAX ("IT") AND ASSETS TAX ("AT"): During the years ended December 31, 1999, 2000 and 2001, Cotsa had taxable loss (income) of Ps8,675, Ps5,753, and (Ps4,096), respectively. Prior years' tax-loss carryforwards were amortized in the year ended December 31, 2001. The main temporary differences for which deferred IT recognized are shown below: Year ended December 31, Deferred income tax asset: 2000 2001 - ------------------------- ---- ---- Tax loss carryforwards Ps 1,639 Rental collected in advance 889 Ps 13 Recoverable asset tax 3,287 Allowance for doubtful accounts 354 --------- --------- 5,815 367 --------- --------- Deferred income tax liability: - ----------------------------- Property and equipment (21,792) (21,649) --------- --------- Net deferred income tax liability (Ps 15,977) (Ps 21,282) ========= ========= AT is computed by fiscal year applying a 1.8% rate to the average value of certain assets and liabilities. The AT corresponding to the year ended December 31, 2001 amounted to Ps5,030. According to the AT Law, the difference between the IT and AT in the previous three years (when IT is higher than AT in the same year) can be carried forward against future AT annual or AT prepayments. According to this rule, the AT at December 31, 1999 and 2000, amounting to Ps5,334 (Ps4,689 nominal) and $5,151 ($4,699 nominal), respectively, were credited against the IT payable. NOTE 7 - COMMITMENT: In 2000, Cotsa signed several building lease agreements. The rental income under these operating leases amounted to Ps12,598 and Ps13,109 for the years ended December 31, 2000 and 2001, respectively. F-86 Below is a schedule (by years) of future minimum rental payments to be received as of December 31, 2001: Year ending December 31: - ------------------------ 2002 Ps 9,742 2003 1,958 2004 849 2005 and thereafter 640 -------- Total Ps13,189 ======== NOTE 8 - RECONCILIATION BETWEEN MEXICAN (MEXICAN GAAP) AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP): Cotsa's financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from US GAAP. The Mexican GAAP financial statements include the effects of inflation as provided for under Statement B-10, "Recognition of the Effects of Inflation on Financial Information". The application of this statement represents a comprehensive measure of the effects of price level changes in the Mexican economy, which for many years was hyperinflationary and is considered to result in a more meaningful presentation than historical cost-based financial reporting for both Mexican and U. S. accounting purposes. Therefore, the following reconciliations to US GAAP do not include the reversal of such inflationary effects. The principal differences between Mexican GAAP and US GAAP are summarized below with an explanation, where appropriate, of the effects on net loss and stockholders' equity. The various reconciling items are presented net of any price level gain (loss). a. Reconciliation of net loss:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Net loss under Mexican GAAP (Ps73,793) (Ps27,889) (Ps25,318) Deferred income taxes 28,974 -------- --------- -------- Net loss under US GAAP (Ps44,819) (Ps27,889) (Ps25,318) ======== ======== ========
F-87 b. Reconciliation of stockholders' equity: December 31, ------------ 2000 2001 ---- ---- Balance under Mexican GAAP Ps472,388 Ps447,070 --------- --------- Balance under US GAAP Ps472,388 Ps447,070 ========= ========= c. An analysis of the changes in stockholders' equity under US GAAP is shown below:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Balance at beginning of year Ps 654,467 Ps495,700 Ps472,388 Net loss (44,819) (27,889) (25,318) Recoverable assets tax 4,577 Effect of assets and liabilities transfers on equity (468,921) Increase in capital stock 354,973 ---------- --------- --------- Balance at end of year Ps 495,700 Ps472,388 Ps447,070 ========== ========= =========
d. Significant differences between US GAAP and Mexican GAAP: i. Deferred income tax As stated in Note 2c., through December 31, 1999 income tax was recorded under Mexican GAAP following interperiod allocation procedures under the partial liability method. Under this method, deferred tax was recognized only in respect of nonrecurring timing differences between taxable and book income which were expected to reverse at a definite future date. This substantially eliminated all deferred taxes under Mexican GAAP. Also, under Mexican GAAP the benefit from utilizing tax loss carryforwards and asset tax credits were not recognized until utilized, at which time it was presented as an extraordinary item. Beginning on January 1, 2000, the Company adopted Statement D-4 "Accounting Treatment of Income Tax, Asset Tax and Employees' Profit Sharing". Under this statement, deferred tax assets or liabilities are F-88 initially recognized for all differences between book and tax value of assets and liabilities and for tax loss carryforwards and asset tax carryforwards that have a high probability of realization. The cumulative effect of adopting Statement D-4 as of January 1, 2000 resulted in a net decrease in stockholders' equity of Ps21,721. U.S. GAAP Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS No. 109"), requires an asset and liability approach for financial accounting and reporting for income tax under the following basic principles: (a) a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year, (b) a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards, (c) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated, and (d) the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Under this method, deferred tax and profit sharing are recognized in respect of all temporary differences, and the benefit from utilizing tax loss carryforwards and asset tax credits is recognized in the year in which the loss or credits arise (subject to a valuation allowance in respect of any tax benefits not expected to be realized). The subsequent realization of this benefit does not affect income. Consequently, they do not represent extraordinary items for U.S. GAAP purposes. The temporary differences under FAS No. 109 are determined based on the difference between the indexed tax-basis amount of the asset or liability and the related stated amount reported in the financial statements. Except as indicated in the following paragraph, the deferred tax expense or benefit is calculated as the difference between: (a) the deferred tax assets and liabilities at the end of the current period determined as indicated above, and (b) the deferred tax assets and liabilities reported at the end of the prior period remeasured to units of current general purchasing power at the end of the current period. The deferred profit sharing expense or benefit is calculated similarly. The significant components of income tax (expense) benefit under US GAAP are as follows:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Deferred income tax benefit (expense) Ps28,974 Ps4,873 (Ps5,483) -------- ------- ------- Ps28,974 Ps4,873 (Ps5,483) ======== ======= =======
F-89 The following items represent the principal differences between income tax computed under US GAAP at the statutory rate and Cotsa's provision for income tax in each period:
Year ended December 31, ----------------------- 1999 2000 2001 ---- ---- ---- Loss before income tax expense (Ps73,793) (Ps32,762) (Ps 19,835) ======== ======== ========= Income tax benefit at statutory rate Ps25,828 Ps11,467 Ps 6,942 Property and equipment (298) (8,233) (10,786) Tax loss carryforwards 3,444 1,639 (1,639) -------- -------- --------- Net income tax - benefit (expense) Ps28,974 Ps 4,873 (Ps 5,483) ======== ======== =========
The income tax effects of significant items comprising the Cotsa's net deferred tax assets and liabilities under US GAAP are as follows: Year ended December 31, ----------------------- Deferred income tax asset: 2000 2001 - ------------------------- ---- ---- Tax loss carryforwards Ps 1,639 Rental collected in advance 889 Ps 13 Recoverable asset tax 3,287 Allowance for doubtful accounts 354 -------- -------- 5,815 367 -------- -------- Deferred income tax liability: - ----------------------------- Property and equipment (Ps21,792) (Ps21,649) -------- -------- Net deferred income tax liability (Ps15,977) (Ps21,282) ======== ======== ii. Fair value information The carrying amounts of cash, current receivables, accounts payable and accrued expenses, due from and to related companies, approximate fair value, due to the short term maturity of these instruments. F-90 iii. Effect of recently issued accounting standards ---------------------------------------------- In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB No. 125", ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, but it carries over most of the provisions of SFAS 125 without change. SFAS 140 is effective for transfers of financial assets occurring after March 31, 2001. The adoption of SFAS 140 did not have a material impact on the Company's financial statements. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") which supersedes APB Opinion No. 16, "Business Combinations" and amends or supersedes a number of related interpretations of APB 16. The statement is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS 141 addresses financial accounting and reporting for business combinations, eliminates the pooling-of-interests method of accounting for business combinations, and prescribes the initial recognition and measurement of goodwill and other intangible assets, accounting for negative goodwill and the required disclosures in respect of business combinations. The adoption of SFAS 141 did not have a material impact on the Company's financial statements. Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business acquisition) should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 discontinues the amortization of both existing and future acquired goodwill. Furthermore, negative goodwill will be reflected as a one-time extraordinary gain. In addition, SFAS 142 states that upon adoption, any remaining negative goodwill will be written off as a change in accounting principle. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. As of December 31, 2001, the Company does not have intangible assets under US GAAP. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires the recognition of a liability for the legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction and (or) normal operation of the asset. The liability is recognized at fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. A corresponding asset retirement cost is added to the carrying value of the long-lived asset and is depreciated to expense using a systematic and rational method over its useful life. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Upon initial adoption, a liability is recognized for F-91 existing asset retirement obligations and the associated asset retirement cost is capitalized as an increase to the carrying value of the asset. The recognized liability and asset are adjusted for cumulative accretion and accumulated depreciation, respectively, from the time period when the asset retirement obligation would have originally been recognized had this statement been in effect to the date of initial adoption. The cumulative effect of initial adoption of SFAS 143 is recorded as a change in accounting principle. Management estimates that the adoption of SFAS 143 will not have a material impact on the financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS 144 retains the fundamental provisions of SFAS 121 for recognition and measurement of the impairment of long-lived assets to be held and used, but resolves a number of implementation issues and establishes a single accounting model for assets to be disposed of. SFAS 144 also retains the requirements to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonment or distribution to owners or is classified as held for sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and their interim periods. The provisions of SFAS 144 for long-lived assets to be disposed of by sale or otherwise are effective for disposal activities initiated after the effective date of SFAS 144 or after its initial application. Management is currently evaluating the impact that the adoption of SFAS 144 will have on the financial statements. iv. Concentrations Financial instruments which potentially subject Cotsa to significant concentrations of credit risk consist primarily of cash and cash equivalents, customers and other accounts receivable. Cotsa maintains its cash and cash equivalents with various major financial institutions. Concentrations of credit risk with respect to customers and other accounts receivable is limited due to the fact that there are several customers mainly related parties. Cotsa maintains allowances for doubtful accounts based on the expected collectibility of all receivables. v. Cash flow information Under US GAAP, a statement of cash flow is prepared based on provisions of Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows" (FAS No. 95). This statement does not provide guidance for the preparation of cash flow statements for price level adjusted financial statements. F-92 Presented below are statements of cash flows for the years ended December 31, 1999, 2000 and 2001, prepared after considering the impact of US GAAP adjustments. The cash flow statements below present nominal cash flow during the periods, adjusted to pesos of December 31, 2001, purchasing power.
Year ended December 31, ----------------------- Cash flow from operating activities: 1999 2000 2001 - ----------------------------------- ---- ---- ---- Net loss (Ps 44,819) (Ps 27,889) (Ps 25,318) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 62,335 25,036 25,036 Deferred income tax (28,974) Equity in joint venture 22,179 (Gain) loss on monetary position (10,423) (543) 803 Net changes in working capital (129,069) (20,292) (4,466) ----------- ----------- ----------- Net cash used in operating activities (128,771) (23,688) (3,945) ----------- ----------- ----------- Cash flow from investing activities: - ----------------------------------- Transfer of cash (8) Sale of property and equipment 156,664 25,162 2,315 ----------- ----------- ----------- Net cash generated by investing activities 156,656 25,162 2,315 Cash flows from financing activities: - ------------------------------------ Payments of promissory notes (27,836) (47) - ----------- ----------- ----------- Effects of inflation (85) 288 187 ----------- ----------- ----------- (Decrease) increase in cash (36) 1,715 (1,443) Cash at beginning of the year 217 181 1,896 ----------- ----------- ----------- Cash at end of the year Ps 181 Ps 1,896 Ps 453 =========== =========== =========== Supplemental disclosure: Cash paid during the period for: Interest (Ps 5,721) (Ps 16) (Ps 11) ----------- ----------- ----------- Income tax and asset tax Ps - Ps - Ps 2,891 =========== =========== ===========
F-93 Non cash activities: Increase in capital stock Ps 354,974 Effect of asset and liabilities transfers on equity (468,921) Restatement of 1999 results: The Company has restated previously issued U. S. GAAP results for the year ended December 31, 1999. The restated result reflects the correction for the computation of the deferred tax liability, as of December 31, 1999 which took, into consideration on incorrect tax bases for certain property and equipment. The following summarizes the impact of the restatement: As previously reported As restated -------- ----------- Deferred income tax liability Ps 56,925 Ps 26,299 Net loss (75,445) (44,819) Stockholders' equity 465,074 495,700 F-94 List of Exhibits Exhibit No: Description Exhibit 1.1 Public Instrument of Merger, including the English translation of the Amended and Restated Bylaws of Grupo Elektra, S.A. de C.V.* Exhibit 2.1 Indenture, dated as of March 22, 2000, between Grupo Elektra, the Guarantors, and The Bank of New York, as Trustee.** Exhibit 3.1 English translation of Amendment to form of CPO Trust Deed.*** Exhibit 4.1 Option Agreement between Grupo Elektra and CASA, dated September 1, 2000, together with English translation.* Exhibit 4.2 English translation of Current Option Plan for Grupo Elektra employees.*** Exhibit 4.3 List of Grupo Elektra's Significant Subsidiaries. - ---------------------------- * Incorporated by reference to Grupo Elektra's Annual Report on Form 20-F filed on July 2, 2001 (File No. 1-13200) ** Incorporated by reference to Grupo Elektra's Registration Statement on Form F-4 filed on September 15, 2000 (File No. 333-12536). *** Incorporated by reference to Grupo Elektra's Annual Report on Form 20-F filed on June 27, 2000 (File No. 1-13200). SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Mexico City, Mexico, D.F. June 25, 2002 GRUPO ELEKTRA, S.A. DE C.V. /s/ Ricardo Martinez Cruz --------------------------------------- Ricardo Martinez Cruz, Esq. General Legal Affairs Counsel EX-4.3 3 dex43.txt LIST OF SUBSIDIARIES Exhibit 4.3 Grupo Elektra, S.A. de C.V. List of Subsidiaries Elektrafin Comercial, S.A. de C.V. Salinas y Rocha, S.A. de C.V. Elektra Mexicana, S.A. de C.V. Comercios Elektra, S.A. de C.V. Entrega Especializada, S.A. de C.V. Almacenes Especializados, S.A. de C.V. Direccion Especial, S.A. de C.V. Electronica del Moral, S.A. de C.V. Inmuebeles Selectos, S.A. de C.V. Mi Garantia Extendida, S.A. de C.V. Importaciones Electronicas Ribesa, S.A. de C.V. Inmuebles Ardoma, S.A. de C.V. Compania Operadora de Teatros, S.A. de C.V. Siglo XXI, S.A. de C.V. Direccion de Administracion Central, S.A. de C.V. Grupo Proasa, S.A. de C.V. Grupo Mercantil Finemsa, S.A. de C.V. Elmex Superior, S.A. de C.V. Mercadotecnia Tezontle, S.A. de C.V. Aerotraxis Metropolitanos, S.A. de C.V. Sistemas de Mision Estrategica, S.A. de C.V. Administrativos Empresariales, S.A. de C.V. Inmobiliaria Hecali, S.A. de C.V. THE ONE, S.A. de C.V. The One Internet, S.A. de C.V. Operadora SYR, S.A. de C.V. Colchones, S.A. Intra Mexicana, S.A. de C.V. Elektra Transfer, S.A. de C.V. Mercantil Agricola, S.A. de C.V. Datacion y Supervision de Personal, S.A. de C.V. Importadora y Exportadora Elektra de El Salvador, S.A. de C.V. Comercializadora Elektra, S.A. de C.V. Elektra Elektra del Peru, S.A. Inmuebles Elektra, S.A. de C.V. Elektra Centroamerica, S.A. de C.V. Inmobiliaria Liur, S.A. de C.V. Colchones Coloso, S.A. de C.V. Direccion Sistematica Empresarial, S.A. de C.V. Operadoras en Servicios Comerciales, S.A. de C.V. Control y Direccion Administrativa, S.A. de C.V. Direccion de Admimistracion en Proyectos Aplicados, S.A. de C.V. Direccion de Admimistracion en Proyectos Especiales, S.A. de C.V. Mediciones y Representaciones Comerciales, S.A. de C.V. Gerencia Administrativas Operacionales, S.A. de C.V. Bienes Raices en Promocion del Centro, S.A. de C.V. Multinational Customer Services LLC Investment Partners III, LLC Cappello Investment Partners IV, LLC Cappello Investment Partners V, LLC -----END PRIVACY-ENHANCED MESSAGE-----