20-F 2003

As filed with the Securities and Exchange Commission on June 30, 2004.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
⌧
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1 13196
DESC, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
Paseo de los Tamarindos 400-B, Bosques de las Lomas, 05120 Mexico, D.F.
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
American Depositary Shares, each representing Twenty
Series B Shares(1)
Series B Shares, without expression of par value(2)
New York Stock Exchange, Inc.
(1)
(2)
New York Stock Exchange, Inc.
Evidenced by American Depositary Receipts.
Not for trading, but only in connection with the registration of the American Depositary Shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
8- 3/4% Guaranteed Notes due 2007 of Desc, S.A. de C.V.
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the
period covered by the annual report.(3)
Series A Common Stock, without expression of par value: 587,479,900
Series B Common Stock, without expression of par value: 506,257,866
Series C Common Stock, without expression of par value: 275,341,610
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
Yes
No
and (2) has been subject to such filing requirements for the past 90 days.
⌧
Indicate by check mark which financial statement item the registrant has elected to follow.
(3)
Item 17 ⌧ Item 18
At our stockholders’ meetings held on March 8, 2004, our stockholders approved a mandatory conversion of all of the issued
and outstanding Series C shares into Series B shares on a one-for-one basis (the “Reclassification”). The effective date of the
Reclassification was March 16, 2004. At the effective date of the Reclassification, each Series C share was reclassified as a
Series B share and each of our American Depositary Shares, which formerly represented twenty Series C shares, thereafter
represented twenty Series B shares. As of May 19, 2004, the number of outstanding shares of each of the issuer’s classes of
capital or common stock was as follows:
Series A Common Stock:
Series B Common Stock:
1,166,108,597
1,115,690,363
TABLE OF CONTENTS
Page
PART I
4
Item 1.
Identity of Directors, Senior Management and Advisers
4
A.
Directors and Senior Management
4
B.
Advisers
4
C.
Auditors
4
Item 2.
Offer Statistics and Expected Timetable
4
Item 3.
Key Information
4
A.
Selected Financial Data
4
B.
Capitalization and Indebtedness
7
C.
Reasons for the Offer and Use of Proceeds
7
D.
Risk Factors
7
Item 4.
Information on our Company
16
A.
History and Development of Our Company
16
B.
Business Overview
17
C.
Organizational Structure
37
D.
Property, Plant and Equipment
44
Item 5.
Operating and Financial Review and Prospects
44
A.
Operating Results
50
B.
Liquidity and Capital Resources
65
C.
Research and Development, Patents and Licenses
73
D.
Trend Information
74
E.
Off Balance Sheet Arrangements
75
F.
Tabular Disclosure of Contractual Obligations
76
Item 6.
Directors, Senior Management and Employees
77
A.
Directors and Senior Management
77
B.
Compensation of Directors and Senior Management
81
C.
Board Practices
81
D.
Employees
82
E.
Share Ownership by Our Executive Officers and Directors
83
Item 7.
Major Stockholders and Related Party Transactions
A.
83
Major Stockholders
83
i
TABLE OF CONTENTS
(continued)
Page
B.
Related Party Transactions
85
C.
Interests of Experts and Counsel
86
Item 8.
Financial Information
86
A.
Consolidated Financial Statements and other Financial Information
86
B.
Significant Changes
88
Item 9.
The Offer and Listing
88
Item 10.
Additional Information
90
A.
Share Capital
90
B.
ByLaws
90
C.
Material Contracts
97
D.
Exchange Controls
97
E.
Taxation
98
F.
Dividends
108
G.
Statements by Experts
109
H.
Documents on Display
109
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
109
Item 12.
Description of Securities Other than Equity Securities
110
PART II
111
Item 13.
Defaults, Dividend Arrearages and Delinquencies
111
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
111
Item 15.
Controls and Procedures
111
Item 16.
[RESERVED]
111
Item 16A.
Audit Committee Financial Expert
111
Item 16B.
Code of Ethics
111
Item 16C.
Principal Accountant Fees and Services
111
Item 16D.
Exemptions From the Listing Standards for Audit Committees
112
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
112
PART III
113
Item 17.
Financial Statements
113
Item 18.
Financial Statements
113
Item 19.
Exhibits
113
ii
Presentation of Information
In this annual report:
•
“Automotive Sector” means the numerous companies of Desc that operate our autoparts business as more fully described in
“Item 4. Information on our Company–Automotive”;
•
“Chemical Sector” means the numerous companies of Desc that operate our chemical business as more fully described in
“Item 4. Information on our Company–Chemicals”;
•
“Depositary” means Citibank, N.A., as depositary, under that certain Amended and Restated Deposit Agreement, dated as of
June 29, 1994, effective as of July 20, 1994, amended as of July 15, 1996, among Desc, Citibank, N.A. and all holders and
beneficial owners from time to time of American Depositary Receipts (“ADRs”), evidencing American Depositary Shares
(“ADSs”), issued thereunder. Each ADS currently represents twenty Series B shares of Desc;
•
“Desc Automotriz” means Desc Automotriz, S.A. de C.V. (formerly Unik, S.A. de C.V.), a wholly owned subsidiary of
Desc engaged in the autoparts business;
•
“Dollars” and “$” refer to the currency of the United States of America;
•
“Financial Statements” means Desc’s audited consolidated financial statements for the years ended December 31, 2003,
2002 and 2001;
•
“GAAP” means generally accepted accounting principles in the indicated country;
•
“LIBOR” means the London interbank offered rate;
•
“Mexico” means the United Mexican States;
•
“Mexican government” means the Mexican federal government;
•
“NCPI” means the Mexican National Consumers Price Index, a measure of inflation in Mexico;
•
“Noon Buying Rate” means the noon buying rate in New York City for cable transfers in Pesos as certified for customs
purposes by the U.S. Federal Reserve Bank, expressed in Pesos per $1.00;
•
“Notes” means the notes issued pursuant to that certain Indenture, dated as of October 17, 1997, among Desc (as successor
to Dine, S.A. de C.V.), as issuer, Desc, as guarantor, and Deutsche Bank Trust Company Americas (as successor to Bankers
Trust Company), as trustee, authorizing the creation of an issue of $150,000,000 aggregate principal amount of 8¾%
Guaranteed Notes due 2007;
•
“Pesos” and “Ps.” refer to the currency of Mexico. Except as otherwise indicated, all Peso amounts reflect thousands of
Pesos;
1
•
“Real Estate Sector” means the numerous companies of Desc that operate our real estate business as more fully described in
“Item 4. Information on our Company–Real Estate”;
•
“Food Sector” means the numerous companies of Desc that operate our branded food and pork businesses as more fully
described in “Item 4. Information on our Company–Food”;
•
“SEC” means the U.S. Securities and Exchange Commission;
•
“TIIE” means the Tasa de Interes Interbancaria de Equilibrio or Equilibrium Interbank Interest Rate; and
•
“we,” “our,” “us” and similar terms, as well as “Desc,” mean Desc, S.A. de C.V. and its consolidated subsidiaries, unless the
context indicates otherwise.
Our fiscal year ends on December 31 of each year, and references to “fiscal year” reflect a 52-week period.
Our Financial Statements are expressed in Pesos and prepared in accordance with Mexican GAAP, which differ from U.S.
GAAP in significant respects, in particular by requiring Mexican companies to recognize effects of inflation. Please see Notes 23 and
24 to our Financial Statements for a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they relate to
Desc.
The Mexican Institute of Public Accountants has issued Bulletin B-10, “Recognition of the Effects of Inflation on Financial
Information”, as amended, and Bulletin B-12, “Statement of Changes in Financial Position”. These bulletins outline the inflation
accounting methodology mandatory for all Mexican companies reporting under Mexican GAAP. Mexican GAAP provides for the
recognition of effects of inflation by restating nonmonetary assets and liabilities using the NCPI, restating the components of
stockholders’ equity using the NCPI and recording gains or losses in purchasing power due to the holding of monetary liabilities or
assets. Mexican GAAP also requires that all financial information be presented in constant Pesos, having the same purchasing power
for each period indicated taking into account inflation, as of the date of the most recent balance sheet presented. The effect of these
inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP, as permitted by the SEC.
In this annual report, all financial data presented in Pesos for all periods in the Financial Statements, unless otherwise indicated,
have been restated in constant Pesos as of December 31, 2003. Dollar amounts, unless otherwise indicated, are stated on a nominal,
that is, noninflation adjusted basis, except for convenience translations of Peso amounts.
Solely for your convenience, this annual report contains translations of Peso amounts into Dollars. We have used an exchange
rate of Ps. 11.1998 per Dollar for these translations, which is the exchange rate quoted by Banco de México on December 31, 2003.
The Noon Buying Rate was Ps. 11.242 per $1.00 on December 31, 2003. Translations contained in this annual report do not constitute
representations that the stated Peso amounts actually represent Dollar amounts or vice versa, or that amounts could be or could have
been converted into Dollars or Pesos, as the case may be, at any particular rate.
2
Cautionary Statement for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995
This annual report includes “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act
of 1995. These forward-looking statements can be identified by the use of forward-looking terminology such as “estimate,” “project,”
“believe,” “anticipate,” “intend,” “expect,” “plan,” “may,” “will,” “would,” “could,” or “should” or the negative of these words or
other variations of these words or other similar expressions. These forward-looking statements reflect the current views of our
management with respect to our future financial performance and future events. All forward-looking statements contained in this
annual report, including those presented with numerical specificity, however, are uncertain. They are based on assumptions and are
subject to many risks and uncertainties that could cause actual results to differ materially from our expectations described in these
forward-looking statements. These factors include, among other things, the following:
•
changes in general political, economic and business conditions, especially an economic downturn or slow economic growth
in Mexico or North America;
•
Mexican political instability, including the reversal of market-oriented reforms and economic recovery measures or the
failure of those reforms and measures to achieve their goals;
•
fluctuations in the demand of our products or for products in which our products are incorporated;
•
competitive product and pricing pressures in both the domestic and international markets;
•
foreign currency rate fluctuations and fluctuations in other market rate sensitive instruments to which we are a party;
•
shortages or interruptions in the supply of fuel or production materials or an increase in the cost of raw materials;
•
labor strikes;
•
changes in business strategy; and
•
other risks and uncertainties, some of which are described under the heading “Risk Factors” in “Item 3. Key Information.”
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Risks
and uncertainties also include the impact of any future events with material unforeseen impacts. Accordingly, we caution readers not
to place undue reliance on these forward-looking statements. We do not undertake any obligation or intend to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent
required by U.S. federal securities laws. Any forward-looking statement speaks only as of the date on which it is made.
3
Statements Regarding Competitive Position
Statements made in “Item 4. Information on our Company” and “Item 5. Operating and Financial Review and Prospects”
referring to our competitive position are based on our belief and, in some cases, on a range of sources, including market studies by
consultants retained by Desc, independent market information provided by Mexican institutions and our internal assessment of market
share based on the financial results and performance of market participants and analysis of various market indicators.
No Internet Site is Part of This Annual Report
Desc maintains an Internet site at www.desc.com.mx. Information contained in or otherwise accessible through this website is
not part of this annual report. All references in this annual report to this Internet site are inactive textual references to this URL
(“uniform resource locator”) and are for your informational purposes only.
PART I
Item 1. Identity of Directors, Senior Management and Advisers.
A. Directors and Senior Management
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
A. Selected Financial Data
The table below presents selected consolidated financial data of Desc for the fiscal years ended December 31, 1999, 2000, 2001,
2002 and 2003. You should read this information in conjunction with “Item 5. Operating and Financial Review and Prospects” and
the Financial Statements included elsewhere in this annual report.
The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in significant respects from U.S.
GAAP, in particular by requiring Mexican companies to recognize effects of inflation. Please refer to Note 4 of our Financial
Statements for a summary of our significant accounting policies and Notes 23 and 24 for a description of the principal differences
between Mexican GAAP and U.S. GAAP, as they relate to Desc, and a reconciliation to U.S. GAAP of Desc’s net income (loss) and
stockholders’ equity. The effect of inflation accounting principles has not been reversed in the reconciliation to U.S. GAAP as
permitted by the SEC.
4
Mexico has experienced high inflation in the past, although inflation rates have declined significantly in recent years. The annual
rates of inflation in Mexico, as measured by changes in the NCPI, were 12.3% in 1999, 9.0% in 2000, 4.4% in 2001, 5.7% in 2002
and 4.0% in 2003. In accordance with Mexican GAAP rules on inflation accounting, the Financial Statements recognize effects of
inflation and restate data for prior periods in constant Pesos as of December 31, 2003. Accordingly, financial data for all periods in
the selected consolidated financial information derived from the Financial Statements and presented below have been restated in
constant Pesos as of December 31, 2003.
Selected Consolidated Financial Information
Year ended December 31,
Convenience
1999
2000
2001
2002
Translation (1)
2003
2003
(In thousands, except for net income (loss) per share/ADS and weighted average shares outstanding)
Income
statement
data:
Mexican GAAP:
Net sales
Operating income
Income (loss)
from
continuing
operations
Discontinued
operations(2)
Extraordinary
items
Change in
accounting
policy
Net consolidated
income (loss)
for the year
Minority interest
Majority net
income (loss)
Income (loss)
from
continuing
operations per
share
Majority net
income (loss)
per share
Majority net
income (loss)
per ADS(3)
Dividends
declared per
share
Dividends
declared per
ADS(4)
U.S. GAAP
amounts:
Net sales
Operating income
Ps. 28,105,698
3,794,538
Ps. 26,209,221
2,589,893
Ps. 22,092,872
1,962,256
2,977,135
484,945
802,570
(584,969)
40,490
7,170
(253,863)
(629,868)
0
76,494
(309,998)
0
143,184
0
Ps. 20,360,380
1,081,300
0
0
Ps. 21,755,055
842,464
(1,042,512)
$ 1,942,450
75,221
(93,083)
22,896
2,044
0
0
(1,384,294)
(123,600)
3,017,625
(797,408)
711,793
(396,391)
238,709
(193,263)
(1,214,837)
130,292
(2,403,910)
163,523
(214,639)
14,601
2,220,217
315,402
45,446
(1,084,545)
(2,240,387)
(200,038)
1.28
0.05
0.39
(0.28)
(0.55)
(0.05)
1.29
0.19
0.03
(0.68)
(1.41)
(0.13)
25.80
3.80
0.57
(13.60)
(28.20)
(2.52)
0.00
0.28
0.28
0.27
0.00
0.00
0.00
5.71
5.68
5.34
0.00
0.00
Ps. 28,106,136
3,049,434
Ps. 26,217,378
1,646,784
Ps. 22,092,872
1,114,764
Ps. 20,360,380
714,757
Ps. 21,755,055
252,289
$ 1,942,450
22,526
Income (loss)
from
continuing
operations
Income (loss)
from
continuing
operations per
share
Net income (loss)
Net income (loss)
per share
Net income (loss)
per ADS(3)
Dividends
declared per
share
Dividends
declared per
ADS(4)
2,851,059
1,405,706
1,201,922
(556,175)
(617,161)
(55,105)
1.66
0.85
0.76
(0.35)
(0.39)
(0.03)
1,987,251
568,335
(133,908)
(2,178,061)
(350,876)
(31,328)
1.16
0.34
(0.08)
(1.37)
(0.22)
(0.02)
23.20
6.80
(1.68)
(27.42)
(4.42)
(0.39)
$
0.00
$
0.03
$
0.03
$
0.03
$
0.00
$
0.00
$
0.00
$
0.52
$
0.52
$
0.52
$
0.00
$
0.00
Balance sheet
data (at
period end):
Mexican GAAP:
Land held for
development
and real estate
projects in
progress
Property, plant
and equipment,
net(5)
Total assets
Capital stock
Total
stockholders’
equity
U.S. GAAP
amounts:
Property, plant
and equipment,
net(5)
Total assets
Stockholders’
equity
Other data:
Dividends
declared
Dividends
declared to
minority
interest
Weighted average
shares
outstanding
Net sales under
Mexican
4,320,700
4,288,589
4,298,869
4,290,528
3,828,312
341,820
17,826,892
37,072,172
11,601,797
16,232,698
36,844,058
11,715,854
13,591,677
30,215,556
11,715,914
13,684,423
30,469,705
11,715,914
11,813,121
26,734,990
11,715,914
1,054,762
2,387,095
1,046,082
20,091,687
19,008,219
13,185,322
11,825,483
9,906,217
884,499
Ps. 19,025,631
39,167,685
Ps. 17,538,468
39,302,114
Ps. 15,576,958
33,754,755
Ps. 14,825,512
31,328,603
Ps. 12,587,136
27,904,759
$ 1,123,871
2,491,540
12,194,283
10,835,058
9,963,556
6,963,498
6,561,428
585,852
0
470,242
448,185
428,936
0
0
0
51,244
402,055
121,073
0
0
1,709,341
1,637,734
1,588,614
1,588,687
1,588,687
1,588,687
GAAP:
Automotive
Sector
Chemical Sector
Food Sector
Real Estate Sector
Desc
Ps. 12,148,024
8,064,429
6,853,662
1,005,603
33,980
Ps. 12,225,417
8,718,730
4,102,740
1,142,385
19,949
Ps. 10,157,225
7,334,118
3,693,349
887,107
21,073
Ps. 8,731,810
7,211,861
3,581,989
799,283
35,437
Ps. 7,820,304
7,868,456
3,883,594
1,968,953
213.748
$ 698,254
702,553
346,756
175,802
19.085
Total
Ps. 28,105,698
Ps. 26,209,221
Ps. 22,092,872
Ps. 20,360,380
Ps. 21,755,055
$ 1,942,450
5
Selected Consolidated Financial Information
Year ended December 31,
Convenience
1999
2000
2002
2001
Translation(1)
2003
2003
(In thousands)
Operating income
under Mexican
GAAP:
Automotive Sector
Chemical Sector
Food Sector
Real Estate Sector
Desc
Ps. 1,957,847
1,070,107
464,856
354,341
(52,613)
Ps. 1,798,255
628,479
45,458
177,812
(60,111)
Ps. 1,144,371
549,791
174,927
159,438
(66,271)
Total
Ps. 3,794,538
Ps. 2,589,893
Ps. 1,962,256
(1)
(2)
(3)
(4)
(5)
Ps. 644,084
341,415
102,380
84,913
(91,492)
Ps. 1,081,300
Ps. 226,670
202,924
123,985
412,329
(123,444)
$
20,239
18,119
11,070
36,816
(11,023)
Ps. 842,464
$
75,221
Dollar amounts shown in the Financial Statements have been included solely for the convenience of the reader and are translated
from Pesos, as a matter of arithmetic computation only, at the exchange rate quoted by Banco de Mexico for December 31, 2003
of 11.1998 Pesos per Dollar. Such translation should not be interpreted as a representation that the Peso amounts have been,
could have been, or could in the future be, translated into Dollars at this or any other exchange rate.
During the second half of 2002, we discontinued the following non-strategic businesses: spark plugs and electrical parts
(Automotive Sector), natural pigments business (Chemical Sector) and our pork production operations in the Bajio region (Food
Sector).
Calculated as if the applicable number of outstanding shares plus the increase in shares resulting from the increase in capital
stock in 2004 (see discussion below in “Item 8. – Significant Changes”) were all represented by ADSs at a ratio of 20 weighted
average shares outstanding per ADS.
Dividends per ADS was calculated by dividing the total dividends by the weighted average number of shares outstanding during
the period plus the increase in shares resulting from the increase in capital stock in 2004 and multiplying the amount by 20. See
discussion regarding dividends in “Item 5. Operating and Financial Review and Prospects—Liquidity”.
Includes investment properties, net.
Exchange Rates
The table below lists, for the periods indicated, the period-end, average, high and low Noon Buying Rate for the purchase and
sale of Dollars, presented in each case as the average between the purchase and sale rates, expressed in Pesos per Dollar. The rates
have not been restated in constant currency units.
Noon Buying Rate
Average (1)
Period End
9.24
9.18
8.95
9.00
10.11
9.56
9.47
9.33
9.66
10.80
9.48
9.62
9.16
10.43
11.24
11.17
10.81
10.91
10.92
11.16
11.38
11.25
10.92
11.03
11.02
11.27
11.52
11.24
11.01
11.06
11.18
11.40
11.41
High
Low
Year Ended December 31,
1999
2000
2001
2002
2003
10.60
10.09
9.97
10.43
11.41
Most Recent 6 months:
December 2003
January 2004
February 2004
March 2004
April 2004
May 2004
11.41
11.10
11.25
11.23
11.43
11.64
(1)
Average of month-end rates.
6
On June 29, 2004, the Noon Buying Rate was Ps.11.525 to $1.00.
During 1997 and 1998, the foreign exchange markets were affected significantly by the financial crises in Asia and Russia and
financial turmoil in various other countries, including Brazil and Venezuela. Fluctuations in the exchange rate between the Peso and
the Dollar will affect the market price of the ADSs traded on the NYSE. To the extent that Desc pays cash dividends and other cash
distributions (including the net proceeds from any sale of securities, property or rights distributed to the owners of Series B shares)
denominated in Pesos, the Depositary must convert or cause to be converted, as soon as possible, such amounts into Dollars, to the
extent that the Depositary, in its judgment, can do so on a reasonable basis and in accordance with applicable law. As a result, any
exchange rate fluctuations will affect the Dollar amounts received by the holders of the ADSs upon conversion of any such Pesodenominated dividend payment or distribution.
Historically, the Mexican economy has suffered balance of payment deficits and shortages in foreign exchange reserves. While
the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert Pesos to Dollars,
and the terms of the North American Free Trade Agreement, to which Mexico is a signatory, generally prohibit exchange controls, no
assurance can be given that the Mexican government will not institute a restrictive exchange control policy in the future. Furthermore,
there can be no assurance that the Peso will not experience a significant depreciation or appreciation in the future.
Please refer to “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures
About Market Risk,” if you would like to read about the effect exchange rate fluctuations has on our business and our operations. In
that section, you can also find a discussion of the hedging techniques we use to manage our exposure to exchange rate fluctuations.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
We are subject to various risks resulting from changing economic, political, social, industry, business and financial conditions,
particularly in Mexico and North America. The principal risks are described below. If we do not successfully address any of the risks
described below, we could experience a material adverse effect on our business, operating results and financial condition and the
price of Desc’s shares, ADSs, and Notes may decline. We cannot assure you that we will successfully address all of these risks.
7
Risk Factors Relating to Our Operations
Restrictive covenants in our outstanding debt instruments may reduce our operating and financial flexibility
Certain of our outstanding debt instruments contain various restrictive covenants that impose significant operating and financial
limitations on us including, but not limited to, restrictions on our ability to: (i) incur additional debt; (ii) pay dividends and make
restricted payments; (iii) create liens; (iv) use the proceeds from sales of assets and subsidiary stock; (v) incur capital expenditures;
(vi) enter into sale and leaseback transactions; (vii) enter into transactions with affiliates; and (viii) enter into certain mergers,
consolidations and transfers of all or substantially all of our assets. Our failure to comply with the covenants contained in our
outstanding debt instruments could result in an event of default, which could materially and adversely affect our operating results and
our financial condition.
We depend upon our subsidiaries for cash to meet our obligations
We are structured as a holding company that operates through more than 90 direct and indirect subsidiaries. Accordingly, we
rely upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries to us in the form of dividends, interest
payments or otherwise to pay our debt, operating, financing and investing obligations. The ability of our subsidiaries to pay dividends
is subject to Mexican legal requirements, which provide that a corporation may declare and pay dividends only out of the profits
reflected in the year-end financial statements that are approved by its stockholders. If such payment is approved by a subsidiary’s
stockholders, then dividends may be paid only after the creation of a required legal reserve and the set-off or satisfaction of losses, if
any, incurred by such subsidiary in previous fiscal years. In addition dividends and other payments by some of our direct and indirect
subsidiaries are shared with substantial minority stockholders of some of those subsidiaries. Therefore, our cash flows could be
affected if we do not receive dividends or other payments from our subsidiaries.
We face risks related to fluctuations in interest rates
We are exposed to fluctuations in interest rates. As of year-end 2003, approximately Ps. 8,260 million, or 72%, of our long-term
borrowings bear interest on a floating basis. Accordingly, changes in interest rates can affect the cost of these interest-bearing
borrowings. As a result, our financial condition, results of operations and liquidity could be materially adversely affected. Our
attempts to mitigate interest rate risk by financing long-term liabilities with fixed interest rates and our use of derivative financial
instruments, such as interest rate swaps, to manage our risk could result in our failure to realize savings if interest rates fall. For
additional information, please see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
Inability to renew joint ventures, technological assistance or licensing agreements may affect our competitive position and revenues
Some of our subsidiaries conduct all or a portion of their businesses through joint ventures or technological alliances with
Mexican and non-Mexican partners. Certain of our partners and other Mexican and non-Mexican companies also license technology
and other intellectual property (e.g., trade names) to our subsidiaries for use in the manufacture and sale of various products,
including autoparts and carbon black. We believe that these ventures, alliances and license arrangements provide us access to
advanced technologies and competitive advantages. However, we cannot assure you that in the future any of these partners will not
prefer to conduct business directly in Mexico and terminate their relationships with us mainly in light of opportunities created by the
North American Free Trade Agreement or for other reasons. In addition, we cannot assure you that we will be successful in renewing
any of our technology,
8
licenses, joint ventures or other agreements or arrangements upon their expiration, in renewing these agreements or arrangements on
terms as favorable as the present ones, in forming similar alliances with other partners or in developing equivalent technologies
independently.
Compliance with governmental laws and regulations could result in added expenditures or liabilities
Our businesses are subject to extensive Mexican and U.S. federal, state, local and foreign laws, regulations, rules and ordinances
concerning, among other things, emissions to the air, discharges and releases to land and water, the generation, handling, storage,
transportation, treatment and disposal of wastes and other materials and the remediation of environmental pollution caused by releases
of wastes and other materials (collectively, “Environmental Laws”). The operation of any manufacturing plant and the distribution
of chemical products entail risks under Environmental Laws, many of which provide for substantial fines and criminal sanctions for
violations. There can be no assurance that significant costs or liabilities will not be incurred with respect to our operations and
activities.
We are also subject to extensive governmental regulation from both domestic and U.S. governmental entities concerning our
competitive and marketplace conduct, as well as the health, safety and working conditions of our employees.
The Food Sector is subject to extensive governmental regulation from both domestic and U.S. governmental entities concerning,
among other things, product composition, packaging, labeling, advertisement and the safety of its products.
From time to time, additional legislative initiatives may be introduced that may affect our operations and the conduct of our
businesses, and we cannot provide assurance that the cost of complying with these initiatives or that the effects of these initiatives will
not have a material adverse effect on our profitability or financial condition in the future. In addition, we have no basis for predicting
what effect, if any, stricter enforcement of existing laws and regulations would have on our results of operations, cash flows or
financial condition.
Risks Relating to Our Automotive Sector
The automotive industry is highly cyclical and could adversely affect our revenues and results of operations
Our Automotive Sector is directly affected by domestic and foreign automotive production and sales, in particular with respect
to our principal clients. Automotive production and sales are highly cyclical and impacted by, among others, the strength of the
general economic conditions, interest rates, money supply and consumer confidence. The largest U.S. and foreign automobile
manufacturers were affected by the slow growth of the U.S. economy and the success of their marketing plans to promote sales, and
therefore, have reduced, delayed or refocused their output, which has adversely affected our Automotive Sector, as well as the
automotive parts industry in Mexico. We cannot predict when the U.S. economy will totally recover or whether a recovery will result
in increased sales or profit margins.
Increase in steel prices could affect our production and results of operations
During 2003 and the first half of 2004, steel prices increased significantly. We cannot assure you that if steel prices increase or
persist Desc will not experience increased costs or disruptions in supply over the remainder of the year or for a longer term, or that
such increased costs will not adversely impact earnings.
9
We are dependent on a small group of principal customers and the sales of certain products and the loss of these customers could
affect our revenues and results of operations
Our largest customers in our Automotive Sector are General Motors, Ford, Dana, Renault-Nissan and Volkswagen. In 2003,
these customers represented 55% of our total autoparts sales, of which General Motors accounted for 20%, Ford for 14%, Dana for
10%, Renault-Nissan for 6% and Volkswagen for 5%. Aggregated sales to Original Equipment Manufacturers (“OEMs”) represented
81% of our total sales, of which 19% was for aftermarket products. If we lost any significant portion of our sales to any of these
customers, it would adversely affect our business and operating results.
In 2003, a significant percentage of our sales was derived from the following products: transmissions (31%), constant velocity
joints (15%), propeller shafts (12%), rear and front traction axles (12%), valve lifters, pistons and piston pins (6%), stamped metal
products (5%), gears (5%) and steel wheels (5%). A significant decrease or change in product mix of such sales could also adversely
affect our business and operating results.
The OEM supplier industry is highly competitive, which could affect our net sales and operating expenses
The automotive industry is characterized by a small number of OEMs that are able to exert considerable pressure on automotive
parts suppliers to reduce prices, improve quality and provide additional design and engineering capabilities. We cannot assure you
that our business will not be adversely affected by increased competition in the markets in which we operate.
Labor relations may affect our revenues and results of operations
We consider our relations with our employees and their union representatives to be on good terms, but cannot assure you that
future contract negotiations with union representatives will be favorable to us or that a change in the nature of these relationships will
not result in labor interruptions, or that work stoppages or other labor unrest will not occur in the ordinary course of these
relationships.
Risks Relating to Our Chemical Sector
We are involved in governmental investigations and litigation
In 2003, our former subsidiary Girsa, S.A. de C.V.’s joint venture partner, Uniroyal Chemical Company, Inc. (“Uniroyal”), in
our currently wholly owned subsidiary, ParaTec Elastomers, L.L.C. (“ParaTec”), and Uniroyal’s parent Crompton Corporation
(“Crompton”) were implicated in an investigation by United States, Canadian and European authorities concerning alleged price
fixing and anticompetitive activity in the nitrile butadiene rubber (“NBR”) and other elastomer and rubber chemical markets. In
September 2003, ParaTec was accepted, as part of Crompton’s application, into the Corporate Leniency Program of the U.S.
Department of Justice (“DOJ”) and received a letter of conditional amnesty with respect to allegations of price fixing. As a condition
of the amnesty, ParaTec and its representatives are required to cooperate in the ongoing investigation of the NBR industry and pay
restitution to any person or entity injured as a result of the alleged anticompetitive activity in which ParaTec may have been a
participant. So long as ParaTec observes the conditions of the letter, the DOJ will not bring a criminal prosecution against it. The
conditional amnesty granted by the DOJ does not exempt ParaTec from possible civil lawsuits that any direct or indirect NBR
purchaser may file, seeking damages incurred as a consequence of the alleged anticompetitive activity.
Last January, Canada’s Attorney General and Commissioner of Competition granted ParaTec a provisional guarantee of
immunity from prosecution under Canada’s Competition Act. The immunity is conditional on ParaTec providing the Competition
Bureau and the Attorney General information and evidence in connection with the Commissioner’s inquiry into the NBR industry.
10
A similar investigation based on the same allegations is still pending in the European Union. Crompton did not include ParaTec
in its application for conditional amnesty in the EU, which application, according to Crompton, was allowed. ParaTec is attempting
on its own to obtain conditional amnesty in that jurisdiction as well, however a final resolution of this matter is still pending.
In December of 2003, a federal antitrust class action suit was commenced in federal court in Pennsylvania by Diamond Holding
Corporation, on behalf of itself and other direct purchasers of NBR, against ParaTec, the parent holding company Desc and other
sellers of NBR, including Uniroyal and its parent Crompton. The action seeks treble damages for alleged damages incurred as a result
of the alleged price fixing scheme. Desc has filed a motion to dismiss all claims against it on the basis that, among other grounds,
Desc is not adequately alleged to be a member of the alleged combination or conspiracy. ParaTec intends to defend both as to liability
and damages, and as to damages will vigorously assert that if and to the extent there was any improper activity, that activity had no
substantial impact on prices. ParaTec has also filed several crossclaims against Crompton and Uniroyal, which was the majority
shareholder of ParaTec during most of the class period, seeking full indemnification, on the basis of certain contractual and noncontractual claims, for any losses that ParaTec may incur as a result of the suit, as well as injunctive relief, punitive damages,
attorneys’ fees and costs and expenses. In the event that Desc’s motion to dismiss is unsuccessful, Desc will assert a similar
crossclaim.
Desc and ParaTec are also named defendants in a state court civil case commenced in Superior Court of California by
Competition Collision Center L.L.C., on behalf of itself and other indirect purchasers of NBR in California. Plaintiffs seek treble
damages for alleged price fixing and unfair competition in violation of California law. Desc and ParaTec intend to respond similarly
in this action as they did in the federal action, except Desc may also move to dismiss for lack of personal jurisdiction in this state
case.
As of this date, the contingencies related to this matter, including any amounts that ultimately be paid in judgement or settlement
by Desc and or ParaTec, together with the projected legal fees and expenses, can not be quantified. Any claims against us and any
future claims could have an adverse impact on our financial condition, cash flows or results of operations.
Our chemicals business is cyclical and may be adversely affected by events and conditions beyond our control
The chemicals industry is a highly cyclical business. Ethylene- and benzene- derivative products, such as petrochemicals, are
heavily impacted by the business cycles of the chemicals industry. Our chemicals business may also be affected by other events or
conditions that are beyond our control, including changes or developments in domestic or foreign economic markets, increases in
natural gas prices or the cost of raw materials, competition from other chemicals manufacturers, changes in the availability or supply
of chemical products generally, and unanticipated downtime of plants. These external factors may cause fluctuations in the demand
for our chemical products and fluctuations in our prices and our margins, which may adversely affect our financial results, income
and cash flow.
The principal raw materials used in our chemicals business (such as styrene monomer, butadiene and natural gas) are subject to
substantial price fluctuations, which may adversely affect the financial results of our Chemical Sector.
11
We are dependent on a small group of principal customers in some of our chemicals businesses and the loss of these customers could
affect our revenues and results of operations
Our largest customers in our synthetic rubber business are tire manufacturing facilities, in our phosphates business are Procter &
Gamble and Fabrica de Jabon La Corona and in our polystyrene business are Plasticos Bosco (Vitro) and Jaguar Group. The 10 major
customers of the Chemical Sector accounted for 36% of the Chemical Sector’s total sales in 2003. If we lost any significant portion of
our sales to any of these customers, it would adversely affect our business and operating results.
We rely on one supplier to provide all our phosphoric acid requirements
The principal raw material needed for the production of phosphate is phosphoric acid. Currently, Rhodia de México, S.A. de
C.V. supplies all of our phosphoric acid on competitive terms. If Rhodia de México, S.A. de C.V. were unable to supply this raw
material, we believe we could secure alternative suppliers, but it may result in increased raw material costs. In addition, Rhodia de
México, S.A. de C.V. was recently sold to another company, and although we continue to have a good relationship with Rhodia, we
cannot assure you that the change in ownership will not affect our commercial relationship with Rhodia in the future.
Risks Relating to Our Food Sector
Competition in the food industry may affect our operations
The food industry is highly competitive. We compete with companies that have greater capital resources, research and
development staffs, facilities, diversity of product lines and brand recognition. Increased competition as to any of our products could
result in reduced prices, which would reduce our sales and profit margins. In addition, our competitors may also prove to be more
successful in marketing and selling their products than we are with ours.
Dependence upon food retailers may adversely affect our sales and margins
With the growing trend towards consolidation of food distributors and retailers in Mexico and United States, we are increasingly
dependent upon large food retailers (such as Wal-Mart) whose bargaining strength is growing. As a result, we may be negatively
affected by changes in the policies of such customers, such as limitations on access to shelf space, payment terms and other
conditions, which may adversely affect our sales and margins.
Price increases and shortages of food raw materials could adversely affect our results of operations
Our results of operations may be affected by the availability and pricing of raw materials, principally materials needed to
produce our food products (such as tomatoes, tuna and hot peppers) or used in our pork production operations (such as grains, corn,
sorghum and soy). Factors such as changes in the global or regional levels of supply and demand, weather conditions and government
controls could substantially impact the price of food raw materials. A substantial increase in the raw material prices of our Food
Sector (if not passed on to customers through price increases) or a continued interruption in supply could have a material adverse
effect on our financial condition and results of operations.
Outbreaks of disease can adversely affect our revenues and operating margins
The productivity and profitability of any pork operation depends, to a great extent, on the ability to maintain animal health and
control disease. Disease can reduce the number of offspring weaned per
12
sow and hamper the growth of pigs to finished size. Diseases can be spread from other infected pigs, in feed, in trucks, by rodents or
birds, by people visiting the farms or through the air. We have experienced outbreaks of certain diseases in the past, and may in the
future, including Porcine Reproductive and Respiratory Syndrome (PRRS), a respiratory disease commonly affecting swine herds.
The prices of our pork products may decline as a result of lower-priced U.S. pork imports
In May 2002, the U.S. Farm Security and Rural Investment Act of 2002 (the “Farm Bill”) was enacted into law, which, among
other things, grants subsidies to U.S. pork producers. As a result of these subsidies, and their over-production, U.S. pork producers
have been exporting pork to Mexico at prices below Mexican market prices.
Risks Relating to Our Real Estate Sector
The value of our real estate investments is subject to factors and conditions outside of our control
Our revenue from real estate operations is affected by many factors outside of our control, including the granting of
governmental permits related to the supply of water, ecology, land use and construction, the overall economic conditions in Mexico
and the conditions of the Mexican and the United States real estate sector. Our real estate business would be adversely affected if
these external factors reduced demand for our properties or resulted in increased costs, which we were not able to reflect in the price
of our projects.
Risks Relating to Our Controlling Stockholder and Capital Structure
Certain members of the Senderos family effectively control our management and their interests may differ from those of other security
holders
As of May 19, 2004, Fernando Senderos Mestre, our chairman and chief executive officer, and his immediate family
approximately own (beneficially or of record) 59.2% of our Series A shares and 8.8% of our Series B shares. As a result of the shares
owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre exercises voting control (see
“Item 6. — Compensation of Directors and Officers” for information about these additional shares), the Senderos family has the
power to elect a majority of our board of directors, to control the general management of Desc and to determine the outcome of
substantially all matters requiring stockholder approval, including the payment of dividends.
Future sales of our shares by the controlling stockholder may affect the stock prices of our securities
Sales of Desc shares held by the Senderos family may adversely affect the trading price of the Series A and Series B shares
traded on the Bolsa Mexicana de Valores, S.A. de C.V. (the “Mexican Stock Exchange”) and the price of the ADSs traded on the
New York Stock Exchange (“NYSE”). The Senderos family is not subject to any contractual restrictions that limit their right to
dispose of their Series A and Series B shares.
Exchange rate fluctuations may affect the value of our securities
Fluctuations in the exchange rate between the Peso and the Dollar will affect the Dollar value of an investment in our equity
securities and of dividend and other distribution payments on those securities. See above under the heading “Exchange Rates.”
13
The market for the ADSs and the Series B shares is limited
The Series B shares are listed on the Mexican Stock Exchange, which is Mexico’s only stock exchange. There is no public
market outside of Mexico for the Series B shares. The ADSs are listed on the NYSE. The Mexican securities market is not as large or
as active as securities markets in the United States and certain other developed market economies. As a result, the Mexican securities
market has experienced less liquidity and more volatility than has been experienced in such other markets. These market
characteristics may limit the ability of a holder of ADSs to sell the underlying Series B shares and may also affect the market price of
the Series B shares and the ADSs.
Desc is subject to different corporate disclosure and accounting standards than U.S. companies
As a listed company, we are required to provide annual audited and quarterly unaudited financial information to the Mexican
Stock Exchange and the Comisión Nacional Bancaria y de Valores (the National Banking and Securities Commission or the
“CNBV”) and to file certain information with the SEC pursuant to U.S. law. However, you may not be able to obtain as much
publicly available information about foreign issuers of securities traded in the United States as is regularly published by or about U.S.
issuers of publicly traded securities.
Mexican companies must prepare their financial statements in accordance with Mexican GAAP. Mexican GAAP differs in
significant respects from U.S. GAAP, including, but not limited to, the treatment of capitalized interest, deferred income taxes,
deferred employee profit sharing, minority interest, amortization of negative goodwill and fixed asset valuations. In particular, all
Mexican companies must incorporate the effects of inflation directly in their accounting records and in financial statements. The
effects of inflation accounting under Mexican GAAP are not eliminated in a reconciliation to U.S. GAAP, as permitted by the SEC.
For this and other reasons, the presentation of Mexican financial statements and reported earnings may differ from that of U.S.
companies. See Notes 23 and 24 to the Financial Statements.
Holders of ADSs are not entitled to attend stockholders’ meetings, and they may only vote through the Depositary
Under our ByLaws, our stockholders must deposit their shares with our secretary or with a Mexican custodian in order to attend
our stockholders’ meetings. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to attend our
stockholders’ meetings. Our ADS holders also will not be permitted to vote their ADSs directly at our stockholders’ meetings or to
appoint a proxy to do so. Rather, our ADS holders are entitled to instruct the Depositary as to how to vote their Series B shares
represented by the ADS in accordance with the procedures provided in the deposit agreement with respect to the ADSs.
You may not be entitled to participate in any future preemptive rights offering, which may result in a dilution of your equity interest in
Desc
Under Mexican law, if we issue new shares for cash as a part of a capital increase, we generally must grant our stockholders the
right to purchase a sufficient number of shares to maintain their existing ownership percentage in Desc. Rights to purchase shares in
these circumstances are commonly referred to as preemptive rights. We may not be legally permitted to allow holders of ADSs in the
United States to exercise preemptive rights in any future capital increase unless (1) we file a registration statement with the SEC with
respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S.
Securities Act of 1933, as amended. At the time of any future capital increase, we will evaluate the costs and potential liabilities
associated with filing a registration
14
statement with the SEC, as well as the benefits of preemptive rights to holders of ADSs in the United States and any other factors that
we consider important in determining whether to file a registration statement.
We cannot make any assurances that we will file a registration statement with the SEC to allow holders of ADSs in the United
States to participate in a preemptive rights offering or that an exemption from the registration requirements of the U.S. Securities Act
of 1933, as amended will be available. As a result, the equity interests of holders of ADSs would be diluted to the extent that ADS
holders cannot participate in a preemptive rights offering.
Minority stockholder protections in Mexico are different from those in the United States
Under Mexican law, the protections provided to minority stockholders are different from those in the United States. Specifically,
the law respecting fiduciary duties of directors is not well developed, there is no procedure for class actions or stockholder derivative
actions and the procedural requirements for bringing stockholder lawsuits are different. Therefore, it may be more difficult for
minority stockholders to enforce their rights against us, our directors or our controlling stockholders than it would be for minority
stockholders to do so in the United States.
Risks Relating to Mexico
Economic developments in Mexico may adversely affect our business
Desc is a Mexican company and most of its assets are located in Mexico, including its manufacturing facilities. Therefore, the
financial situation, operational results, the prospects and the capacity to pay its debt, may be affected by different factors, including
inflation, interest rates, currency fluctuations, social instability, changes in legal and other political or economic events that occur in
Mexico or that affect Mexico, over which we have no control.
Political Events in Mexico may adversely affect our business
Political events in Mexico may also significantly impact our operations. Vicente Fox of the Partido Acción Nacional (the
National Action Party) or “PAN”, won the presidency in the Mexican national elections held on July 2, 2000. Although his victory
ended over 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 Mexican congress. In addition, the PAN lost additional seats in
the Mexican congress and state governorships in the 2003 elections. This political landscape has resulted in a legislative gridlock that
has impeded the progress of reforms in Mexico, which may adversely affect economic conditions in Mexico or our financial
condition. There will be an election for governors in ten of 32 states and for local congresses in 14 states in 2004.
We are subject to currency exchange rate fluctuations
We generate revenues primarily in Pesos and Dollars and, to a lesser extent, in Euros. As a result, we are exposed to foreign
currency exchange rate risk because the mix of currencies in which our costs are denominated are different from the mix of currencies
in which we earn revenues. As an example, the majority of our equipment purchases are in Dollars and, as of May 2004, 67% of our
indebtedness was in Dollars and 33% was in Pesos (and we may incur additional non-Peso denominated debt) and most of our costs
in the synthetic rubber business in Spain are in Euros while sales are in Dollars. Consequently, declines in the value of the Peso
relative to other currencies may increase our costs and result in foreign exchange losses, which may adversely affect our results of
operation and cash flow.
15
An increase in inflation may adversely affect our financial condition and results of operation
In the past, inflation in Mexico has led to higher interest rates, depreciations of the Peso and substantial government controls
over exchange rates and prices, which at times adversely affected our operating revenues and margins. High rates of inflation relative
to the rate of depreciation of the Peso against the Dollar reduce our operating margins in business segments where some costs are
denominated in Pesos while sales are denominated in Dollars, such as autoparts. The annual rates of inflation, as measured by
changes in the NCPI, were 4.4%, 5.7%, and 4.0% for the years, 2001, 2002, and 2003, respectively. We cannot assure you that
Mexico will not experience high inflation in the future.
Developments in other markets may affect our business or the market price of our securities
The market value of Mexican company securities might be affected by economic and market conditions in the U.S., or in other
emerging markets. 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. During the second half of 1998, prices of Mexican securities were adversely affected by the economic crises in
Russia and Brazil. A serious deterioration in the political and economic climate in Argentina occurred in December 2001, including
high inflation levels and the rapid depreciation of the Argentine peso against the Dollar (which did not have the same affect on
Mexico as previous emerging market country crises). The slowdown in the American economy, the war in Middle East, and the
terrorist attacks, affected the markets in 2002. We can make no assurance that the market value of our securities would not be
adversely affected by events elsewhere, especially in emerging markets.
Item 4. Information on our Company
A. History and Development of Our Company
Desc is a corporation (sociedad anónima de capital variable) organized under the laws of Mexico. It was incorporated in 1973
under the name “Desc, Sociedad de Fomento Industrial, S.A. de C.V.” On April 28, 1994, we changed our name to “Desc, S.A. de
C.V.” Desc’s duration is 99 years from the date of its incorporation.
Our executive offices are located at Paseo de los Tamarindos 400-B, 27th Floor, Bosques de las Lomas, 05120 Mexico, D.F.,
Mexico, our telephone number at that address is (5255) 5261-8000.
Desc’s agent for service for actions brought by the SEC pursuant to the requirements of U.S. federal securities laws is CT
Corporation System, which is located at 111 Eighth Avenue, 13th Floor, New York, NY 10011.
See “—Restructuring of our Business Portfolios” in Item 5 for additional information regarding the divestiture of certain of our
businesses.
Principal Capital Expenditures and Divestitures
The table below lists our capital expenditures and other investments by business segment for the periods shown. Capital
expenditures and other investments may include investments in or acquisitions of assets or the capital stock of existing businesses. A
more-detailed explanation of Desc’s principal capital expenditures and divestitures and the restrictions on our capital expenditures is
described under each of the business segments below and in “Item 5. Operating and Financial Review and Prospects—Credit
Facilities” and “—Capital Expenditures.”
16
Year ended December 31,
2001
2002
2003
(In millions)
(1)
Automotive Sector
Chemical Sector
Food Sector
Real Estate Sector (1)
Desc
Ps. 333.1
261.2
185.4
2.8
2.7
Ps.
777.0
278.9
31.3
25.0
5.2
Ps. 556.8
159.2
80.0
2.5
4.1
Total
Ps. 785.2
Ps. 1,117.4
Ps. 802.6
Does not include the Real Estate Sector’s operating expenses, such as expenditures for land acquisitions, construction costs,
permits, architects’ and engineering fees and related expenditures.
B. Business Overview
General
Desc is one of the most important conglomerates in Mexico. It focuses its activity on four business sectors: Automotive,
Chemical, Food and Real Estate. The diversity of Desc allows it to compensate for the effects of the natural economic cycles of the
businesses in which it participates and to concentrate its investments and efforts in areas offering the best economic opportunities.
The following charts depict the percentage of our 2003 consolidated net sales and operating income by business segment:
17
The following chart depicts our stockholders’ equity for each of our sectors as of December 31, 2003:
18
Sales information by geographic market
The following table shows the approximate aggregate sales of Desc’s products for each of the past three years by geographic
region:
Net Sales for the Years Ended December 31,
Region
2001
2002
2003
(Thousands of Pesos)
Europe
U.S. and Canada
Asia
Mexico
Rest of the World
Ps.
Total
618,304
7,858,587
679,395
12,031,813
904,773
Ps.
599,354
7,424,643
732,101
11,073,681
530,601
Ps.
868,708
7,479,705
311,505
12,277,830
817,307
Ps. 22,092,872
Ps.
20,360,380
Ps. 21,755,055
Autoparts
Our Automotive Sector manufactures 31 different types of autoparts products, including light, medium and heavy duty manual
transmissions, constant velocity joints, stamping products, valve lifters, pistons and piston pins, steel wheels, rear and front traction
axles, propeller shafts, gears, gaskets and seals.
We are one of the largest independent autoparts manufacturers in Mexico. For the years ended December 31, 2001, 2002 and
2003, our autoparts business contributed 56.4%, 54.7% and 23.5%, respectively, of our consolidated operating income and 46.1%,
43.0% and 36.3%, respectively, of our consolidated net sales.
The following table presents the net sales generated by our principal autoparts products for the years ended December 31, 2001,
2002 and 2003, and the percentage of this segment’s 2003 net sales that is represented by these products:
% of Net
Sales
Net Sales
2001
2002
2003
2003
(Thousands of Pesos)
Transmissions
Constant velocity joints
Rear and front traction axles
Propeller shafts
Motor valves and tappets, pistons and piston pins
Gears
Pick-up truck bodies and other stamped metal products
Steel and aluminum wheels
Other autoparts(3)
Ps. 2,720,234
1,191,169
1,762,373
651,484
620,671(2)
400,548
1,326,527
506,422
977,797
Ps. 2,691,925
1,110,047
1,261,951 (1)
605,151(1)
596,410
360,098
890,705(1)
472,332
743,191
Ps. 2,436,353
1,155,680
945,029
928,121
504,215
398,064
390,354
391,555
670,933
31.2%
14.8
12.1
11.9
6.4
5.1
5.0
5.0
8.5
Total
Ps. 10,157,225
Ps. 8,731,810
Ps. 7,820,304
100.0%
(1)
Our sales were impacted by the closing of the DaimlerChrysler Lago Alberto Facility and the non-renewal of certain contracts
with DaimlerChrysler (as the parties failed to reach agreement on the principal terms thereof), which collectively translated into
a decline of approximately $200 million in annual sales.
19
(2)
(3)
During October 2001, Desc swapped 60% of its valve business for 40% of TRW Inc.’s piston business (pistons, pins and
tappets). As a result, TRW acquired 100% of the valve business and Desc Automotriz retained 100% of the pistons, pins and
tappets business and the “Moresa” brand.
During 2002, we discontinued our spark plug and electrical parts operations.
The Automotive Sector’s total capital expenditures during 2003 were $50 million, of which $15.5 million was financed using
sale and leaseback transactions. These capital expenditures were principally for the continued implementation of phases I and phases
II of the Tractor Project (propeller shafts, axles, forge and foundry) and the expansion of our production capacity of constant velocity
joints, gears and valve lifters.
The Tractor Project, which consists of the manufacture and sale of parts for axles, semi-axles and output-shafts to Dana
Corporation. In 2002, phase I of the project was implemented and included propeller shafts and forging. During 2003, phase II was
implemented and included the platform and axle businesses. The total sales of this project during 2003 reached $66 million. As of
today, the project is operating at full capacity.
The companies of our Automotive Sector have received numerous quality awards from the Mexican government, clients and
joint venture partners. In 2003, Velcon, S.A. de C.V. (“Velcon”), our subsidiary which manufactures constant velocity joints,
received “The Most Improved Award”, Pintura y Estampado, S.A. de C.V. (“Pemsa”), and Ejes Tractivos, S.A. de C.V., our
subsidiaries that manufacture stamping products and rear axles respectively received the “Zero Defects” and “Quality Master”
awards, Morestana, S.A. de C.V. (“Morestana”) and Transmisiones y Equipos Mecánico, S.A. de C.V. (“Tremec”), our subsidiaries
that manufacture valve lifters and manual transmissions each received the “Zero Defects” award and Cardanes, S.A. de C.V.
(“Cardanes”), our subsidiary that manufactures propeller shafts received the “Quality Master” awards from Renault-Nissan. Also in
2003, Velcon received the “Volkswagen Group Award” from Volkswagen, Cardanes received the “Kenworth Mexicana” award from
Kenworth, S.A. de C.V. and TF Victor, S.A. de C.V. (“TF Victor”), our subsidiary that focuses in aftermarket products, received an
award from the Confederación Nacional de Talleres de Servicio Automotriz y Similares.
Cardanes received the “Dana Quality Leadership Process” and the “Supplier of the Year” award from General Motors in 2001.
Pemsa and Velcon received a “Supplier of the Year” award from General Motors in 2001. In 2001, Velcon, TF Victor and Morestana
received the “Yurio Shoh” award from Nissan.
All of our plants that supply OEMs are QS-9000 certified, which qualifies them as each approved suppliers to DaimlerChrysler,
Ford and General Motors. Tremec, Cardanes and TF Victor have received ISO-14001 certification, which is an international standard
for environmental management.
Market overview; competition
We sell autoparts to OEMs for installation in new cars and trucks, among others, as well as to distributors for sale in the
autoparts aftermarket. Our significant OEM customers include General Motors, Dana, Ford, Renault-Nissan, Volkswagen,
DaimlerChrysler, International, Getrag, ZF-Meritor, Kenworth, BMW, Aston Martin, John Deere and Freightliner.
20
Both the OEM market and the aftermarket for autoparts are highly competitive with regard to price and quality. We compete
with numerous domestic and foreign manufacturers of autoparts. We continually seek to maintain a competitive advantage over other
manufacturers with respect to productivity and product quality. We accomplish this, in part, through technical assistance and license
agreements with leading foreign manufacturers of autoparts, the development of our own technology, our knowledge of the markets
in which we compete and our ability to achieve manufacturing efficiencies.
The table below presents information concerning our domestic and export sales of autoparts. Approximately 91.7% of our
exports of autoparts are to the United States and Canada.
% of Net Sales
2001
Domestic market
OEMs
Aftermarket
Export market (1)
Total export sales (Ps. in millions)
Total export sales ($ in millions)
(1)
18%
17%
65%
Ps 6,592.0
$ 638.0
2002
18%
17%
65%
Ps. 5,695.4
$
555.0
2003
14%
19%
67%
Ps. 5,234.0
$
475.0
Includes “indirect” exports by OEMs that purchase parts from us, direct exports, and aftermarket exports.
In 2003, exports by the Automotive Sector constituted 67% of its total sales to more than 21 countries, which furthers our
objective of diversifying our markets.
Technological assistance, licensing agreements and joint ventures
Most of our major autoparts are produced using technology and licenses from leading international automobile manufacturers
and autoparts producers. Through these arrangements, we have access to up-to-date technology necessary to manufacture automotive
components competitively in world markets. In many cases, these arrangements not only provide us with technological information,
but also give us access to worldwide markets and customers. The following are the most significant of these arrangements:
Licensor
Product
Termination Date
Dana Corporation
Driveshaft assemblies and light axle assemblies
and related products
GKN Industries Limited
Constant velocity joints Tripod plunging joints
and drive shafts
21
Evergreen unless terminated upon eighteen
months written notice, provided such notice is
not given prior to January 1, 2006. This contract
also contains other customary termination
provisions.
Renews automatically for successive one year
terms unless either party gives twelve months
prior written notice of termination. This contract
also contains other customary termination
provisions.
Licensor
Hayes Lemmerz International
Product
Termination Date
Steel wheels
January 15, 2009. This contract also contains
other customary termination provisions.
Generally, under technology and license agreements, these foreign manufacturers provide us with technological assistance or
license their proprietary technology to us in return for a fee based upon a percentage of sales. These technology assistance and license
agreements typically were entered into for initial fixed terms; however, many are renewed on an annual or biannual basis, and could
now be terminated by either party on relatively short notice. We also develop our own technology with respect to some automotive
products, such as transmissions, pistons, piston pins, valve lifters and stamping products and we work with our partners to jointly
develop technologies for specific applications.
We are also partners with some of these foreign manufacturers in joint venture companies that produce various automobile parts
utilizing technology licensed by the foreign joint venture partner. In the fourth quarter of 2000, we restructured the ownership of
Velcon, our joint venture with Dana Corporation and GKN Industries Limited, which manufactures constant velocity joints. As a
result of this restructuring, Desc Automotriz increased its ownership to 51%, GKN increased its ownership to 49% and Dana exited
this subsidiary.
During October 2001, Desc reached an agreement to swap 60% of its valve business for 40% of TRW Inc.’s piston business
(pistons, piston pins and valve lifters). This transaction ended the partnership between TRW and Desc Automotriz, as TRW acquired
100% of the valve business. However, Desc Automotriz retained 100% of the pistons, piston pins and valve lifters business and
retained the “Moresa” brand, which is a leader in the Mexican autoparts market.
During July 2001, Desc sold its heavy “duty and medium” duty truck clutch business (Transmisiones TSP, S.A. de C.V.) to
Eaton Corporation.
In June 2002, as part of our broader efforts to divest assets that are underperforming or non-strategic, we closed our spark plugs
(Bujías Mexicanas, S.A. de C.V.) and electrical parts (Industria Eléctrica Automotriz, S.A. de C.V.) businesses, which we believe is
an important step to enhancing our competitive stance.
In January 2004, we sold our aluminum wheel business to Hayes Lemmerz International, Inc. and acquired Hayes Lemmerz
International Mexico, Inc.’s equity stake in Steel Wheels, S.A. de C.V., a manufacturer of steel wheels. As a result, Desc Automotriz
now owns 100% of the equity of Steel Wheels, S.A. de C.V.
The following is a list of the most significant of our joint ventures in the Automotive Sector and the percentage ownership of our
partner in the joint venture:
Joint Venture Company
Joint Venture Partner
Dana Corporation
GKN Industries Limited
Spicer, S.A. de C.V.
Velcon, S.A. de C.V.
% Ownership
By Joint
Venture Partner
49.0
49.0
22
Distribution arrangements
Our autoparts products generally are sold by means of open purchase orders, which require us to supply products for particular
model releases during the life of the platform. We have been seeking to increase our participation in the export market. In 2002,
exports represented 65% of Desc Automotriz’ total sales, while in 2003 exports represented 67% of its total sales. The autoparts
exports in 2003 totalled Ps. 5,233,967 or $475 million.
Suppliers
The primary raw materials used in the manufacture of our autoparts are iron castings, steel and aluminum. Generally, these raw
materials are available from numerous qualified sources in quantities sufficient for our needs, and, normally, we do not experience
difficulty in obtaining these commodities. However, in 2003 and first half of 2004, steel prices increased significantly. We cannot
assure you that if steel prices increase or persist, Desc will not experience increased costs or disruptions in supply over the remainder
of the year or in the long term, or that such increased costs will not adversely impact earnings.
Properties/plants
During the past few years, we have implemented a modernization program to improve our existing autoparts manufacturing
facilities and also built new facilities to replace outdated facilities. We invested approximately Ps. 333,071 in this program in 2001,
Ps. 776,994 in 2002 and Ps. 556,810 in 2003. We believe that the resulting improvements in efficiency, the increased flexibility in
utilizing excess plant capacity and decreases in fixed costs resulting from this modernization program have enabled us to improve our
operating margins.
The average capacity utilization increased from 53% in 2002 to 55% in 2003, reflecting a combination of the moderate
improvement of the U.S. economy and increased sales from the Tractor Project.
We produce our autoparts at 17 plants located throughout Mexico and one plant located in the United States. It is our policy to
own our facilities. A few sites are leased under long-term leases. Some of our principal facilities are subject to mortgages and other
security interests granted to secure indebtedness to certain financial institutions. The following table presents the principal products
produced at each of the most significant of these plants and their locations and their respective plant capacity and rates of utilization:
Company
Location of the plant
Products
Ejes Tractivos, S.A. de C.V.
La Presa, Estado de
México
Front and rear axles
Transmisiones TSP, S.A. de
C.V.
Transmisiones y Equipos
Mecánicos, S.A. de C.V.
Pedro Escobedo, Qro.;
Knoxville, Tennessee
Querétaro, Qro.
Medium & heavy
transmissions
Light and medium-duty
manual transmissions
Stamping & Wheels, S.A. de
C.V.
Pistones Moresa, S.A. de
C.V.
Tlanepantla, Estado
de México
Celaya, Gto.;
Saltillo, Coah.;
Celaya, Gto.
Plant capacity (in
thousands / year)
Utilization
30 %
88 %
Steel wheels
320 rear axles
565 rear axles (tractor
line)
69 medium & heavy
transmissions
282 light transmissions
2,267 heavy-duty
components
6,100 pieces
Pistons
Pistons
Piston Pins
11,800 pieces
1,200 pieces
23,500 pieces
30 %
80 %
47 %
23
24%
66 %
50 %
37%
Location of the plant
Company
Pintura, Estampado y
Montaje, S.A. de C.V.
Velcon, S.A. de C.V.
Forjas Spicer, S.A. de C.V.
Cardanes, S.A. de C.V.
Engranes Cónicos, S.A. de
C.V.
TF Víctor, S.A. de C.V.
Morestana, S.A. de C.V.
Autometales, S.A. de C.V.
Plant capacity (in
thousands / year)
Products
Utilization
Celaya, Gto.
Stamping products
32,000 strokes
35%
Celaya, Gto.
Querétaro, Qro.;
Tlaxcala, Tlax.
Querétaro, Qro.
Constant velocity joints
Steel forging
2,900 pieces
50 tons
64%
45%
Propeller shafts and
universal joints
51%
Querétaro, Qro.
Gears
585 propeller shafts
assembly – pieces
756 propeller shaft,
tractor line – pieces
850 sets
Naucalpan, Estado de
México
Aguascalientes, Ags.
La Presa, Estado de
México
Gaskets and seals
24,275 pieces
46%
Valve lifters
Iron casting foundry
14,238 pieces
24 tons
87%
62%
58%
78%
We believe that these facilities are in good condition and are adequate to meet customer requirements. We are in the process of
expanding the production capacity of our gears production facility to 184,000 kits per year.
Chemicals
We conduct our chemical business through various chemical subsidiaries, such as Industrias Negromex, S.A. de C.V., Resirene,
S.A. de C.V., Quimir, S.A. de C.V., Plastiglás de México, S.A. de C.V., Nhumo, S.A. de C.V. and Rexcel, S.A. de C.V. The
Chemical Sector produces and sells chemical products and is the leading (and in some cases the only) producer of some of these
chemical products in Mexico. Our main chemical products include synthetic rubber, phosphates, polystyrene, acrylics, carbon black
and particle board and laminates. For the years ended December 31, 2001, 2002 and 2003, the Chemical Sector contributed 27.0%,
29.1% and 21.0%, respectively, of our consolidated operating income, and 33.2%, 35.4% and 36.5%, respectively, of our
consolidated net sales.
The following table presents the net sales generated by our principal Chemical Sector products for the years ended December
31, 2001, 2002 and 2003, and the percentage of this segment’s 2003 net sales that is represented by these products:
% of Net
Sales
Net Sales
2001
2002
2003
2003
(Pesos in thousands)
Synthetic rubber
Polystyrene
Phosphates
Acrylics sheet
Carbon black
Waterproofing and adhesives(1)
Ps. 1,948,187
1,135,507
1,321,374
458,628
588,454
941,326
24
Ps. 2,295,598
1,061,507
1,088,806
581,053
572,355
918,328
Ps. 2,663,382
1,217,898
1,187,749
761,688
731,961
694,805
33.9%
15.5
15.1
9.7
9.3
8.8
% of Net
Sales
Net Sales
2002
2001
Particle board & laminates
Phenol(2)
Emulsions (specialty lattices) (3)
Total
(1)
(2)
(3)
2003
424,435
415,117
101,090
554,525
63,867
75,822
601,467
9,506
0.0
Ps. 7,334,118
Ps. 7,211,861
Ps. 7,868,456
2003
7.6
0.1
0.0
100.0%
We sold our waterproofing and adhesives businesses in September 2003.
We discontinued our phenol business in February 2004.
We combined our emulsions business with our synthetic rubber business in January 2003.
Our chemical products are used in the manufacture of a wide variety of other products, including asphalt and plastic modifiers,
disposables, packaging, tires and other industrial rubber goods, automotive rubber parts, footwear, carpeting, furniture and detergents.
We sell our chemical products in Mexico and export markets, exporting products to over 40 countries in 2003. Our export sales were
Ps. 3,106,309 in 2003 and Ps. 2,538,326 in 2002.
In the chemical sector, our subsidiaries Industrias Negromex, S.A. de C.V., Nhumo, S.A. de C.V., Resirene, S.A. de C.V.,
Plastiglás de México, S.A. de C.V., Rexcel, S.A. de C.V., Quimir, S.A. de C.V. and Industrias Resistol, S.A de C.V., each has
received ISO-9002 or ISO-9001 certification, which are international standards for quality management and assurance adopted by
more than 90 countries, thus enhancing our reputation as a reliable, high-quality supplier of chemicals.
Market overview; competition
We are Mexico’s only producer of synthetic rubber and carbon black, and we are a leading Mexican producer of polystyrene and
phosphates. The majority of our chemical products are sold in both the domestic and export markets. The domestic market accounted
for 61% of our chemicals sales in 2003, and the export market accounted for 39% of such sales. We compete with foreign companies
such as Royal Dutch/Shell Company, Dow Chemical Company, Basf Chemical Company, Nova Chemicals Corp., Atofina
Chemicals, Inc., Degussa Corporation, Georgia Gulf Chemicals, Goodyear Tire & Rubber Company, Rhodia de México, S.A. de
C.V., Astaris LLC and Ralph Wilson Co.
Technology and Joint Ventures
With respect to the majority of our chemical businesses, we utilize proprietary technology that we have developed or acquired
from third parties. Our carbon black business utilizes technology developed by Cabot Corporation, our partner in this business and a
world leader in carbon black research, development and production. Our polystyrene business utilizes technology originally licensed
from Monsanto Company, which the Chemical Sector has improved and developed over the years. Similarly, our synthetic rubber
business utilizes technology originally licensed from Phillips Petroleum, which the Chemical Sector has improved and adapted over
the years. More recently, we have entered into reciprocal technological exchange agreements in connection with our joint ventures in
synthetic rubber with Repsol Química, which is a world leader in synthetic rubber research, development and production. Our
phosphate business utilizes technology originally licensed from Monsanto Company, which the Chemical Sector has improved and
further developed, and has also developed new technology over the years.
The following is a list of the most significant of our joint ventures in the Chemical Sector and the percentage ownership of our
partner in the joint venture:
Joint Venture Partner
Repsol Química, S.A.
Cabot Corporation
Calsak Corporation
(1)
Joint Venture Company
Dynasol Companies (1)
Nhumo S.A. de C.V.
Plastiglás de México, S.A. de C.V.
This entity is accounted for under the proportionate consolidation method.
25
% Ownership
By Joint
Venture Partner
50.0
40.0
5.0
Supply arrangements and suppliers
Petróleos Mexicanos (“Pemex”) is one of our principal suppliers of raw materials used in our chemical businesses. Pemex
supplies us styrene monomer, hydrogen cyanide, carbon black feedstock, natural gas and methanol. We also purchase raw materials
from numerous other domestic and foreign suppliers. The market for the raw materials used by our Chemical Sector is highly price
competitive, and we believe that there generally is an adequate supply of these raw materials. However, in 2003 and 2004, there was
an increase in the price of styrene monomer, butadiene monomer, acrylonitrile monomer and natural gas, which was due to the
increase in crude oil prices and severely affected the industry in general. The increase in raw material prices could not be transferred
with the same speed to our final products due to aggressive competition and the weakness of product demand.
Products
The following table presents information with respect to our chemical products:
Product
Synthetic rubber
Polystyrene
Carbon black
Phosphates
Acrylic sheets
Particle boards and laminates
Principal Uses
Production of tires, footwear, asphalt and
plastic modifiers, adhesives, industrial rubber
products, automotive engines and other
autoparts
Production of plastics for disposable
packaging, home appliances, cassettes,
compact discs, light fixtures, school supplies
and office equipment
Production of tires, ink, hoses, belts and other
products using rubber
Detergents, water treatment and soft drink
production
Manufacturing of signs, displays,
advertisements and safety devices
Manufacturing of furniture, office and home
products, kitchen countertops and tabletops,
and floors
Raw Materials Used in the
Production of the Product
Butadiene and styrene monomer
Styrene monomer
Carbon black feedstock and natural gas
Phosphoric acid and soda ash or caustic soda
Polymethyl Metha Acrylate
Raw wood, urea and melamine resins
Synthetic Rubber
This is the largest business of the Chemical Sector. In 2003, the synthetic rubber business contributed 33.9% of the Chemical
Sector’s net sales. We are the only manufacturer of synthetic rubber in Mexico. We produce solution rubber and emulsion rubber, as
well as elastomers, thermoplastics and specialty rubbers. We are a leading manufacturer of asphalt modifying rubbers, which we sell
to highway
26
paving companies in the United States and more recently in Europe. Synthetic rubber products are exported to over 40 countries,
principally to the United States, Canada and countries in Europe, South America and the Far East. In 2003, exports accounted for
approximately 79% of our synthetic rubber sales.
Polystyrene
Our polystyrene business produces crystal polystyrene (GPPS) and high impact polystyrene (HIPS), which are used in
disposable packaging and packing industries, lighting fixtures, school supplies, office equipment and home appliances, including
audio and video equipment and refrigerators. In 2003, our polystyrene business contributed 15.5% of the Chemical Sector’s net sales.
Most of our polystyrene sales are to the domestic market, where we estimate that our market share in 2003 was approximately 45%.
We attribute our dominance in the domestic polystyrene market to our ability to customize products, the quality of our service and our
timely delivery.
Carbon Black
We are the only manufacturer of carbon black in Mexico. Carbon black is principally used by the tire industry. Cabot
Corporation, a world leader in carbon black research, development and production, owns a 40% interest in our carbon black business.
We believe that our share of the domestic carbon black market in 2003 exceeded 95% and attribute our dominance to our technology,
our large installed plant capacity, our focus on those carbon black varieties which have the highest demand, our continuous
development of carbon black varieties with specific competitive advantages for their application, and our low-production costs which
enable us to price our products competitively. Approximately 37% of our carbon black sales in 2003 were exported primarily to the
United States, Germany, Spain and Latin America.
Phosphates
Our phosphates business produces chemicals for use in the manufacturing of household detergents, in soft drinks and for water
treatment. In 2003, our phosphates business contributed 15.1% of the Chemicals Sector’s net sales. We are the largest manufacturer
of phosphates in Mexico, and rank third in rated capacity of industrial sodium phosphates worldwide. In 2003, we had approximately
a 78% market share of the phosphates business in Mexico. We principally compete with Rhodia de México, S.A. de C.V. and some
imports from Astaris of USA.
Acrylic Sheet
We are the leading manufacturer of acrylic sheets in Mexico. These products are used in the manufacture of signs, displays,
advertisements and safety devices. Approximately 43% of our sales of these products in 2003 were to the United States, Canada,
Europe, Central and South America. Our manufacturing technology allows us to develop differentiated products targeted at greater
value-added markets in the different countries where our products are sold. We estimate that our market share in 2003 was
approximately 41% of the Mexican market.
Particle Board And Laminates
We manufacture particle board and plastic laminates using wood as a principal raw material. We sell these products to
manufacturers in the furniture and construction industries. Approximately 91% of our sales of these products in 2003 were sold in the
domestic market, with the remainder being exported principally to North America and Central America. Last year there was a
shortage of cellulosic supply
27
due to the closing of certain saw mills and new regulations from the Mexican government. We acquired forest plantations in 2001,
which are operated by Forestaciones Operativas de México, S.A. de C.V. This acquisition guaranteed the supply of the raw materials
necessary for the production of particle board.
Properties/plants. The table below presents the location of the facilities at which our chemical products are manufactured and
their respective plant capacity and rates of utilization:
Company
Industrias Negromex, S.A.
de C.V.
Dynasol Elastómeros, S.A.
de C.V.
Dynasol Elastómeros, S.A.
Industrias Negromex, S.A.
de C.V.
Resirene, S.A. de C.V.
Nhumo, S.A. de C.V.
Fenoquimia, S.A. de C.V.
Quimir, S.A. de C.V.
Plastiglás de México, S.A.
de C.V.
Rexcel, S.A. de C.V.
Location of the Plant
Products
Plant capacity
(in thousands /year)
Utilization
Altamira, Tamps.
Synthetic rubber
Emulsion Rubber
96,000 tons
84%
Altamira, Tamps.
Solution Rubber
90,000 tons
86%
Santander, Spain
Altamira, Tamps.
Solution Rubber
Nitrile Rubber
110,000 tons
24,000 tons
90%
75%
Coatzacoalcos, Ver.
Xicohtzingo, Tlax.
Altamira, Tamps.
Cosoleacaque, Ver.
Polystyrene
80,000 tons
70,000 tons
120,000 tons
24,000 tons
84 %
57 %
93%
97%
100,000 tons
85,000 tons
40,000 tons
10,700 sheets
5,000 sheets
4,600 m2
10,270 m2
100%
69 %
20 %
73 %
92 %
71 %
89 %
Coatzacoalcos, Ver.
Tultitlán, Edo. de Méx.
Lechería, Edo. de Méx.
Ocoyoacac, Edo. de Méx
San Luis Potosí, SLP
Lerma, Edo. de Méx.
Zitácuaro, Mich.
Carbon black
Methyl methacrylate
(MMA)
Phosphates/phosphorus
derivatives
Acrylic sheet
Laminates/particle board
We believe that these facilities are in good condition and are adequate to meet our needs, and we do not currently have any plans
to build any new facilities or expand our existing facilities. We intend to increase our utilization levels by increasing our sales
volumes to existing and new clients.
It is our policy to own our facilities. A few sites are leased under long-term leases. Some of our principal facilities are subject to
mortgages and other security interests granted to secure indebtedness to certain financial institutions.
The Chemical Sector’s research efforts are focused on the development of specialty chemical products, which enhances our
competitive position and is expected to generate higher profit margins. Our styrenic and acrylic transparent copolymers and high
impact resistant acrylic sheets are examples of such specialty products yielding higher margins. At the end of 2001, the Chemical
Sector began to use a miniaturized robotic system acquired from Symyx Technologies, establishing a strategic technological platform
to compete in the chemical industry for the 21st century.
Food
Our food operations involve the production and sale of pork and shelf-stable branded products. For the years ended December
31, 2001, 2002 and 2003, our food segment contributed 8.6%, 8.7%, and 12.8%, respectively, to our consolidated operating income,
and 16.7%, 17.6%, and 18.0%, respectively, to our consolidated net sales.
28
Our strategy for our Food Sector business has been to gradually shift its product mix away from commodity products to branded
products, which have more stable margins.
We use Corfuerte, S.A. de C.V. (“Corfuerte”) as our vehicle for the expansion of our branded food products business in Mexico
and Authentic Acquisition Corporation for the expansion of this business in the United States.
The following table presents the net sales generated by each product line in our food segment for the years ended December 31,
2001, 2002 and 2003 and the percentage of this segment’s 2003 net sales that is represented by each product line:
% of Net
Sales
Net Sales
2001
2002
2003
2003
(Pesos in thousands)
Shelf-stable branded products (Mexico)
Shelf-stable branded products (U.S.)
Pork (1)
Total
(1)
1,412,414
779,790
1,501,145
1,487,402
763,838
1,330,749
1,619,564
816,761
1,447,269
Ps. 3,693,349
Ps. 3,581,989
Ps. 3,883,594
41.7
21.0
37.3
100.0%
We discontinued our pork business located in the Bajio in 2002.
Products
Pork. Our pork business is conducted through our subsidiary Agrokén, S.A. de C.V., which is operated principally in the
southeastern region of Mexico. We have operating slaughterhouses in Guanajuato and Yucatán, and from the latter we supply
products for the export market, principally to Japan. Our domestic sales strategy seeks to reduce the intermediary channels between
producers like us and consumers by establishing distribution centers where consumers may buy different pork products directly from
us. We currently operate 43 distribution centers. Our pork products are marketed under the “Keken” brand name, Mexico’s
southeastern leader.
Shelf-stable branded products. Our branded food product operations are conducted in Mexico through Corfuerte and in the
United States through Authentic Acquisition Corporation. We are a domestic leader in the production of tomato sauce and related
products and canned vegetables with our “Del Fuerte” brand. We also have a large share of the domestic corn oil and gelatin with our
“La Gloria” brand of products. We participate in the canned jalapeño peppers market and in the salsa market with our “Del Fuerte”
brand, in the coffee market with our “Blasón” brand, in the canned tuna market with our “Nair” brand and in the ketchup market with
our “Embasa” brand. We also have exclusive distribution rights in Mexico for “Smuckers™” jams, “Zuko™” and “Livean™” drinks
mix, which have been embraced by the domestic market and continue to increase in market share.
In the United States, we manufacture and/or distribute a wide variety of high quality, authentic Mexican food products such as
salsas, taco sauces, other Mexican sauces, and items such as jalapeño peppers under labels that include La Victoria™ and Embasa™.
Our products are targeted principally at the U.S. Hispanic market, and our brands have strong market positions in the southwestern
and western regions of the United States, particularly in California.
29
Market overview; competition
Pork. The pork industry in Mexico is highly fragmented, but smaller, inefficient companies in Mexico are being replaced by
larger, higher quality, more efficient, integrated companies, principally located in the states of Sonora, Sinaloa and Yucatán. We have
developed a fully integrated business with high quality genetics and advanced farming techniques, composed of breeding farms and
facilities for raising, slaughtering, cutting and processing pork. We have approximately a 50% market share in the Southeastern
region of Mexico.
We also have exported Ps. 265,574 of pork cuts and products to Japan, which contributed 6.8% of the Food Sector’s net sales in
2003.
Shelf-stable branded products. The shelf-stable branded food industry in Mexico is highly competitive. Corfuerte has significant
market share in Mexico with respect to tomato puree, which has a 63.2% market share and ketchup, which has a 22.2% market share.
Corfuerte also has significant market shares in the canned vegetables and corn oil sectors. Its principal competitors are Del Monte,
Herdez, La Costeña and Clemente Jacques. The principal competitors of Nair’s products are Herdez, Dolores, Tuny and Calmex. In
the United States, our products compete principally with Mexican food products that are distributed in the southwestern and western
regions of the United States and are marketed principally to the Hispanic market, particularly in California. Its principal competitors
are Pace, Old El Paso, Tostitos, Ortega, Herdez, La Costeña and San Marcos.
Supply arrangements and suppliers
The primary ingredients used by our Food Sector in our branded food operations are tomatoes, carrots, onions, corn and peppers.
The primary supplies used in our pork operations are corn, sorghum grain and soybean. These products are purchased from various
suppliers at prevailing market prices. We have not recently experienced any shortages in the supply of these products and generally
expect these products to be generally available for the foreseeable future.
Joint Ventures
The following is a list of our joint ventures in the Food Sector and the percentage ownership of our partner in the joint venture:
Joint Venture Company
Joint Venture Product
Grupo Casares
Nutrimentos Agropecuarios Cargill, S.A. de C.V.
Silvia Holm Baigts
(1)
Grupo Porcícola Mexicano
Nutrimentos Agropecuarios Purina, S.A. de
C.V.(1)
Intercafé, S.A. de C.V.
This subsidiary is reported under equity in associated companies and unconsolidated subsidiaries.
30
% Ownership
By Joint Venture Partner
37.0
50.0
50.0
Properties/plants
The following table presents the principal production facilities of our food segment and their respective plant capacity and rates
of utilization:
Company
Grupo Porcícola Mexicano,
S.A. de C.V.
Corfuerte, S.A. de C.V.
Intercafé, S.A. de C.V.
Authentic Specialty Food,
Inc.
Nair Industrias, S.A. de C.V.
Location of the plant
Yucatán and Penjamo
Activity
Plant capacity (in
thousands / year
(except as noted))
Utilization
49,000 pigs / month
Los Mochis, Sinaloa
Oaxaca, Oax.
Rosemead, California
Pork production /
slaughterhouse
Tomato products
Coffee
Salsa and chili products
100%
6 million in containers
212 tons / month
166,226 pounds
97%
39%
40%
Mazatlán, Sinaloa
Tuna
2,500 boxes
70%
In addition, Corfuerte has five distribution centers in Los Mochis, Guadalajara, Monterrey, Veracruz and Mexico City.
We believe that these facilities are in good condition, and we do not currently have any plans to build any new facilities or
expand our existing facilities. We intend to increase our utilization levels by increasing our sales volumes to existing and new clients.
It is our policy to own our facilities. A few sites are leased under long-term leases. Some of our principal facilities are subject to
mortgages and other security interests granted to secure indebtedness to certain financial institutions.
Real Estate
Our Real Estate Sector develops land for commercial, residential and tourism and resort uses. We have over 30 years of
experience in this business and believe that we are among the largest diversified real estate developers in Mexico. Desc owns large
land reserves for residential development in the Mexico City metropolitan area (Lagos de la Estadía) as well as properties for tourism
development along the Pacific coast of Mexico. We focus on the upper-income segments of the real estate market, developing high
quality projects that are unique in their respective market segments. The Real Estate Sector was the developer during the late 1960s,
1970s and early 1980s of “Bosques de las Lomas”, a five million square meter upper-income residential and commercial development
in Mexico City, and of “La Estadía”, a high-income residential suburb of Mexico City. Our more recent projects include the Centro
Comercial Santa Fe in Mexico City, Mexico’s largest regional shopping mall, Arcos Bosques Corporativo, Mexico City’s largest
office complex, Punta Mita, an upscale tourist resort, and La Punta Bosques and Bosques de Santa Fe, both of which are residential
projects in Mexico City, which target upper-income residents.
For the years ended December 31, 2001, 2002 and 2003, our real estate business contributed 7.9%, 7.6% and 42.7%,
respectively, of our consolidated operating income and 4.0%, 3.9% and 9.1%, respectively, of our consolidated net sales. As part of
our strategy for this sector, we continue to assess the profitability of each of our real estate projects. In February 2001, we sold our
stake in the Four Seasons Punta Mita Hotel to Strategic Hotel Capital LLC for an aggregate consideration of $52 million (including
the assumption by the buyer of $11 million of net debt), and in September 2001, we sold our stake in Centro Comercial Santa Fe for
an aggregate amount of $70 million. In 2002 and 2003, we sold 14 of 18 commercial lots in the Santa Fe Reserve for $15 million.
Additionally in 2003, we sold an important land reserve, known as Bosques de La Estadía, with a total area of 3.75 million square
meters in the Mexico City metropolitan area, for $76 million. Also, in 2003, we sold the land on which the West Tower of Arcos
Bosques Corporativo was to be constructed for $20 million.
31
The following is a list of the major properties we are developing, which are discussed in greater detail below:
Name and Location
Commercial development projects (office
buildings)
Arcos Bosques Corporativo, México, D.F.
Land Area
(square
meters)
Available
for Sale
Ownership
by Desc (%)
Other Partners
72,570
8,702
100
None
Residential development projects
La Punta Bosques, México, D.F.
Bosques de Santa Fe, México, D.F.
293,000
1,100,000
4,612
142,165
100
73
None
Several investors
Tourist/resort development projects
Punta Ixtapa, Guerrero
Punta Mita, Nayarit
390,000
6,770,000
124,676
2,742,000 (1)
100
100
None
None
Other properties
Lagos de la Estadía, Estado de Mexico
2,412,572
2,412,572
39.4
La Estadía, Estado de Mexico
Los Cabos, Baja California Sur(3)
Punta Gorda, Baja California Sur
Santa Fe land reserve
105,514
38,521
4,000,000
89,000
31,318
38,521
4,000,000
26,386
100
14.7
25
45
Fernando Senderos, Lucía Senderos and
several investors(2)
None
Grupo Casa, S.A. de C.V.
Grupo Casa, S.A. de C.V.
Several investors, of which the principal
investors are Palacio del Hierro and
Liverpool
(1)
(2)
(3)
Punta Mita’s approximate available area for sale does not include roads, green areas, service areas and future golf courses.
The stockholders of Operadora de Nayarit, S.A. de C.V. (Lagos de la Estadía project) are Desc, Fernando Senderos and Lucía
Senderos, who is Mr. Senderos’s sister, and their ownership interest in the Lagos de la Estadía project is 39.4%, 3.5% and 8.1%,
respectively.
Desc owns 100% of the land and has entered into a joint venture agreement with Grupo Casa, S.A. de C.V. (“Grupo Casa”)
pursuant to which Desc contributed the land and Grupo Casa developed the land. Desc is entitled to 14.7% of both the timeshare units constructed and the net income generated by the hotel built on the site.
We invested approximately Ps. 771,809 in 2001, Ps. 433,876 in 2002 and Ps. 438,223 in 2003 to develop our real estate
properties for commercial, residential and resort use.
Strategy for the Real Estate Sector
We intend to continue to sell our existing inventory of developed properties and our land reserves, so long as conditions in the
real estate market in Mexico remain favorable. We also intend to continue to seek partnerships to develop our land reserves in order
to reduce our risk and increase the profit margins and market share of our Real Estate Sector. We also continue to evaluate the
profitability of each of our remaining real estate projects and may decide to divest additional properties in the future.
32
We believe that our real estate projects, which are aimed at the high-end market, generally offer superior quality, amenities and
value.
All of our projects are organized into a predetermined number of phases designed to reduce our risk and exposure to market
conditions and shifts in the economy. When market indicators project a downturn in the real estate market, a project can be stopped in
an orderly and cost-efficient manner at the end of a phase of construction and further delayed construction until market conditions
improve, and when these indicators predict high growth at an accelerated pace, two or more phases can be initiated simultaneously.
We generally subcontract the design and construction of projects, including, but not limited to, hiring independent project managers,
architects, construction companies and project supervisors.
Commercial developments
Arcos Bosques Corporativo. This project consists of a five-phase office development located in Bosques de las Lomas. The first
3 phases, the East Building, the East Tower and the first stage of the North Building A project were completed and sold since 1999. In
November 1999, pursuant to a 50/50 partnership with Ingenieros Civiles Asociados (“ICA”), Mexico’s largest construction company,
we began the construction of the B and C stages of the North Building. The first stage, which consisted of 16,500 square meters of
office area available for sale, was finished and sold by 2001. Desc and ICA reinvested the proceeds from the North Building B to
commence the construction of North Building C in November 2001. Stage C was completed by March 2004, and 69% of the area
available for sale has been sold. The remaining area is expected to be sold during 2004. Desc sold the land for the development of the
West Tower for $20 million, and is in negotiations to sell the remaining 8,702 square meters of land in Arcos Bosques Corporativo.
Residential developments
Bosques de Santa Fe. This 1,100,000 square meter development, located two miles south from the Santa Fe shopping mall, is
currently being developed in partnership with private investors. The current plans call for the development of a high-income
residential community with a nine-hole golf course. We own 73% of this development. We began building the infrastructure for this
project in 1998 and commenced selling lots in June 1998. As of December 31, 2003, we had sold 66% of the available units. During
the third quarter of 2001, we increased our stake in Bosques de Santa Fe from 50% to 73% with an investment of $30 million.
Tourist/resort developments
Punta Ixtapa. This development is a resort consisting of approximately 390,000 square meters located on the western end of the
hotel zone of Ixtapa. As currently planned, the total project will consist of a residential area containing lots for private construction,
finished homes, villas and condominiums, a recreation center and two beach clubs. This project is intended to be developed in five
phases over a twelve-year period. The first phase, consisting of the construction of finished homes and villas on a site of
approximately 63,000 square meters, has been fully sold and construction has been completed. The second and third phases,
consisting of the development and sale of residential lots on a site of approximately 153,000 square meters commenced in June 1993,
of which approximately 88% of the lots were sold as of December 31, 2003. The remaining land is available for two additional phases
of development for which firm plans have not yet been formulated.
Punta Mita. In 1997, Desc commenced the development of its Punta Mita project; which is the Real Estate Sector’s highest
profile tourist project. Punta Mita is a 6.77 million square meter resort
33
project, with 14 kilometers of shoreline, which is located in Bahía de Banderas Nayarit on the coast of the Mexican Pacific near
Puerto Vallarta’s International Airport. We plan on developing this project over a 20-year period. The project will include 3 golf
courses, 5 hotels and a variety of real estate properties (both for homeowners and property subdevelopers). Punta Mita is targeting the
upper-income market of Mexico, United States and Canada.
The first stage of this project was developed in partnership with the Four Seasons Hotels and included a world-class luxury
hotel, an 18-hole championship golf course and clubhouse, a tennis and sports complex, a fitness club, a spa facility, timeshare units,
villas and residential lots. We invested $100 million in the first phase of this project. We completed the golf course construction in
1998, under the supervision of Jack Nicklaus, and completed the hotel construction in 1999. The hotel and golf course opened for
business on September 1, 1999. The hotel was expanded to 140 rooms in 2000. In February 2001, we sold our participation in the
hotel to Strategic Hotel Capital LLC for $52 million plus the purchaser’s assumption of $11 million in net debt, of which we used
$26.5 million to reduce our consolidated debt. The hotel is currently operated by Four Seasons Hotels Ltd. pursuant to a long-term
contract.
During the first stage of the project, we developed 20 lots of beachfront property, each measuring 10,000 square meters, which
were on average each sold for approximately $1,250,000. We also developed 32 lots on the golf course with ocean-front views, each
measuring 1,000 square meters, of which 12 lots have been sold for approximately $500,000 per lot.
As part of the second stage of this project, we are constructing a Four Seasons development consisting of 65 luxury villas. In
addition we are constructing 37 time-sharing units pursuant to a joint venture with Four Seasons and Strategic Hotel Capital. This
development will be situated adjacent to the Four Seasons Hotel, allowing residents of the development access to common areas,
restaurants and the spa located in the Four Seasons Hotel.
We also sold property to a group of investors that have already commenced the construction of a Rosewood hotel and 56 timesharing villas, which will be marketed as a Rosewood development. We are also considering selling property on the tip of the
peninsula on which a luxury hotel will be situated. In the near term, we will commence the construction of another eighteen-hole golf
course designed by Jack Nicklaus. The second stage of this project will also include the construction of three residential developments
located on the exclusive beachfront property, which will be built by high-profile sub-developers.
We expect a sustained increase of sales for this project due to the increasing interest in such luxury developments. We continue
to invest in the urbanization and infrastructure of this project. This project will include other phases of development, which will be
initiated once the first two stages have been successfully completed.
Other properties
Bosques de La Estadía. In June 2003, Cantiles de Mita, S.A. de C.V. (“Cantiles”) sold all of the territorial reserves of Club
Ecuestre Chiluca, S.A. de C.V. (“Chiluca”) for $76 million. Prior to May 29, 2003, Desc owned 77.26% of Club Ecuestre Chiluca, S.
de R.L. de C.V. (“Club Ecuestre”) and Fernando Senderos and Lucía Senderos owned the remaining 22.74%. On May 29, 2003,
Desc acquired the Senderos’s 22.74% equity stake in Club Ecuestre and agreed to pay Fernando and Lucía Senderos their pro rata
share (based upon their relative equity holdings in Club Ecuestre immediately prior to Desc’s acquisition of the Senderos’s equity
stake, as noted above) of the proceeds of the sale of the Chiluca territorial reserves, with the balance of the proceeds being paid to
Desc.
34
Competition
We believe that Desc, through its real estate business subsidiaries, is one of the largest real estate developers in the commercial
and residential real estate markets in Mexico City. We compete with many mid-size Mexican real estate developers.
Governmental Regulation
The North American Free Trade Agreement (“NAFTA”) became effective on January 1, 1994. Under NAFTA, Mexico, the
United States and Canada agreed to phase out tariffs and other trade barriers on each other’s products, as well as to liberalize or
eliminate many barriers to investment. The lowering of U.S. and Canadian trade barriers has facilitated access to those markets while
the lowering of Mexican barriers to U.S. and Canadian products, and in some cases investments, also has increased the competition in
the Mexican market. While most changes required by NAFTA had to be implemented during the first six years of operation of the
agreement, tariff and non-tariff restrictions on the most sensitive products will continue to be phased down through 2003, or in the
case of a few products, 2008.
In the automotive industry, the liberalization of automotive trade between the parties is now virtually complete, to the extent
required by NAFTA. All autoparts traded between the NAFTA countries are now duty free if they originate in Canada, Mexico or the
United States. NAFTA has also required Mexico to gradually phase out its trade balancing and domestic value-added requirements
imposed on OEMs. The phasing out of artificial restrictions has facilitated the integration of the North American industry, with
beneficial effects for efficient Mexican parts producers such as Desc. This liberalization as required by NAFTA is now essentially
complete in all three countries.
In the chemicals industry, NAFTA requires Mexico to phase out its tariffs to reduce barriers to foreign investment in Mexico,
and imposes requirements that prohibit Pemex from discriminating against U.S. or Canadian persons in the supply of raw materials,
over which Pemex has a monopoly. As in the case of the automotive sector, duties and other restrictions in all three countries have
now been eliminated to the extent required by the NAFTA.
In the food industry, NAFTA requires Mexico to gradually phase out tariffs on imported feed products used by us. Since the
enactment of NAFTA special regulations enacted by the Mexican government have permitted livestock growers to import feed
products duty-free when domestic feed consumption is projected to exceed domestic feed production. While some Mexican farm
groups have recently objected to this continued liberalization, the Mexican government is aware it could face a strong U.S. reaction if
Mexico took restrictive actions.
In the food industry, NAFTA also implements procedures for certification of conformity with health and sanitary requirements
to facilitate the export of Mexican pork and other agricultural products to the United States. The regulatory clearing procedures for
importing pork products from Mexico’s Yucatan Peninsula and the Northwest region into the United States have been put in place
and these areas have been certified as disease-free areas by the U.S. Department of Agriculture. The state of Sonora also exports pork
products to the United States. The United States is finalizing regulations in this regard which would open further export opportunities
for Mexican producers.
Desc continues to benefit from the policy changes required by NAFTA. Despite occasional disputes and threats of restrictions
from both sides of the border, overall compliance has been good. Mexico, Canada and the United States have all benefited from
NAFTA, and each country realizes that if it failed to continue to honor its commitments, such breaches could result in sanctions by
the other countries. These circumstances give greater stability to the liberalization required by NAFTA than the normal unilateral
policies of governments.
35
Domestic and Foreign Laws
Our businesses are subject to extensive Mexican and U.S. federal, state and local and foreign environmental laws concerning,
among other things, emissions to the air, discharges and releases to land and water, the generation, handling, storage, transportation,
treatment and disposal of wastes and other materials and the remediation of environmental pollution caused by releases of wastes and
other materials. The operation of any manufacturing plant and the distribution of chemical products entail risks under environmental
laws, many of which provide for substantial fines and criminal sanctions for violations. There can be no assurance that significant
costs or liabilities will not be incurred with respect to our operations and activities.
For example, the fundamental environmental law in the Mexican federal system is the Ley General del Equilibrio Ecológico y la
Protección al Ambiente (which translates into “General Law of Ecological Balance and Environmental Protection” or the
“Ecological Law”). Under the Ecological Law, the Mexican government has implemented an aggressive program to protect the
environment by promulgating standards concerning water, land and air pollution, hazardous waste and hazardous materials. The
Mexican government also has enacted regulations concerning the importation and exportation of hazardous materials and hazardous
waste. The Mexican federal agency in charge of overseeing compliance with, and enforcing the federal environmental laws is the
Secretaría del Medio Ambiente y Recursos Naturales (the “Ministry of Environmental Protection and Natural Resources” or the
“Semarnat”). As part of its enforcement powers, the Semarnat is empowered to bring administrative proceedings against companies
that violate environmental laws, impose economic sanctions and close temporarily or permanently non-complying facilities.
We, and particularly our Chemical Sector, due to the use and production of substantial amount of substances, have emissions
that are or could become subject to regulatory control. To our knowledge all of our facilities are presently in substantial compliance
with applicable environmental laws as currently enforced.
We are also subject to extensive governmental regulation from both domestic and U.S. governmental entities concerning our
competitive and marketplace conduct, as well as the health, safety and working conditions of our employees.
The Food Sector is subject to extensive governmental regulation from both domestic and U.S. governmental entities concerning,
among other things, product composition, packaging, labeling, advertisement and the safety of our products.
From time to time, additional legislative initiatives may be introduced that may affect our operations and the conduct of our
businesses, and we cannot provide assurance that the cost of complying with these initiatives or that the effects of these initiatives will
not have a material adverse effect on our profitability or financial condition in the future. In addition, we have no basis for predicting
what effect, if any, stricter enforcement of existing laws and regulations would have on our results of operations, cash flows or
financial condition.
Seasonality
Our business is subject to seasonal effects and we have generally experienced the highest level of operations for our Automotive
Sector during the second and third quarters, in the second and third quarter for the Chemical Sector and in the third and fourth
quarters for the Food Sector. Given the nature our real estate business, it is difficult to identify a pattern with respect to the sales of
this sector.
36
C. Organizational Structure
Desc is a holding company and its operations are carried out by its direct and indirect wholly owned subsidiaries. Set forth
below is a list of our principal subsidiaries as of December 31, 2003, including name, country of incorporation or residence,
proportion of ownership interest and, if different, proportion of voting power held:
Country of
Incorporation or
Residence
Name of Entity
Automotive Sector
Desc Automotriz, S.A. de C.V. and Subsidiaries
Chemical Sector
Industrias Negromex, S.A. de C.V.
Quimir, S.A. de C.V.
Resirene, S.A. de C.V.
Rexcel, S.A. de C.V.
Nhumo, S.A. de C.V.
Dynasol Elastómeros, S.A. de C.V.
Real Estate Sector
Cantiles de Mita, S.A. de C.V.
Cañada de Santa Fe, S.A. de C.V.
Promociones Bosques, S.A. de C.V.
Inmobiliaria Dine, S.A. de C.V.
Food Sector
Agrokén, S.A. de C.V. and Subsidiaries
Corfuerte, S.A. de C.V. and Subsidiaries
Authentic Acquisition Corporation and Subsidiaries
Proportion of Ownership
Interest or Proportion of
Voting Power Held
Mexico
99.9%
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
99.9%
99.9%
99.9%
99.9%
60.0%
50.1%
Mexico
Mexico
Mexico
Mexico
100.0%
73.0%
100%
100%
Mexico
Mexico
Delaware, U.S.
99.9%
96.1%
99.9%
As of December 31, 2003, Desc Automotriz and Cantiles de Mita, S.A. de C.V. are our significant subsidiaries. Desc, directly or
through its subsidiaries, Desc Automotriz, Agrokén, Corfuerte and Authentic Acquisition Corporation controls or owns majority
interests in more than 90 companies, including our principal subsidiaries such as Industrias Negromex, S.A. de C.V., Quimir, S.A. de
C.V., Resirene, S.A. de C.V., Rexcel, S.A. de C.V., Nhumo, S.A. de C.V., Dynasol Elastómeros, S.A. de C.V., Cantiles de Mita, S.A.
de C.V., Promociones Bosques, S.A. de C.V. and Inmobiliaria Dine, S.A. de C.V.
From time to time, we have merged our subsidiaries to streamline and simplify our corporate and administrative structure. In
2001, Girsa, S.A. de C.V. was merged with and into Desc, with Desc surviving the merger. In 2002, Division Dine, S.A. de C.V. was
merged with and into Desc, with Desc surviving the merger. In 2003, Industrias Resistol, S.A. de C.V. was merged with and into
Desc, with Desc surviving the merger.
37
The following charts summarize our corporate structure as of December 31, 2003. The charts also show, for each company, our
approximate direct or indirect percentage of equity or economic ownership interest. The charts have been simplified to show only our
major and operating companies.
38
39
40
41
42
(1)
This subsidiary is reported under equity in associated companies and unconsolidated subsidiaries
43
D. Property, Plant and Equipment
Our corporate headquarters and executive offices, which we own, are located in Mexico City, Mexico and measure
approximately 6,400 square meters. We believe that all our current properties and facilities are adequate for our present needs.
For a description of our properties and plants, please reference each of the business segment descriptions set forth above under
the heading “—Business Overview.” We are not aware of any material environmental issues that may affect the company’s utilization
of its assets.
Item 5. Operating and Financial Review and Prospects
Basis of Presentation
You should read the following discussion together with our consolidated financial statements and the related notes included
elsewhere in this annual report. The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in
significant respects from U.S. GAAP, in particular by requiring Mexican companies to recognize the effects of inflation. Note 4 to the
Financial Statements provides a description of our significant accounting policies and Notes 23 and 24 to the Financial Statements
provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to Desc and reconciliation to
U.S. GAAP of our majority net income (loss) and majority stockholders’ equity. Net income (loss) information included in this
section consists of “majority net income (loss),” as referred to in the Financial Statements, and therefore is net of minority interests
attributable to third party equity interests in some of our subsidiaries, unless discussed in another context.
The annual rates of inflation in Mexico, as measured by changes in the NCPI, were 4.4% in 2001, 5.7% in 2002 and 4.0% in
2003. Mexican GAAP requires that the Financial Statements recognize the effects of inflation. Financial statements are adjusted by
applying NCPI factors. As a result, financial statements prepared under Mexican GAAP are stated in constant terms, that is, with
adjustments for inflation, rather than in nominal terms. Therefore, all data for all periods in the Financial Statements, and the financial
information derived from the Financial Statements presented in this section, unless otherwise indicated, have been restated in constant
Pesos as of December 31, 2003. Increases or decreases shown as percentages reflect variations in constant Pesos.
Overview
We faced a very challenging year in 2003 (as well as in the prior two years), which was principally due to the disappointing
growth of the Mexican economy (1.3%) and the contraction of the manufacturing sector in the United States (-2.2%), mainly due to
the lack of investment by corporations. These anemic market and economic conditions affected both us and our clients. As a result,
we experienced a decrease in sales volume and a significant decrease in cash flows (from Ps. 1,382,125 in 2002 to Ps. 976,775 in
2003). This decrease in cash flows prevented us from satisfying certain financial covenants in our credit agreements. In response to
the challenging business environment, we undertook the following steps:
•
Debt restructuring: At the end of 2003, we refinanced several of our then existing credit agreements, which extended the
maturities of these loans and relaxed certain financial covenants.
•
Operational restructuring: We focused on improving our operations and reducing our operating costs in order to increase
our cash flows.
44
•
Administrative restructuring: We undertook a major reduction of personnel by laying off 1000 employees, which enabled us
to improve our efficiency, competitiveness and flexibility. We anticipate that this restructuring will yield significant savings
and we expect to reduce operating costs to 15% in 2004.
•
Divestiture of non-strategic assets: During 2003, we sold non-strategic businesses for approximately $100 million, the
proceeds of which were used to reduce our debt levels and strengthen our cash flows.
We believe that these measures will enable us to become a stronger competitor in 2004 and allow us to commence recovering
shareholder value. In furtherance of these goals, we completed an increase in capital stock in 2004. The proceeds of the capital
increase and internally generated cash flows were used to prepay $162 million of our long-term credit facility and $20 million of our
revolving bank credit line and $74 million will be used to redeem the outstanding notes on June 30, 2004.
Our Businesses in 2003
The closing in 2002 of the DaimlerChrysler plant in Lago Alberto continued to affect the Automotive Sector’s sales of stamped
parts, axles and propeller shafts. In addition, the delay in initiating the Tractor Project (which consists of the operation of certain
production lines acquired from Dana Corporation) significantly affected the Automotive Sector’s sales and profit margins.
The Chemical Sector was affected by the pressure on sale prices caused by the global oversupply of chemicals and by the
increase in prices for principal raw materials. These factors caused a reduction of the Chemical Sector’s profit margins even though
its sales volume increased from 2002 levels. During 2003, the Chemical Sector continued its strategy of migrating towards specialty
chemicals products, which yields higher profit margins.
Our branded food business increased its operating margins by, in part, marketing its brands as high-quality products. New
product lines, such as new canned peppers, were introduced into the market and enabled the food business to increase its market
share.
In our pork business, we closed our Bajio pork operations, which was operating at a loss. This closing had a positive impact on
our results. Our pork business in the Southeastern part of Mexico achieved reasonable profits, in part, due to the recovery of
international pork prices during 2003.
The Real Estate Sector experienced exceptional sales and cash flow due to sales from its Bosques de Santa Fe and Punta Mita
projects, as well as the sale of a territorial reserve in the State of Mexico and land from our Arcos Bosques development. The
construction of the Arcos Bosques North Building C was completed, and more than half of the building was sold during the presale
stage.
Financial Restructuring
In 2002, we entered into two credit agreements (the “Credit Agreements”). One credit agreement, for which BBVA-Bancomer,
S.A. acted as the administrative agent, was for an amount of Ps. 1,300 million (or $130 million) with a maturity of five years and an
average life of 3.3 years. The second credit agreement, for which Citibank, N.A. acted as the administrative agent, was for an amount
of $275 million with a maturity of five years and an average life of 3.5 years.
Each of the Credit Agreements required us to, among other things, maintain a certain Leverage EBITDA (“net debt” to earnings
before taxes, depreciation and amortization) ratio each quarter. The
45
ratios became gradually stricter with time. The Credit Agreements were amended effective as of December 31, 2002 to, among other
things, relax the Leverage EBITDA covenant (which we had not complied with in December 2002), restrict the declaration and
payment of dividends during 2003 (other than the payment of dividends declared in 2002) and limit the amount of our capital
expenditures.
Due to the effects of the devaluation of the Peso against the Dollar and the decline of our revenues caused by the weak U.S. and
Mexican economies as well as other factors, we failed to comply with the Leverage EBITDA covenant applicable during the first
quarter of 2003. Desc’s noncompliance with the Leverage EBITDA covenant constituted an event of default under the Credit
Agreements.
In 2003, we reached an agreement with our creditors to the Credit Agreements and the majority of our short-term debt and
entered into three new credit agreements. Approximately $720 million of debt was refinanced ($479 million in dollar-denominated
long-term debt, Ps. 1,300 million in peso-denominated long-term debt and $112 million in revolving debt and letters of credit). These
credit agreements require us to comply with certain covenants, including, among others, restrictions with respect to maximum
permitted capital expenditures and the incurrence of indebtedness, and to meet certain financial ratios and tests.
As a result of restrictions in these credit facilities, we were forced to reduce our capital expenditures from Ps. 1,117.4 million in
2002 to Ps. 802.6 million in 2003. This refinancing improved our liquidity position and financial flexibility through the extension of
debt maturity dates, the relaxing of certain financial covenants and the establishment of a debt reduction program contemplating,
among other things, the sale of certain non-strategic assets.
In 2004, we consummated an increase in capital stock. The proceeds of the capital increase and internally generated cash flows
were used to prepay $162 million of our long-term credit facility and $20 million of our revolving bank credit line and $74 million
will be used to redeem the outstanding Notes on June 30, 2004, thereby enabling us to reduce our total net indebtedness. The resulting
improvement in our liquidity and capital structure should enhance our ability to access the capital markets in the future, thereby
increasing our financial flexibility and enhancing stockholder value.
Restructuring of our Business Portfolios
We selectively divest businesses and assets that no longer fit in our strategic plan. We took the following steps in the years
indicated to streamline our operations and concentrate on our core businesses:
In 2001:
•
we sold our 51% participation in the Four Seasons Punta Mita Hotel;
•
we sold our 51% participation in the Santa Fe shopping mall;
•
we sold our clutch business; and
•
we swapped 60% of our valve business for 40% of TRW Inc.’s piston business (pistons, pins and tappets). As a result, TRW
acquired 100% of the valve business and Desc retained, through Desc Automotriz, 100% of the pistons, pins and tappets
business and the “Moresa” brand.
46
In 2002:
•
we exited the following non-strategic businesses:
•
the spark plugs and electrical parts businesses;
•
the natural pigments business;
•
the pig raising operation, located in the Bajío region (the Food Sector); and
•
the shrimp business (which was disposed of by means of donation).
In 2003:
•
we sold our adhesives and waterproofing businesses.
In 2004:
•
we sold our aluminum wheel business to Hayes Lemmerz International, Inc. and acquired Hayes Lemmerz International
Mexico, Inc. equity stake in Steel Wheels, S.A. de C.V., which manufactures steel wheels. Accordingly, Desc Automotriz
now holds 100% of the shares of Steel Wheels, S.A. de C.V.;
•
our equity ownership of Corfuerte, Authentic Acquisition Corporation and Nair Companies increased from 77.6% to 96.1%,
from 81.3% to 99.9% and from 60% to 100%, respectively; and
•
we closed our phenol business (Fenoquimia, S.A. de C.V.).
See the discussion below under the heading “Credit Facilities” regarding limitations under our new credit facilities on the divestiture
of assets.
Critical Accounting Estimates
The preparation of the Financial Statements requires that we make estimates, assumptions and judgments that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. We base our estimates, assumptions and judgments on
historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under
different estimates, assumptions, judgments or conditions. Our significant accounting policies are described in Note 4 to our Financial
Statements. We evaluate our estimates, assumptions and judgments on an on-going basis, and we believe our most critical accounting
policies that implicate the application of estimations, assumptions and/or judgments to be:
Revenue recognition
Revenues generated by the subsidiaries of the Automotive, Chemical and Food Sectors are recognized when the inventories are
delivered or shipped to customers and customers assume responsibility for them. Revenue is recorded net of discounts. As discussed
below, we periodically review the collectability of accounts in order to determine and record the recoverability of our accounts
receivable.
47
The Real Estate Sector recognizes revenues and costs related to sales of developed plots and tracts when the sales contracts are
formalized and sufficient down payment has been received. Therefore revenue is matched with costs incurred to reach the stage of
completion to terminate the project. Our estimation of the percentage of completion requires considerable judgment and significantly
impacts the revenues recognized by the Real Estate Sector. If the latest estimated costs determined exceed the total revenues
contracted, the respective provision is charged to results of the year.
Revenues and costs from real estate projects are recorded originally as a deferred credit for construction commitments and as
real estate projects in process and are recognized in results based on the “percentage of completion” method. Therefore, revenue is
matched with costs incurred to reach the stage of completion to terminate the project. If the latest estimated costs determined exceed
the total revenues contracted, the respective provision is charged to results of the year.
Land held for development and real estate projects
Undeveloped land, which represents territorial reserves held for future development, and real estate projects in progress are
recorded at acquisition and construction costs are restated at their value in Dollars translated at the exchange rate in effect as of yearend. Periodically, the accounting and market values of real estate assets are compared in order to adjust the value of such assets. This
method is consistent with the practices followed in the real estate market in Mexico in order to reflect current market prices.
Allowance for bad debts
Estimates are used in determining our allowance for bad debts and are based on our historical collection experience, current
trends, credit policy and a percentage of our accounts receivable by aging category. In determining these percentages, we look at the
historical write-offs for our receivables. We also look at current trends in the credit quality of our customer base as well as changes in
the credit policies. We believe that our allowance for bad debts is a critical accounting estimate because changes in this estimation
could have a significant effect on our financial statements.
Useful Lives of Long-Lived Tangible and Intangible Assets
We consider that the determination of the useful lives of long-lived tangible and intangible assets to be a critical accounting
estimate because such estimate has a significant impact on the related depreciation and amortization of these assets. In making these
estimations, we take into account manufacturer specifications and internal operating estimates. Additionally, we consider the salvage
value of buildings and equipment.
With regard to major repairs that can increase the useful life of an asset, the related costs are capitalized and the asset’s useful
life is revised accordingly. All other repairs and maintenance costs are charged to the results of the period in which they were
incurred.
Impairments of assets
We recognize impairment losses on long-lived assets such as property, plant and equipment and goodwill used in operations
when events and circumstances indicate that the assets might be impaired and the discounted cash flows estimated to be generated by
those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect
our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value.
Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.
48
In 2003, we early adopted the provisions of new Bulletin C-15, “Impairment in the Value of Long-Lived Assets and Their
Disposal”. In connection with this adoption, we recorded long-lived tangible and intangible asset impairment totaling Ps. 1,384,294,
net of taxes.
Accounting for income taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of
the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income (taxable on our best estimate of future results of operations), and, to the extent
that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance
or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. We believe
that this accounting policy is critical because significant management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
Labor liabilities
Our employee liabilities include pension plan and seniority premium obligations. The determination of our obligation and
expense for pension and other post-retirement benefits is dependent on our selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions are described in Note 13 to the Financial Statements and include, among others, the
discount rate, expected long-term rate of return on plan assets and rates of increase in compensation costs, as well as expected
contributions to the plan. In accordance with generally accepted accounting principles, actual results that differ from our assumptions
are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in
such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or
significant changes in our assumptions may materially affect our pension and other post-retirement obligations and future expenses.
Contingencies
We account for contingencies in accordance with Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and
Commitments”. Such accounting principles require that we record an estimated loss from a loss contingency when information
available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has
been incurred or an obligation arises from a past event as of the date of the financial statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our
judgment. When necessary, we engage an expert to assess the contingency and provide us with the best estimate of the contingency to
be recorded in our financial statements. While we believe that our accruals for these matters are adequate, if the actual loss from a
loss contingency is significantly different than the estimated loss, our results of operations may be overstated or understated. Our
significant contingencies are described in Note 10 to our Financial Statements.
49
A. Operating Results
Results of Operations for Years Ended December 31, 2001, 2002 and 2003
The following table provides information derived from our Financial Statements:
Year ended December 31,
2002
2001
2003
(In thousands, except percentages)
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Operating margin
Integral financial result
Impairment of fixed assets
Other income (expenses), net
Provisions for income taxes and employee profit sharing
Equity in associated companies and unconsolidated subsidiaries
Change in accounting principle
Extraordinary item
Majority net income (loss)
Exports (Ps. in millions) (1)
(1)
Ps. 22,092,872
16,284,573
26.3%
Ps. 3,846,043
1,962,256
8.9%
Ps. (348,332)
(101,205)
(519,690)
65,083
(125,376)
—
(309,998)
45,446
Ps.
10,061
Ps. 20,360,380
15,572,154
23.5%
Ps. 3,706,926
1,081,300
5.3%
Ps. (1,273,832)
(50,988)
(84,318)
251,725
(5,406)
—
—
(1,084,545)
Ps.
9,287
Ps. 21,755,055
17,024,252
21.7%
Ps. 3,888,339
842,464
3.9%
Ps. (1,351,473)
(14,140)
(364,629)
165,986
11,252
(1,384,294)
—
(2,240,387)
Ps.
9,477
The 2003 increase in exports as measured in Pesos is principally attributable to a favorable foreign exchange rate impact.
The following table presents financial data from our consolidated statements of income expressed as a percentage of net sales:
Year ended December 31,
2001
Net sales
Cost of sales
Gross margin
Operating expenses
Operating margin
Integral financial result
Equity in associated companies and unconsolidated subsidiaries
Other expenses, net
Majority net income (loss)
50
100.0%
73.7
26.3
17.4
8.9
(1.6)
(0.6)
(2.4)
0.2
2002
100.0%
76.5
23.5
18.2
5.3
(6.3)
(0.0)
(0.4)
(5.3)
2003
100.0%
78.3
21.7
17.8
3.9
(6.2)
0.0
(1.7)
(10.3)
Foreign Exchange Rates
We transact business in many currencies other than the Dollar. On average in 2003, the Dollar was weaker against the Euro and
was stronger against the Peso.
As a result of our foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation
risk and transaction risk on our financial statements. Translation risk is the risk that our consolidated financial statements for a
particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the reporting
subsidiaries against the Dollars. Transaction risk is the risk that the value of transactions executed in currencies other than the
subsidiary’s measurement currency may vary according to currency fluctuations. The Automotive Sector and the Chemical Sector are
particularly affected by foreign exchange rates because a significant portion of their revenues are in Dollars.
New Administrative Restructuring
In the past few years, we have experienced a decrease in sales, which resulted in an increase in operating expenses
(administrative and sales) as a percentage of sales, from 13.5% in 1998 to 18.2% in 2002. As a result in 2003, we laid off
approximately 400 administrative employees, which resulted in a decrease in our operating expenses to 17.8%.
However, in an effort to further reduce costs, we initiated a new organizational restructuring at the end of 2003. This
restructuring resulted in a layoff of more than 1,000 administrative employees. We anticipate that this restructuring will yield
significant savings and we expect to reduce operating expenses to 15% in 2004.
This restructuring project should be completed by the end of 2004 and is expected to allow us to have a more flexible, efficient
and lower-cost organizational structure.
Additional Considerations
AquaNova Donation. In October 2002, our board of directors decided to donate our shrimp business (AquaNova) to the
Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). This was part of our broader efforts to divest assets that are
underperforming or non-strategic, which we believe will enhance our competitiveness.
Closing of Bajío Operations. The decline of results of our pork business in 2002 can be attributed to the poor results in the Bajío
region, as well as the high costs, low production levels, low efficiency and higher mortality of animals in that area. Accordingly, our
board of directors decided to close the Bajío operations in September 2002. We incurred costs of Ps. 424,729 to discontinue the Bajío
operations.
Fenoquimia. In 1994, Fenoquimia, S.A. de C.V., a wholly owned subsidiary of Desc (“Fenoquimia”), filed a lawsuit against,
Sales Nacionales, S.A. de C.V. (“Sales Nacionales”), seeking to confirm the termination of certain agreements between them. Sales
Nacionales filed a countersuit demanding, among other things, mandatory compliance with these contracts, plus the payment of
damages and lost income. A final judicial resolution was issued on November 5, 1998, which ordered Fenoquimia to comply with the
agreements in question and pay Sales Nacionales accrued damages and lost income, which amounts were to be approved by a court.
On November 18, 2003, Sales Nacionales was awarded damages equal to Ps. 150,703. On December 11, 2003, Desc settled the claim
with Sales Nacionales for an aggregate cash amount of Ps. 22,000 and real estate assets valued at Ps. 32,480, for which a reserve had
previously been established.
51
Recall in the Automotive Sector. At the end of 2001, Stamping & Wheels, S.A. de C.V., an indirect 60% subsidiary of Desc,
received a claim from its customer, Nissan Mexicana, S.A. de C.V. (“Nissan”) alleging the existence of defects in certain steel rims
manufactured by Stamping & Wheels, S.A. de C.V. In 2003, Desc and Hayes Lemmerz Int. reached an agreement with Nissan to
settle this claim for $7 million pursuant to an installment payment plan. As of December 31, 2003, the outstanding balance of the
settlement payment was $2.7 million, which was recorded as a warranty liability. The final payment was made in May 2004.
Hayes Lemmerz Mexican Joint Venture. On January 15, 2004, Desc Automotriz and Hayes Lemmerz International Mexico,
Inc. (“HLI”) agreed to end their joint venture. In furtherance of this agreement and in settlement of then pending litigation claims,
Desc sold its aluminum wheel business to Hayes Lemmerz International, Inc. and acquired HLI’s equity interest in Steel Wheels, S.A.
de C.V. Accordingly, Desc Automotriz now holds 100% of the shares of Steel Wheels, S.A. de C.V., which manufactures steel
wheels. As of December 31, 2003, Desc adjusted the realizable value of the fixed assets of the aluminum wheels plant based on the
selling price to HLI, generating a charge to year-end results of Ps. 114.2 million, net of taxes.
2003 and 2002 compared. Consolidated net sales for 2003 increased 6.8%, reaching Ps. 21,755,055 versus Ps. 20,360,380 in
2002, mainly due to improved revenues in the Chemical, Food and Real Estate Sectors. On the other hand, sales in the Automotive
Sector decreased 10.4%. Exports totaled Ps. 9,477 million (or $860 million) representing a 2.0% annual increase principally due to a
favorable exchange rate. The Chemical Sector increased its exports by of 22.4% and the Automotive Sector’s exports decreased by
8.1%. During 2003, our profitability was adversely affected by expenses for the implementation of the Tractor Project and nonrecurring charges in the Automotive Sector, significant increases in the prices of basic raw materials used by the Chemical Sector, and
increases in the Food Sector’s raw material prices. Cost increases could not be transferred to our customers due to the weakness of the
markets. Therefore, our margins were adversely affected. Operating expenses increased 4.9% due to higher administrative and sales
expenses. As a result, operating margin decreased from 5.3% in 2002 to 3.9% in 2003.
2002 and 2001 compared. Consolidated net sales for 2002 decreased 7.8% to Ps. 20,360,380 from Ps. 22,092,872 in 2001, and
exports were Ps. 9,286,698 or ($902 million), representing a 7.6% decrease from 2001. These decreases were mainly due to the
economic slowdown in the U.S. and Mexico, which started in 2001 and continued in 2002, primarily affecting the Autoparts and
Chemical Sectors. In addition, net sales was also affected by higher raw material costs in the Chemical Sector, which were not passed
on to final product prices at the same rate, and foreign currency exchange translation effects. Cost of sales decreased 4.4% from Ps.
16,284,573 in 2001 to Ps. 15,572,154 in 2002, principally due to the cost-reduction programs we implemented during the year, which
was offset by the higher raw material costs. Our gross margin was 23.5% in 2002, which was lower than the 26.3% gross margin
reported in 2001. Operating expenses decreased 3.6% from Ps. 3,846,043 in 2001 to Ps. 3,706,926 in 2002, due to our cost-reduction
measures. As a result, operating margin decreased from 8.9% in 2001 to 5.3% in 2002. The factors described above and the charges
for discontinued operations contributed to our net majority loss in 2002.
52
Segment Reporting
Automotive
The results of the Automotive Sector continued to be affected by the slow growth of the U.S. economy affecting the results of
the Automotive Sector. Production in the NAFTA region declined by 3%, reaching 16.2 million vehicles and the Mexican automotive
industry declined 13% compared with 2002. Additionally, Ford, General Motors and DaimlerChrysler, the North American OEMs,
which represented 38% of our sales, lost 2% of the market to non-American manufacturers) globally. Our clients reduced their
inventory levels by temporarily shutting down some of their assembly plants and using various sales promotions such as 0%
financings and price discounts, which adversely affected our sales volume.
The following table presents selected operating data for our Automotive Sector:
Year ended December 31,
Change
from
Previous
Year (%)
2001
2002
Change
from
Previous
Year (%)
2003
(In thousands, except percentages)
Net sales
Cost of sales
Gross margin
Ps. 10,157,225
7,674,936
24.4%
-14.0%
-10.4%
Ps. 8,731,810
6,877,621
21.2%
-10.4%
-5.5%
Ps. 7,820,304
6,500,085
16.9%
Operating expenses
Operating income
Operating margin
Ps. 1,337,918
1,144,371
11.3%
-9.6%
-43.7%
Ps. 1,210,105
644,084
7.4%
-9.6%
-64.8%
Ps. 1,093,549
226,670
2.9%
2003 and 2002 compared. During 2003, the Automotive Sector’s net sales decreased by 10.4%, from Ps. 8,731,810 in 2002 to
Ps. 7,820,304 in 2003, and operating income decreased 64.8% from Ps. 644,084 in 2002 to Ps. 226,670 in 2003. These decreases were
attributable to:
•
a 13% decline in annual production of cars and light trucks in Mexico to 1,518,628 units, and a 1.35% drop in the United
States to 11,825,151 units;
•
temporary shutdowns of several assembly plants operated by General Motors, Ford, Renault-Nissan, Volkswagen and
DaimlerChrysler in order to reduce inventory levels;
•
lower sales of axles, transmissions, pistons, wheels and stamping products due to a decreased demand from OEMs in the
United States and Mexico, such as DaimlerChrysler, General Motors, Eaton and Renault-Nissan;
•
the impact on operating income of pre-operating expenses relating to the implementation of the Tractor Project installation
at the propeller shaft, axle and forge businesses; and
53
•
the non-recurring charges associated with the write-off of inventory, pension reserves and guarantees, asset value
adjustments, and administrative restructuring costs.
Sales were positively affected by:
•
The Tractor Project consists of the manufacturing and sale of parts for axles, semi-axles and output-shafts to Dana. In 2002,
phase I of the project was implemented and included propeller shafts and forging. During 2003, phase II was implemented
and included the platform and axle businesses. The Tractor Project generated $66 million in sales during 2003. As of today,
the project is operating at full capacity.
•
Our gear business began supplying components to BMW North America for the front axle of its X5 platform as well as
components for the front axle of Nissan’s ZW platform.
During 2003, exports sales were Ps. 5,233,967 (or $475 million), which represents an annual decrease of 8.1% compared to Ps.
5,695,321 in export sales during 2002. Cost of sales decreased 5.5%, from Ps. 6,877,621 in 2002 to Ps. 6,500,085 in 2003 due to
lower sales. Operating expenses decreased 9.6% from Ps. 1,210,105 in 2002 to Ps. 1,093,549 in 2003, which in part reflects lower
expenses due to lower sales volume. As a result of the above-mentioned reasons, operating margin decreased to 2.9% in 2003
compared to 7.4% in 2002.
2002 and 2001 compared. During 2002, the Automotive Sector’s net sales decreased by 14.0%, from Ps. 10,157,225 in 2001 to
Ps. 8,731,810 in 2002. Sales were impacted by the closing of the Daimler Chrysler Lago Alberto Facility and the non-renewal of
certain contracts with DaimlerChrysler (as the parties failed to reach agreement on the principal terms thereof), which collectively
translated into a decline of approximately $200 million in annual sales, the reduced demand of automobiles in the NAFTA market as
a result of the economic slowdown in the U.S. and Mexico and the strengthening of the Peso versus the Dollar. Production in the U.S.
and Mexican automotive industries rose 7.5% and declined 2.4%, respectively, when compared to 2001. In addition, during 2002, as
part of our strategy to sell non-strategic assets we closed our spark plugs (Bujías Mexicanas, S.A. de C.V.) and electric parts
(Industria Eléctrica Automotriz, S.A. de C.V.) businesses and sold the underlying operational assets; the total sales of these
businesses represented Ps. 16.2 million in 2001 and did not contribute to our operating income. During 2002, exports sales were Ps.
5,695,321 (or $555 million), which represents an annual decrease of 13.6% compared to Ps. 6,592,039 in export sales during 2001.
Cost of sales decreased 10.4%, from Ps. 7,674,936 in 2001 to Ps. 6,877,621 in 2002 due to lower sales volume. Operating expenses
decreased 9.6% from Ps. 1,337,918 in 2001 to Ps. 1,210,105 in 2002, which in part reflects lower expenses due to lower sales volume.
As a result, operating income was Ps. 644,084 in 2002 compared to Ps. 1,144,371 in 2001. As a result of the above-mentioned
reasons, operating margin decreased to 7.4% in 2002 compared to 11.3% in 2001.
Chemicals
Introduction
During 2003, the Chemical Sector’s sales increased by 9.1% and totaled Ps. 7,868.5 million despite the divestiture of its
adhesive business and waterproofing products in the third quarter of 2003. Exports increased by 22.4%, totaling Ps. 3,106.3 million
(or $282 million) principally due to increased exports in synthetic rubber (mainly to U.S., European and Asian markets) and
polystyrene (mainly to U.S. markets). This increase in exports offset the decrease in Mexican market demand for some of our
products. The domestic tire market showed a recovery during 2003 due to the reopening of the Michelin plant in Queretaro.
54
During 2003, due to global instability beginning in late 2002 stemming from political problems in Venezuela, the impact of the
SARS epidemic in China and the war in Iraq, the price of crude oil has significantly increased resulting in a rise in the prices of
products and services derived from crude oil. Consequently, basic raw materials in the petrochemical industry, such as vinyl benzene,
butadiene and acrylonitrile, experienced major price increases during 2003, some of them even reaching historical highs. In addition,
the increase in natural gas prices has severely affected the petrochemical industry in general.
Such increased raw material costs could not be transferred immediately to the prices of final products due to aggressive
competition and weak demand, which had a negative impact on the operating results of the chemical sector. As a result of these
factors, the operating margin for 2003 was 2.6% compared to 4.7% in 2002.
The following table presents selected operating data for our Chemical Sector:
Year ended December 31,
Change
from
Previous
Year (%)
2001
2002
Change
from
Previous
Year (%)
2003
(In thousands, except percentages)
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Operating margin
Ps. 7,334,118
5,473,909
25.4%
Ps. 1,310,418
549,791
7.5%
-1.7%
-0.1%
6.8%
-37.9%
Ps. 7,211,861
5,470,290
24.1%
Ps. 1,400,156
341,415
4.7%
9.1%
15.6%
-4.3%
-40.6%
Ps. 7,868,456
6,325,727
19.6%
Ps. 1,339,805
202,924
2.6%
2003 and 2002 compared. Net sales increased 9.1%, from Ps. 7,211,861 in 2002 to Ps. 7,868,456 in 2003, despite the divestiture
of the adhesives and waterproofing businesses in October 2003.
The increase in net sales was principally due to an increase in demand and a slight recovery of the global markets. The principal
businesses that experienced an increase in sales were carbon black (22%), acrylics (16%), phosphates (2%) and polystrene (1%).
Inventory repositioning by some of our clients, the seasonal increase in demand at the end of the year and a slight recovery of markets
were the main reasons for the volume growth. The Chemical Sector improved its utilization rates (operating at approximately 90% of
installed capacity for most of its products) due to a slight recovery of markets, mainly in Europe and the United States.
These increases were offset, in part, by decreases in the sale of:
•
nitrile rubber, which was adversely affected by the slow recovery of the automotive industry, and
•
specialty rubber, which was adversely affected by the strength of the Euro and the challenging competitive landscape in the
European market.
The Chemical Sector businesses posted improvements in utilization, reaching 90% of installed capacity in practically all of its
products (particularly in the solution rubber and polystyrene business) due to a slight recovery of the markets, mainly in Europe and
the United States. Inventory repositioning by some of our clients and the seasonal increase in demand at the end of the year were the
main reasons for the volume growth.
55
Prices of our chemical products decreased in 2003, as a result of the anemic global economic environment and the continued
presence of integrated competition with very low pricing. This situation resulted in a global oversupply of certain chemicals.
The weakness of the markets and the rise in raw material prices such as styrene monomer, butadiene monomer and acrylonitrile
monomer, as well as natural gas, severely affected the industry in general. These increases in raw material prices were not passed on
at the same rate to the price of our finished products, due to aggressive competition and the weak demand. As a result, operating
income decreased 40% to Ps. 202,924 while the operating margin decreased to 2.6% in 2003, compared to 4.7% reported in 2002.
2002 and 2001 compared. Net sales decreased 1.7%, from Ps. 7,334,118 in 2001 to Ps. 7,211,861 in 2002. The continuing
depressed global economic conditions, the global oversupply of chemical products and increased price competition contributed to the
decrease in sales. The decrease in sales was primarily due to lower volumes during the second half of the year resulting from the
worldwide economic slowdown, market contractions in the tire, furniture, construction, packaging and disposable products industries,
as well as the high inventory levels of our clients. In 2002 prices were affected, in most businesses, by the depressed global economic
situation, and strong competitive landscape characterized by low prices and the oversupply of some products such as plastic, rubber
and laminates. In 2002, export sales were equal to Ps. 2,538,326, which reflects an 12% increase from 2001, but were partially offset
by a decrease in demand in the Mexican market due to the closing of the Euzkadi tire-production facility, as well as the structural
crisis in the footwear industry. During 2002, cost of sales decreased 0.1% to Ps. 5,470,290, compared to Ps. 5,473,909 in 2001, and
operating expenses increased 6.8% to Ps. 1,400,156, compared to Ps. 1,310,418 in 2001. The decrease in costs of sales was due to
cost-reduction measures and the greater utilization of installed capacity. The rise in the prices of raw materials like styrene monomer,
butadiene monomer and acrylonitrile monomer, as well as, natural gas severely affected the industry in general, including Desc. The
rise in raw material prices could not be transferred at the same rate to the final product due to the aggressive competition and the weak
demand. Due to the decrease in sales, operating income declined 37.9%, from Ps. 549,791 in 2001 to Ps. 341,415 in 2002. As a result
of the above-mentioned reasons, operating margin decreased to 4.7% in 2002 compared with 7.5% in 2001.
Food
Introduction
Branded Products
Sales of our branded products grew in 2003 despite a decrease in demand due to the weak economic activity in Mexico and the
United States. The increase in sales volume growth was principally due to increased sales of our Del Fuerte chile and salsa lines,
increased distribution of Ybarra tuna and increased sales of Zuko powdered drinks.
Our sales of branded products in the United States were affected by a strike at Southern California’s three main convenience
store chains and increased costs due to a small fish harvest.
In 2003, we increased our marketing and promotion of our branded food products. Our brand “La Victoria” continued to
distinguish itself as a leader in the Mexican sauce market in the west coast of the United States and, as a result we introduced
additional product lines under the “La Victoria” brand.
56
Our Embasa brand, which includes jalapenos, chipotles, serranos, green tomatoes, peppers and sauces, maintained its market
share. Tomato-based products marketed under the Del Fuerte brand had a 63.2% market share, demonstrating it is a leading product
favored by consumers. Our Blasón coffee brand, which is a premium product in the toasted and ground coffee bean segment,
improved its exports to the U.S. market by 40%.
Pork business
In 2003, our pork business experienced an increase in sales, principally as a result of a recovery of international pork prices and
the stability of the Peso against the Dollar. Due to an increased demand of grains, we experienced higher raw material costs.
The following table presents selected operating data for our Food Sector:
Year ended December 31,
Change
from
Previous
Year (%)
2001
2002
Change
from
Previous
Year (%)
2003
(In thousands, except percentages)
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Operating margin
Ps. 3,693,349
2,690,972
27.1%
Ps. 827,450
174,927
4.7%
-3.0%
3.0%
-14.5%
-41.5%
Ps. 3,581,989
2,772,484
22.6%
Ps. 707,125
102,380
2.9%
8.4%
2.1%
31.2%
21.1%
Ps. 3,883,594
2,831,602
27.1%
Ps. 928,005
123,985
3.2%
2003 and 2002 compared. During 2003, net sales increased by 8.4%, from Ps. 3,581,989 in 2002 to Ps. 3,883,594 in 2003. This
increase was mainly due to: a 7.6% increase in the sales of branded products in the domestic market, which was primarily supported
by the strong performance of “Del Fuerte” tomato puree, “Embasa” ketchup; higher exports of our coffee to the United States; an
8.8% increase in pork sales, due to higher domestic and international pork prices, and a 3.3% increase in pork exports to Japan. Cost
of sales increased 2.1% to Ps. 2,831,602 from Ps. 2,772,484 due to increases in raw material prices such as cans and cooking oil,
which are used in our branded products business, and in 2002, grains, corn, sorghum and soy, which are used in our pork operations.
Operating expenses increased 31.2%, from Ps. 707,125 in 2002 to Ps. 928,005 in 2003, principally due to costs associated with
employee layoffs and higher marketing, administrative and sales expenses. As a result of the foregoing and the closing of our Bajio
pork operations, operating income increased 21.1%, from Ps. 102,380 in 2002 to Ps. 123,985 in 2003, and operating margin increased
to 3.2% in 2003 compared with 2.9% in 2002.
2002 and 2001 compared. During 2002, net sales declined by 3.0%, from Ps. 3,693,349 in 2001 to Ps. 3,581,989 in 2002, due to
lower sales in our pork business, the closing of the Bajio operations, a 22% reduction in pork prices and the discontinuance of our
shrimp business in 2001. The decrease in net sales was partially offset by increases in our branded food business and savings from
cost reduction programs. In our pork business, exports to Japan increased by 21.9%. Cost of sales increased 3.0% to Ps. 2,772,484,
compared to Ps. 2,690,972 in 2001 due in part to an increase in price of grains used in our pork business, and operating expenses
decreased 14.5% from Ps. 827,450 in 2001 to Ps. 707,125 in 2002, due in part to our cost-reduction measures. Operating income
decreased 41.5%, from Ps. 174,927 in 2001 to Ps. 102,380 in 2002, due to the restructuring of our branded food business and the
implementation of a new distribution strategy. As a result, operating margin decreased from 4.7% in 2001 to 2.9% in 2002.
57
Real Estate
In 2003, the Real Estate Sector was affected by the slow recovery of the North American economy.
Nevertheless, the Real Estate Sector had an exceptional year due to sales in Bosques de Santa Fe and Punta Mita, as well as the
sale of a territorial reserve in the Estado de México and a piece of land from our Arcos Bosques development. The construction of the
Arcos Bosques North Building C was completed and more than half of the building was sold during the presale stage.
With regard to our tourist projects, we continued selling “Ranchos”, which are large lots of approximately one hectare, near the
seashore. Sales of lots adjacent to the golf course continued, as well as some luxury beach lots. Also, Punta Mita started the
construction and promotion of the first phase of hillside villas.
As for our residential developments, we made significant advances in the urbanization as well as in the sales of “Bosques de
Santa Fe”, a project located in the southern part of Santa Fe in Mexico City. This project’s infrastructure and recreational areas are
expected to be completed by October of 2004. Approximately 87% of the residential lots and 57% of the multifamily lots have been
sold. Currently, there are more than 29 houses and 115 apartments under construction, with several families already living in this
residential development.
We continued marketing the residential lots of “La Estadía”, “Punta Ixtapa” and “La Punta Bosques” (with only 2 lots available
for sale in “La Punta Bosques”, 6 lots remaining in “Punta Ixtapa” and 15 lots remaining in “La Estadia”).
Due to the sale of Club Ecuestre, we had non-recurring revenues in 2003. Therefore, we anticipate that the Real Estate Sector’s
sales and operating margins for 2004 will be lower than 2003 figures.
The following table presents selected operating data for the Real Estate Sector:
Year ended December 31,
2001
Change
from
Previous
Year (%)
2002
Change
from
Previous
Year (%)
2003
(In thousands, except percentages)
Net sales
Residential
Tourism/resort
Commercial
Ps. 340,837
293,710
252,560
Total
Cost of sales(1)
Gross margin
Operating expenses
Operating income
Ps. 887,107
470,429
47.0%
Ps. 257,240
159,438
58
4.1%
-29.0%
-6.5%
-9.9%
-4.0%
2.1%
-99.5%
Ps. 354,770
208,437
236,076
241.9%
111.7%
33.3%
Ps. 1,213,066
441,267
314,620
Ps. 799,283
451,623
43.5%
Ps. 262,747
84,913
146.3%
180.2%
Ps. 1,968,953
1,265,649
35.7%
Ps. 290,975
412,329
10.7%
385.6%
Year ended December 31,
2001
Change
from
Previous
Year (%)
Change
from
Previous
Year (%)
2002
2003
(In thousands, except percentages)
Operating margin
(1)
18.0%
10.6%
20.9%
Includes recognized cost of land, subcontracted construction costs, permit costs, architects’ and engineering fees and related
costs. These costs are recognized proportionately as revenues are recognized for the particular project.
2003 and 2002 compared. During 2003, net sales increased by 146.3%, from Ps. 799,283 in 2002 to Ps. 1,968,953 in 2003. This
increase was due to the sale of the “Bosques de la Estadía” and “West Tower” land reserves. The cost of sales increased by 180.2% to
Ps. 1,265,649 in 2003 compared to Ps. 451,623 in 2002, and operating expenses increased by 10.7%, from Ps. 262,747 in 2002 to Ps.
290,975 in 2003, in each case due to an increase in net sales. Consequently, gross margin decreased to 35.7% in 2003 compared to
43.5% in 2002. Operating income increased 385.6% to Ps. 412,329 in 2003 from Ps. 84,913 in 2002 due to the increase in net sales.
The operating margin in 2003 was 20.9% compared to 10.6% in 2002, which reflects a mixture of sales with higher margins. During
2003, capital expenditures decreased to Ps. 2,477 from Ps. 24,979 in 2002.
2002 and 2001 compared. During 2002, net sales declined by 9.9%, from Ps. 887,107 in 2001 to Ps. 799,283 in 2002. This
decline was due to the slowdown of the U.S. and Mexican economies, thereby delaying sales of the Punta Mita and Bosques de Santa
Fe projects into 2003. The cost of sales declined by 4.0% to Ps. 451,623 in 2002 compared to Ps. 470,429 in 2001, due to a lower
sales volume and our cost-reduction programs, and operating expenses increased by 2.1%, from Ps. 257,240 in 2001 to Ps. 262,747 in
2002. Consequently, gross margin decreased to 43.5% in 2002 compared to 47.0% in 2001. Operating income declined 46.7% to Ps.
84,913 in 2002 from Ps. 159,438 in 2001 due to the decline in sales. The operating margin in 2002 was 10.6% compared to 18.0% in
2001, which reflects a mixture of sales with smaller margins.
Integral financial result
Integral financial result includes: (1) interest expense paid by us on financing, (2) interest earned by us on temporary
investments, (3) the variations in our UDI-denominated debt which result from the inflation adjustment mechanism of these
instruments, (4) foreign exchange gains or losses on our foreign currency-denominated monetary assets or liabilities, and (5)
monetary earnings or losses due to the effects of inflation on our net monetary liability or asset position. To the extent that our
monetary liabilities exceed our monetary assets during inflationary periods, we will generate a monetary position gain.
The following table presents the components of our integral financial result for each of the periods indicated:
Year ended December 31,
2001
2002
2003
(In thousands)
Interest expense
Interest income
UDIS variation
Ps. (1,076,283)
126,211
(109,282)
59
Ps. (865,104)
68,192
(120,648)
Ps. (1,076,072)
42,136
(93,847)
Year ended December 31,
2001
2002
2003
(In thousands)
Exchange, gain (loss), net
Gain on monetary position
336,046
374,976
Integral financial result
Ps. (348,332)
(770,354)
414,082
(529,668)
305,978
Ps. (1,273,832)
Ps. (1,351,473)
2003 and 2002 compared. In 2003, the integral financial result reflected a loss of Ps. 1,351,473 compared to a loss of Ps.
1,273,832 in 2002. This result was mainly due to a combination of the following factors: (i) an increase of 24.4% in interest expense
from Ps. 865,104 in 2002 to Ps. 1,076,072 in 2003, which reflects an increase in the interest spread of our debt and Ps. 200 million in
banking fees, commissions and other expenses incurred in connection with our debt restructuring; (ii) a decrease of 38.2% in interest
earned from Ps. 68,192 in 2002 to Ps. 42,136 in 2003, owing to lower levels of cash (iii) the depreciation of the Peso during 2003,
which created an exchange rate loss of Ps. 529,668 in comparison to the exchange rate loss of Ps. 770,354 in 2002; (iv) a loss of Ps.
93,847 in 2003 from the two medium-term notes denominated in UDIS, and (v) a 26.1% decrease in the gain from monetary position,
from Ps. 414,082 in 2002 to Ps. 305,978 in 2003, which is due to a lower inflation rate.
2002 and 2001 compared. In 2002, the integral financial result reflected a loss of Ps. 1,273,832 compared to a loss of Ps.
348,332 in 2001. This result was mainly due to the combination of the following factors: (i) a decline of 19.6% in interest expense
from Ps. 1,076,283 in 2001 to Ps. 865,104 in 2002, which is attributable to the decline in interest rates; (ii) a 46.0% decrease in
interest income from Ps. 126,211 in 2001 to Ps. 68,192 in 2002, which is due to a decline in cash levels and interest rates; (iii) a
depreciation of the Peso exchange rate during 2002, which resulted in an exchange rate loss of Ps. 770,354 compared to an exchange
rate gain of Ps. 336,046 in 2001; (iv) a loss of Ps. 120,648 from the two medium-term notes denominated in UDIS; and (v) a 10.4%
increase in the gain from monetary position, from Ps. 374,976 in 2001 to Ps. 414,082 in 2002 due to an increase in the inflation rate in
2002.
Other expense and change in accounting principles
In 2003, net other expenses amounted to Ps. 1,763,063, compared to Ps. 135,306 in 2002. The principal expenses in 2003
consisted of amortization of goodwill, pre-operating expenses and patents of Ps. 154,377, severance payments of Ps. 121,131, loss on
the sale of assets and stock of Ps. 87,661 and impairment of fixed assets of Ps. 14,140. In 2002, other expenses principally consisted
of amortization of goodwill, expenses incurred prior to the commencement of operations and amortization of patents, which
collectively were equal to Ps. 117,488 and impairment of fixed assets of Ps. 50,988.
Additionally, Desc adopted the new Bulletin C-15, which resulted in a charge to the 2003 year-end results of Ps. 1,384,294, net
of taxes.
Income taxes and employee profit sharing
As a result of amendments to the Mexican income tax law, which became effective on January 1, 1999, the nominal corporate
income tax rate was increased from 34% to 35%. The nominal corporate tax rate, however, may not be less than 1.8% of the average
value of a company’s assets, subject to some adjustments, whether or not the company had taxable income for the year. From 1999
through 2001, companies were permitted to defer a portion of their income tax liability on their net taxable income until dividends
were paid from that income. For 1999, companies initially were required to pay income tax at a
60
32% rate, with the remaining 3% income tax liability payable on a proportional basis upon the distribution of dividends. For 1999,
2000 and 2001, the income tax liability due initially was 30% and the remaining 5% income tax could be deferred. Effective January
1, 2002, a new Mexican income tax became effective and eliminated the option to defer the 5% portion of the income tax payment
and reduces the 35% tax rate by one percentage point each year until reaching 32% in 2005. The deduction for employee statutory
profit sharing (“PTU”) and the obligation to withhold taxes on dividends paid to individuals or foreign residents were also eliminated.
With some exceptions, the amendments to the Mexican income tax laws also limit the extent to which we may reduce our
consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries, to 60% of our
equity interest in the relevant subsidiaries.
In addition, aside from wages and agreed-upon fringe benefits, we and each of our subsidiaries are required by law to provide to
our workers PTU equal to 10% of taxable profit of the relevant company, calculated before any adjustments for inflation or
amortization of tax losses for previous years.
Revised Bulletin D-4, “Accounting for Income and Asset Taxes and Employee Profit Sharing,” became effective on January 1,
2000 for all Mexican companies. Prior to the effective date of this Bulletin, companies reporting under Mexican GAAP did not record
the deferred tax effect of recurring temporary differences in the timing of the recognition of income and expenses for financial
statement and income tax purposes. These differences, together with other non-recurring and permanent differences between income
and expenses for accounting and tax purposes, resulted in an effective income tax rate that was lower than the statutory rate. New
Bulletin D-4 requires that the comprehensive deferred effects (assets or liabilities) applicable to the cumulative temporary differences
between assets and liabilities for financial statement and tax purposes be recorded. Deferred employee profit sharing will be
calculated only for the temporary differences of the year whose reversal period can be determined. Our effective income tax rate for
corporate income taxes was (9.5)% in 2001, (43.6)% in 2002 and (7.0)% in 2003, as compared to the combined statutory rates of 35%
in 2001 and 2002 and 34% in 2003.
U.S. GAAP Reconciliation
In 2003, we had a net loss under U.S. GAAP of Ps.350,876 compared to a net loss under Mexican GAAP of Ps. 2,240,387. In
2002, we a had net loss under U.S. GAAP of Ps. 2,178,062 compared to a net loss under Mexican GAAP of Ps. 1,084,545. In 2001,
we had a net loss under U.S. GAAP of Ps. 133,910 compared to net income under Mexican GAAP of Ps. 45,446. These differences
are attributable mainly to the recognition of deferred taxes and employee profit sharing, net of their monetary gain, and the effect of
restatement of fixed assets based on NCPI for U.S. GAAP rather than Dollars as recorded under Mexican GAAP. The other major
reasons for these differences relate to the recognition of the benefits of tax consolidation, preoperating expenses, as well as the
minority interest and inflation effect of the U.S. GAAP adjustments and additionally in 2002 for the impairment of the goodwill.
For a further description of these and other adjustments under U.S. GAAP, see Notes 23 and 24 to the Financial Statements.
Also, in Note 23 to the Financial Statement there is a discussion of recently issued accounting standards and their estimated impact on
Desc’s financial position and results of operations.
61
New Accounting Principles
Mexican GAAP
In December 2001, the Mexican Institute of Public Accountants (the “IMCP”) issued new Bulletin C-9, “Liabilities, Provisions,
Contingent Assets and Liabilities and Commitments” (C-9) (“New Bulletin C-9”), whose provisions are mandatory for fiscal years
beginning January 2003, although early application is encouraged. C-9 supersedes the former bulletins C-9, “Liabilities”, and C-12,
“Contingencies and Commitments”, and establishes additional guidelines clarifying the accounting for liabilities, provisions and
contingent assets and liabilities, and establishes new standards for the use of present value techniques to measure liabilities and
accounting for the early settlement of obligations. During 2003, there was no adverse effect as a result of the application of New
Bulletin C-9.
In January 2002, the IMCP issued a new Bulletin C-8, “Intangible Assets” (“New Bulletin C-8”), whose provisions are
mandatory for fiscal years beginning January 1, 2003, although early application is encouraged. New Bulletin C-8 supersedes the
former Bulletin C-8, “Intangibles”, and establishes that project development costs should be capitalized if they fulfill the criteria
established for recognition as assets. Any preoperating costs incurred after the effective date of Bulletin should be recorded as an
expense, unless they meet certain criteria. The unamortized balance of capitalized preoperating costs under the former Bulletin C-8
will continue to be amortized. New Bulletin C-8 requires identification of all intangible assets to reduce as much as possible the
goodwill relative to business combinations. During the year ended December 31, 2003, there was no adverse effect derived from the
application of New Bulletin C-8.
In December 2002, the IMCP issued a new bulletin E-1, “Agriculture” (“New Bulletin E-1”), the observance of which is also
compulsory for fiscal years beginning on or after January 1, 2003, although earlier adoption is recommended. New Bulletin E-1
establishes the rules for valuing, presenting and disclosing biological assets and agricultural products, which includes the
administration carried out by a related party with respect to biological transformation of live animals or plants (biological assets) that
are destined to be sold as an agricultural product or as a comprehensive part of a biological asset. New Bulletin E-1 requires
biological assets and agricultural products to be valued at their fair market value, less the estimated costs at the point of sale. New
Bulletin E-1 also states that when the fair market value cannot be determined in a reliable and objective manner, the aforementioned
assets should be valued at production cost, less accumulated depreciation. Crop production in progress as of December 31, 2003 is
valued at cost. The effects derived from the application of New Bulletin E-1 in the consolidated financial statements were not
material.
In May 2003, the IMCP issued Bulletin C-12 “Financial Instruments of a Debt or Equity Nature or a Combination of
Both” (“Bulletin C-12”), whose application is mandatory for financial statements of periods beginning on or after January 1, 2004,
although early adoption is encouraged. Bulletin C-12 is the compilation of the standards issued by the IMCP with respect to the issue
of debt or equity financial instruments, or a combination of both, and includes additional standards on the accounting recognition for
these instruments. Consequently, Bulletin C-12 indicates the basic differences between liabilities and stockholders’ equity and
establishes the rules for classifying and valuing the components of debt and equity of combined financial instruments in the initial
recognition. Subsequent recognition and valuation of liabilities and stockholders’ equity of the financial instruments is subject to the
standards issued previously in the applicable bulletins. We believe that the effects of adopting this new accounting principle will not
have significant effects on its consolidated financial position and results of operations.
In April 2003, Bulletin B-5, “Financial Information by Segment” (“Bulletin B-5”), issued by IMCP went into effect superseding
the provisions in International Accounting Standard (“IAS”) No. 14, “Segment Reporting,” which was a supplement based on the
provisions in Bulletin A-8, “Aplicación Supletoria de Normas Interacionales de Contabilidad” (Supplementary Application of
International Accounting Standards), with respect to disclosing financial information by segment. The provisions of this new bulletin
are substantially similar to those of IAS No. 14; however, Bulletin B-5 incorporates a managerial focus, which requires at a minimum
disclosure of the segment information that is used by management to make decisions. These new provisions do not change the
segment information previously presented by us.
62
In March 2003, the IMCP issued Bulletin C-15, “Impairment of Long-Lived Assets and their Related Disposal” (“Bulletin C15”), whose application is mandatory for financial statements of periods beginning January 1, 2004, although early application is
encouraged. Desc early adopted the provisions of new Bulletin C-15. Bulletin C-15 establishes, among other things, that if there is an
indication of impairment of a long-lived asset in such use, whether tangible or intangible, including goodwill, entities must determine
the possible loss from impairment, unless they have evidence clearly demonstrating that such impairment is of a temporary nature. To
calculate the loss from impairment requires the determination of the recovery value, now defined as the higher of the net selling price
of cash generating unit and its use value, which is the present value of future net cash flows, at an appropriate discount rates. In the
provisions prior to Bulletin C-15, net future cash flows referenced to the purchasing power in effect at the evaluation date were used,
without requiring the discounting of such flows. The effect derived from the application of this new principle was the recognition of
Ps. 712,457 of impairment in the value of certain property, plant and equipment and Ps. 898,891 of impairment in the value of the
goodwill of certain subsidiaries. The charge to the 2003 results was Ps. 1,384,294, net of a reduction of Ps. 227,054 in the related
deferred income tax liability, presented in the statement of income under the heading “Change in accounting principle”.
U.S. GAAP
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards
(“SFAS”) No. 143, which was effective for Desc beginning in 2003. Desc plans to adopt this new standard in 2003. SFAS No. 143
addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the year in which it is
incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 did not have a significant impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections”, which requires that gains and losses from extinguishment of debt in all years presented
be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion 30, “Reporting the Results
of Operations - Discontinued Events and Extraordinary Items”. The amendment of SFAS No. 13, “Accounting for Leases”, eliminates
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. The new standard will be effective for
financial statements issued for fiscal years beginning after May 15, 2002 and lease transactions occurring after May 15, 2002, with
early application encouraged. Desc adopted this new standard in 2003. SFAS No. 145 did not have a significant impact on our
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which
nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The principal difference between SFAS
No. 146 and EITF 94-3 relates to the SFAS requirement that a liability for a cost associated with an exit or disposal activity
63
be recognized and measured initially at fair value when the liability is incurred, as opposed to recognition under EITF 94-3 at the date
of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Previously issued financial statements cannot be restated, and
the provisions of EITF 94-3 shall continue to apply for an exit activity initiated under an exit plan prior to the initial application of
SFAS No. 146. Desc adopted this new standard in 2003. SFAS No. 146 did not have a significant impact on our financial position or
results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which requires that a guarantor recognize, when
certain guarantees are established, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial
recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15,
2002. FIN 45 did not have a significant impact on our financial position or results of operations.
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities”. FIN 46 clarified the application of
Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 was effective immediately for all variable interests held
by Desc in a variable interest entity created after January 31, 2003. For a variable interest held by Desc in a variable interest entity
created before February 1, 2003, Desc will be required to apply the provisions of FIN 46 as of December 31, 2004. The Company
does not currently have any variable interests in a variable interest entity.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging
Activities”, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in SFAS No. 149 improve
financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new standard will be
effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003. In addition, except as stated below, all provisions of this statement should be applied prospectively.
The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. SFAS No. 149 did
not have a significant impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity”, which aims to eliminate diversity in practice by requiring that the following three types of financial
instruments be reported as liabilities by their issuers:
•
Mandatorily redeemable instruments (i.e., instruments issued in the form of shares that unconditionally obligate the issuer to
redeem the shares for cash or by transferring other assets).
64
•
Forward purchase contracts, written put options, and other financial instruments not in the form of shares that either obligate
or may obligate the issuer to settle its obligation for cash or by transferring other assets.
•
Certain financial instruments that include an obligation that (1) the issuer may or must settle by issuing a variable number of
its equity shares and (2) has a “monetary value” at inception that (a) is fixed, (b) is tied to a market index or other
benchmark (something other than the fair value of the issuer’s equity shares), or (c) varies inversely with the fair value of
the equity shares, for example, a written put option.
To date these types of instruments have been variously reported by their issuers as liabilities, as part of equity, or between the
liability and equity sections (sometimes referred to as “mezzanine” reporting) of the balance sheet. The provisions of SFAS No. 150
are effective for financial instruments entered into or modified after May 31, 2003, and pre-existing instruments effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 did not have a significant impact on our financial
position, results of operation or cash flows.
B. Liquidity and Capital Resources
Liquidity
We are a holding company and, as such, have no operations of our own. Our ability to meet our obligations is primarily
dependent on the earnings and cash flows of our direct and indirect subsidiaries and the ability of those subsidiaries to pay us
dividends, interest on intercompany loans or other amounts.
In 2002, we relied primarily on cash flows from our operations, as well as cash from our credit facilities, to fund our obligations.
At the end of 2002 and in 2003, we were in default of the Credit Agreements and were unable to incur new indebtedness or borrow
from our existing facilities. As a result, in 2003, we exclusively relied on internally generated cash flow and proceeds from the sale of
non-strategic assets to satisfy our obligations.
During 2003, we used cash resources to (1) pay interest expense, (2) pay taxes, (3) finance working capital requirements and (4)
finance capital expenditures. At the end of 2003, we used a portion of the proceeds from the sale of our adhesives and waterproofing
business to make a $40 million principal payment on our indebtedness, which was the sole principal payment of the year. Since our
debt refinancing in 2003, we have principally used our cash flows to prepay our indebtedness.
Currently, we do not have any capital commitments related to any capital expenditures investments. We have also increased our
internally generated cash flows by reducing our working capital requirements and operating expenses. In addition, in March 2004, our
stockholders approved a proposal to increase our capital stock by approximately Ps. 2.738 billion by issuing approximately
912,719,584 shares of our Series A and Series B shares. In connection with the capital increase, Desc entered into a Stock
Subscription Cooperation Agreement with Inversora Bursátil, S.A. de C.V., Casa de Bolsa, Grupo Financiero Inbursa (“Inbursa”),
pursuant to which Inbursa agreed to purchase up to Ps. 2 billion of any unsubscribed shares on the same terms as our stockholders.
Approximately 502,544,745 shares or 55% of the total shares issued in the capital increase were subscribed by our stockholders, and
410,174,839 shares were sold to Inbursa. The proceeds from the increase in capital stock and internally generated cash flows were
used to prepay our indebtedness in the following manner: $162 million was used to prepay our long-term credit facility, $20 million
was applied towards repayment of our revolving bank credit line and $74 million will be used to redeem the outstanding Notes on
June 30, 2004. As a result of these prepayments, the interest spread on certain of our credit facilities have been reduced. See the
discussion below under the heading “Credit Facilities” for additional information on our new credit facilities.
65
In accordance with Desc’s strategy and the terms of some of our credit agreements, the net available cash obtained from any
asset sale or equity or indebtedness issuance, as well as a significant percentage of the excess cash generated by our operations will be
used to reduce our outstanding indebtedness. The reduction of our debt levels will improve our financial situation, optimize our
weighted average cost of debt, improve our financial indicators and recover our profitability levels.
Accordingly, we believe that these sources will be adequate to meet our cash requirements over the next 12 months.
The table below summarizes the sources and uses of cash for the three years ended December 31, 2003. Under Mexican GAAP,
we present our consolidated statement of changes in financial position in accordance with Bulletin B-12, “Statement of Changes in
Financial Position” (“Bulletin B-12”), which identifies the generation and application of resources by the differences between
opening and final financial statement balances in constant Mexican pesos. Bulletin B-12 also requires that monetary and foreign
exchange gains and losses be treated as cash items for the determination of resources generated by operations.
Principal Sources and Uses of Cash
Year ended December 31,
(thousands of constant Pesos at December 31, 2003)
2001
Net cash generated by (used in) operating activities
Net cash generated by (used in) investing activities
Net cash provided by (used in) financing activities
Payments of debt
Proceeds from debt
Dividends paid
Ps 3,545,599
675,094
(4,480,930)
(508,058)
(1,384,338)
(228,323)
2002
Ps
79,122
(520,714)
1,458,670
(2,654,645)
4,852,720
(440,469)
2003
Ps (1,628,153)
1,195,110
(1,348,553)
(7,505,534)
7,097,310
(206,315)
Net Cash Generated by (Used In) Operating Activities
Net cash generated by operating activities was Ps. 3,545,599 in 2001 and Ps. 79,122 in 2002 and net cash used in operating
activities was approximately Ps. 1,628,153 in 2003. In 2003, the cash used in our operating activities was primarily attributable to a
loss in our integral financial result of Ps. 1,351,473, the extraordinary charge for the adoption of the Bulletin C-15 of Ps. 1,384,294
and increased working capital requirements equal to Ps. 505,633. This was partially offset by depreciation and amortization for Ps.
1,380,750.
As of December 31, 2003, we had cash and marketable securities totaling Ps. 286,453 on a non-consolidated basis, and Ps.
719,967 on a consolidated basis.
During 2003, we received Ps. 102,452 in dividends from our subsidiaries, which we used to pay dividends to our stockholders
totaling Ps. 206,315 (which dividends were declared in 2002) and to service debt. During 2002, we received Ps. 285,814 in dividends
from our subsidiaries, which we also used to pay dividends to our stockholders totaling Ps. 440,469 and to service debt. During 2001,
we received Ps. 117,988 in dividends from our subsidiaries, which we used to pay dividends to our stockholders totaling Ps. 228,323.
The dividend policies of the entity proposing to pay the dividend may change at the discretion of its stockholders and is subject to the
limitations under our credit agreements. In addition, general limitations under Mexican corporate law apply to the amount of
dividends payable by each of Desc and its direct and indirect subsidiaries.
66
All of our series of shares are entitled to the same dividend and distribution rights, and, therefore, any dividends must be
declared and paid in equal amounts with respect to all outstanding shares. We did not declare any dividends in 1999 and 2003, and
paid cash dividends in 2000, 2001 and 2002. The table below presents the cash and stock dividends paid on each share, as well as the
number of shares entitled to these dividends during the periods indicated. Dividend per share amounts have not been adjusted for
inflation, and reflect share amounts outstanding immediately prior to the distribution of the dividend. Peso figures have been
translated into Dollars at the Noon Buying Rate on the first date that the dividend was available for payment:
Period
1999
2000
2001 (2)
2002 (3)
2003
(1)
(2)
(3)
Dividends
Number of shares
entitled to dividends
per share(1)
1,492,363,425
1,444,774,155
1,368,998,270
1,369,079,376
1,369,079,376
0.00
0.27
0.29
0.29
0.00
Dividends reflected in the table are in nominal Pesos.
Paid on July 20, 2001, October 19, 2001, January 31, 2002 and April 18, 2002.
Paid on July 25, 2002, October 24, 2002, January 31, 2003 and April 9, 2003.
In accordance with Mexican Law and our ByLaws, at least 5% of our net income, as reflected in the financial statements
approved by our stockholders, must be allocated to a legal reserve until this reserve equals 20% of our paid-in capital. We increased
this reserve in April 1998 to reflect the increase in paid-in-capital caused by the stock dividend declared in 1997. After this allocation,
the remainder of our net profits is available for distributions as dividends subject to stockholders’ approval and the terms of any
applicable law or indebtedness that restricts dividends.
The declaration, amount and payment of dividends are determined by majority vote of the holders of the Series A shares and the
Series B shares, generally, but not necessarily, on the recommendation of our board of directors, and will depend on our results of
operations, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors and
the holders of the Series A and the Series B shares.
As a general policy, approximately 35% of the legally available net income of Desc has been paid annually to our stockholders.
However in 1999 and 2003, we were not permitted to pay cash dividends under the terms of our then existing credit facilities that
have since been repaid. On December 23, 2003, Desc refinanced a significant portion of its bank indebtedness. As part of such
refinancing, Desc agreed not to pay cash dividends to its stockholders unless it complies with certain financial ratios and its
outstanding indebtedness is below certain thresholds. Our outstanding indebtedness does not currently allow us to pay any dividends.
Therefore, at our last stockholders’ meeting held on April 26, 2004, our stockholders resolved not to pay cash dividends in 2004.
We cannot assure you that we will be able to pay cash dividends in the future or that any future dividends will be comparable to
historical dividends.
Owners of ADSs are entitled to receive any dividends payable in respect of the Series B shares underlying the ADSs. The
Depositary generally will convert cash dividends received by it in respect of Series B shares evidenced by ADSs from Pesos into
Dollars and, after deduction or upon payment of expenses of the Depositary, pays these dividends to the holders of ADSs in Dollars.
67
Net Cash Generated by (Used In) Investing Activities
In 2003, our investment activities primarily consisted of capital expenditures and the acquisition of the capital stock of our
minority partners equity interests in Corfuerte and Authentic Acquisition Corporation. Net cash provided by investing activities in
2001 and 2003 was approximately Ps. 675,094 and Ps. 1,195,110, respectively. Net cash used in investing activities in 2002 was
approximately Ps. 520,714.
Net Cash Generated by (Used In) Financing Activities
Net cash (applied to) generated by financing activities was Ps. (4,480,930) in 2001, Ps. 1,458,670 in 2002 and Ps. (1,348,553) in
2003. In 2003, net cash was primarily used to pay indebtedness of Ps. 892,913 and dividends in the amount of Ps. 206,315.
In the past, our principal subsidiaries generally did not rely on Desc or each other for financing, except when substantial capital
expenditures were to be made and in other limited circumstances. Since the last quarter of 2001, Desc has been the source of
financing for our subsidiaries through intercompany loans. We anticipate that Desc alone will make future debt offerings in the capital
markets. The proceeds of any future offerings of this kind would be used to repay debt at the Desc level or, to the extent required by a
subsidiary and to the extend permitted by the covenants in our credit agreements, would be provided to the subsidiary either by means
of a capital contribution or an intercompany loan, as determined by Desc at the time. See below under the heading “Credit Facilities”
for a discussion of the restrictions under our credit agreements.
Credit Facilities
As of December 31, 2003, our consolidated liabilities were Ps. 11,801 million. Of this amount, Ps. 1, 283 million are Pesodenominated, Ps. 2,282 are UDIS, Ps. 7,418 ($662 million) are Dollar-denominated and Ps. 818 ($73 million) correspond to the
Notes. The total indebtedness of our syndicated credit facilities is Ps. 8,064 million (including the Peso, Dollar and revolving credit
facilities)
As part of our 2003 restructuring plan, we reached an agreement with our creditors to refinance our then existing syndicated
loans and the majority of our short-term debt. Approximately $720 million of debt was refinanced ($479 million in dollardenominated long-term debt, Ps. 1,300 million in peso-denominated long-term debt and $112 million in revolving debt and letters of
credit). The refinancing substantially reduces our short- and medium-term financial requirements as the maturities for the remaining
debt are $27 million for 2004 and $18 million for 2005.
In connection with the refinancing, we entered into the following credit agreements:
•
Credit Agreement, dated as of December 19, 2003, among Desc, as the borrower, Citibank, N.A. as the administrative agent,
and the lenders party thereto from time to time for a $479 million credit facility (the “Dollar Facility”). The facility
amortizes in 6 equal installments, payable on June 30, 2006, December 31, 2006, June 30, 2007, December 31, 2007, June
30, 2008 and December 19, 2008.
•
Revolving Loan and Letter of Credit Agreement, dated as of December 19, 2003, among Desc, as the borrower, Citibank,
N.A. as the administrative agent, and the other entities and lenders party thereto from time to time for a $112 million
revolving credit and letters of credit facility (the “Revolving Facility”). The facility amortizes on June 30, 2006.
68
•
Credit Agreement, dated as of December 23, 2003, among Desc, as the borrower, BBVA Bancomer, S.A. as the
administrative agent, and the lenders party thereto from time to time for a Ps. 1,300 million credit facility (the “Peso
Facility,” and together with the Dollar Facility and the Revolving Facility, the “New Credit Facilities”). The facility
amortizes in 6 equal installments, payable on June 30, 2006, December 31, 2006, June 30, 2007, December 31, 2007, June
30, 2008 and December 23, 2008.
We used the proceeds from our recent increase in capital stock and internally generated cash flows to prepay $256 million of our
debt during the second quarter of 2004. As of May 2004, our total net indebtedness was $761 million.
As a result of this prepayment, the interest rate applicable to the New Credit Facilities decreased:
•
for the Dollar Facility debt, the applicable rate is LIBOR + 250 basis points;
•
for the Peso Facility debt, the applicable rate is TIIE + 250 basis points; and
•
for the Revolving Facility, the applicable rate is LIBOR + 250 basis point.
Each of the New Credit Facilities provides for a reduction in interest rates if Desc’s financial leverage improves.
The obligations of Desc under the New Credit Facilities are guaranteed by Desc Automotriz, Moresa, S.A. de C.V.,
Comercializadora Moresa, S.A. de C.V., Morestana, S.A. de C.V., Pistones Moresa, S.A. de C.V., Inmobiliaria Corcel, S.A. de C.V.,
Inmobiliaria Unik, S.A. de C.V., Pintura Estampado y Montaje, S.A. de C.V, Agrokén, S.A. de C.V., Corporativo Dine, S.A. de C.V.,
Promociones Bosques, S.A. de C.V., Cantiles de Mita, S.A. de C.V., Aeropycsa, S.A. de C.V., Corporativo Arcos Desc, S.A. de C.V.,
Corporativo Arcos II, S.A. de C.V., Operadora de Nayarit, S.A. de C.V., Corfuerte, Alimentos del Fuerte, S.A. de C.V., Nair
Industrias, S.A. de C.V., Pesquera Nair, S.A. de C.V., Inmobiliaria El Puente, S.A. de C.V., Authentic Acquisition Corporation,
Authentic Specialty Foods Inc. and Cañada de Santa Fé, S.A. de C.V. (collectively the “Guarantors”). In addition, as security for the
performance by Desc of its obligations under the New Credit Facilities, the following companies acted as pledgors of different assets:
Desc, S.A. de C.V., Pistones Moresa, S.A. de C.V., Inmobiliaria Corcel, S.A. de C.V., Inmobiliaria Unik, S.A. de C.V., Pintura
Estampado y Montaje, S.A. de C.V., Corporativo Arcos Desc, S.A. de C.V., Corporativo Arcos II, S.A. de C.V., Cantiles de Mita,
S.A. de C.V., Promociones Bosques, S.A. de C.V., Desc Automotriz, S.A. de C.V., Moresa, S.A. de C.V., Operadora de Nayarit, S.A.
de C.V., Corporativo Dine, S.A. de C.V., Corfuerte, S.A. de C.V., Authentic Acquisition Corporation.
The terms of the New Credit Facilities contain a number of restrictive covenants that impose significant operating and financial
covenants on us including, among other things, restrictions on our ability to: (i) incur additional debt; (ii) pay dividends and make
restricted payments; (iii) create liens; (iv) use the proceeds from sales of assets and subsidiary stock; (v) incur capital expenditures;
(vi) enter into sale and leaseback transactions; (vii) enter into transactions with affiliates; and (viii) enter into certain mergers,
consolidations and transfers of all or substantially all of our assets.
69
The New Credit Facilities require Desc to comply with certain financial covenants, such as maintaining:
•
an interest coverage ratio in excess of 2.25. At the close of 2003, the ratio was 2.91.
•
a ratio of total debt of subsidiaries to consolidated debt below 0.20. At the close of 2003, the ratio was 0.11.
•
a ratio of consolidated debt to operating profit, plus depreciation to amortization, at below 5.35 based on nominal Pesos and
Dollars. At the close of 2003, the ratio was 4.96.
•
a ratio of consolidated debt to total capitalization below 0.55. At the close of 2003, the ratio was 0.53.
These ratios become gradually stricter over the term of the credit agreement.
The New Credit Facilities contain customary events of default, including, among others, the failure to pay amounts thereunder,
breach of other obligations, any representation and warranty being incorrect or misleading in any respect, cross-defaults, certain
insolvency events or ceasing to carry on business, imposition of any currency restrictions, change of control of Desc or any of the
Guarantors, the failure of the corresponding security agreements to create or maintain a valid and duly perfected first priority security
interest in and lien upon any of the collateral securing Desc’s obligations under the corresponding credit agreements or breach of any
covenants.
On April 27, 2004, we entered into: (a) the Consent, Waiver and First Amendment (the “First Amendment to the Dollar
Facility” to our Dollar Facility, (b) the Consent, Waiver and First Amendment (the “First Amendment to the Revolving Facility”)
to the Revolving Facility and (c) the Consent, Waiver and First Amendment (the “First Amendment to the Peso Facility”, and
together with the First Amendment to the Dollar Facility and the First Amendment to the Revolving Facility, the “First
Amendments”) to our Peso Facility. The purpose of the First Amendments was to give us greater flexibility from the covenants
found in the New Credit Facilities. Specifically, the First Amendments allowed us to enter into various consents with lenders Citibank
and Bancomer to, among other things, decrease the interest rates on the New Credit Facilities and to permit Desc to redeem the Notes.
Our failure to comply with the covenants contained in our outstanding debt instruments could result in an event of default,
which could materially and adversely affect our operating results and our financial condition.
On July 12, 2000, Desc issued approximately Ps. 1 billion in UDI-denominated Medium Term Notes with a maturity period of
seven years. These notes bear interest at a net rate of 8.20% and were rated “MAA-” by Fitch Ratings. This placement was done
under the Ps. 3 billion program authorized by the CNBV, from which Ps. 850 million (or 324 million in UDIS) was placed during
October 1999. “UDIs” are Unidades de Inversión or investment units, which are denominated in Pesos and adjusted periodically for
inflation by Banco de México, the Mexican Central Bank.
In January 2000, Girsa entered into a ten-year, $105 million loan agreement with the International Finance Corporation. As a
result of the merger between Girsa and Desc, Girsa’s obligations under this loan agreement were assumed by certain of our Chemical
Sector subsidiaries with a guarantee by Desc of those obligations. The proceeds from this loan were used to fund the establishment of
a joint venture in the synthetic rubber business, increase capacity at various facilities, implement quality, technology and process
improvements in various businesses, and implement various cost reduction programs as well as maintenance and environmental
investments. As of December 31, 2002, we had borrowed all $105 million under this facility.
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In October 1999, Desc issued approximately Ps. 850 million of UDI-denominated Medium Term Notes due 2006. These notes
were our first issuance under a Ps. 3 billion program structured by the Chase Manhattan Bank Mexico and authorized by the CNBV.
These notes bear interest at a net rate of 9% and were rated “MAA-” by Fitch Ratings. We used the proceeds of this issuance to
refinance short-term debt.
On October 9, 1997, Dine placed the Notes, which are guaranteed by Desc, in international markets, bearing interest at 8.75%
and maturing on October 9, 2007. As a result of Dine’s merger into Desc, Desc has assumed all of Dine’s obligations under the
indenture for such notes. As of December 31, 2003, the carrying amount of the notes was $73 million and their fair value was $70.8
million. We are scheduled to redeem the Notes on June 30, 2004. See Item 8B. “Significant Changes” for a discussion of the
redemption of the Notes.
We are in compliance with all covenants or other requirements set forth in our financing agreements.
See Note 11 to our Financial Statements for additional information concerning our credit facilities.
From time to time, as part of our financing activities, we and our subsidiaries have entered into various financing agreements,
including bank sale-leaseback transactions.
Credit Ratings
In January 2004, Fitch Ratings lowered our national scale rating to “BBB- (mex)” from “BBB (mex)” and also maintained our
unsecured bond rating on local and foreign currency to “B”, and our secured bond rating on local and foreign currency to “B+”.
In February 2004, Fitch Ratings placed our national scale rating of “BBB- (mex)” on positive watch.
In March 2004, Standard & Poor’s Ratings Services affirmed its “B+” long-term foreign and local currency corporate credit
ratings on Desc and on Desc Automotriz. The ratings were removed from credit watch. Moody’s downgraded our Senior Implied
rating to B3, from B2, and upgraded the Notes to B3, from Caa1.
The interest rates we pay on our current indebtedness are not directly impacted by changes in credit ratings. Desc has no ratingdowngrade triggers that would accelerate the maturity dates of its debt. A change in ratings is not an event of default, nor is the
maintenance of a specific minimum level of credit rating a condition to drawing upon Desc’s credit agreements. Although credit
ratings may impact the rate at which we can borrow funds, a credit rating is not a recommendation to buy, sell or hold securities. In
addition, a credit rating is subject to revision or withdrawal at any time by the assigning rating organization and each rating should be
evaluated independently of any other rating.
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Capital Expenditures
The following table lists our capital expenditures and other investments by business segment for the periods shown. Capital
expenditures and other investments may include investments in or acquisitions of the capital stock of existing businesses.
Year ended December 31,
2001
2002
2003
(In millions)
Automotive Sector
Chemical Sector
Food Sector
Real Estate Sector (1)
Desc
Total
(1)
Ps. 333.1
261.2
185.4
2.8
2.7
Ps. 785.2
Ps.
777.0
278.9
31.3
25.0
5.2
Ps. 1,117.4
Ps. 556.8
159.2
80.0
2.5
4.1
Ps. 802.6
Does not include the Real Estate Sector’s operating expenses, such as expenditures for land acquisitions, construction costs,
permits, architects’ and engineering fees and related expenditures.
In 2003, our capital expenditures related to:
•
increasing the utilization capacity of our constant velocity joint facilities; and
•
expenses incurred to implement the Tractor Project.
In 2002, most of our capital expenditures were allocated to:
•
increasing the utilization capacity of our constant velocity joints facilities;
•
installation of an additional forge production line; and
•
expenses relating to the Tractor Project.
In 2001, most of our capital expenditures related to:
•
increasing the utilization capacity of our constant velocity joints facilities; and
•
increasing the capacity of our gear production business.
Pursuant to the terms of certain of our credit agreements and subject to certain exceptions, we may not make capital
expenditures (in the aggregate) that exceed $60,000,000 in fiscal year 2003, $75,000,000 in fiscal year 2004, $90,000,000 in fiscal
year 2005 and $50,000,000 in each of fiscal years 2006, 2007 and 2008. However, the limit for any of fiscal years 2006, 2007 and
2008 may be increased to $90,000,000 for such fiscal year if the ratio of our “consolidated net indebtedness” (as defined in our credit
agreements) at the end of the prior fiscal year to “consolidated EBITDA” (as defined in our credit agreements) for the then most
recently concluded period of four consecutive fiscal quarters of Desc is less than 3.0 to 1.0.
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Treasury Policy
Our treasury activities are coordinated and managed by the corporate treasury office in accordance with the policies approved by
our board of directors and our Finance and Planning Committee. These policies include the management of investments and
counterparty risk, interest rate risk and the hedging of currency risk, which are reviewed regularly and have not changed significantly
over the past year. Compliance with these policies is tested on a regular basis. As with all hedging instruments, there are risks
associated with the use of foreign currency forward exchange contracts, as well as interest rate swap agreements. While providing
protection from certain fluctuations in currency exchange and interest rates, by utilizing such hedging instruments we potentially
forego benefits that might result from other fluctuations in currency exchange and interest rates. We have entered into, and expect to
continue to enter into, such hedging arrangements with counterparties that will be selected and approved primarily on the basis of
general creditworthiness. However, any default by such counterparties might have an adverse effect on us.
Income Tax Refunds
In Mexico, each corporation is required to pay an asset tax (substantially equivalent to an alternative minimum income tax) for
each year in an amount not less than 1.8% of the average value of its assets (subject to some adjustments), whether or not the
corporation had taxable income for the year. Under Mexican income tax law, each year, each of our consolidated subsidiaries has
been required to pay to Desc the amount of tax it would have paid to the Mexican government in respect of its annual taxable income
and assets had the subsidiary filed a separate return. These payments were made pro-rata based on our proportionate equity interest in
the subsidiary making the payment. We were required to collect these tax payments and pay to the Mexican government the amount
of tax due on behalf of Desc and its subsidiaries calculated on a consolidated basis. We generally made payments in respect of each
year early in the following year, after completion of our year end audit. Because we were entitled to apply this requirement on the
basis of our consolidated taxable income, we were generally able to reduce our consolidated tax liability below the aggregate amount
of tax payments we receive from our subsidiaries, depending on how many subsidiaries made payments based on the minimum tax
and the extent of consolidated taxable income compared to consolidated taxable assets. Any amount by which these tax payments to
Desc exceeded our consolidated tax liability for any year was retained by Desc and therefore provided a source of cash at the parent
company level. We refer to these excess payments as “refunds.” These refunds and the Mexican tax system are addressed in Notes 4
and 16 to the Financial Statements.
As a result of amendments to Mexican income tax law, which became effective on January 1, 1999, each subsidiary made 40%
of its income tax payments directly to the Mexican government. The income tax law also limits the extent to which we may reduce
our consolidated tax liability by offsetting tax liabilities in some of our subsidiaries against tax losses in other subsidiaries including
Desc, to 60% of our equity interest in the relevant subsidiaries, thus reducing the amount of refunds available to us.
From 1999 to 2001, the Mexican income tax rate was 35%, with the obligation to pay this tax each year at a rate of 30%, with
the remainder payable upon distribution of earnings. Beginning in 2002, the option to defer a portion of the income tax payment until
dividends were distributed was eliminated. The maximum income tax rate was 35% in 2002 and 34% in 2003, is 33% in 2004 and
will be 32% beginning in 2005.
C. Research and Development, Patents and Licenses
We have proprietary technologies some of them protected as trade secrets, Mexican, U.S. and foreign patents, registered
trademarks, trade names and applications for, or licenses in respect of, the
73
same that relate to various businesses. We believe that certain of these intellectual property rights are intangible assets of material
importance to Desc and to the businesses to which they relate. We also believe that the material patents, trademarks, trade names and
trade secrets of our operating subsidiaries and divisions are adequately protected.
The following table lists our research and development investments by business segment for the periods shown:
Year ended December 31,
2001
2002
2003
Automotive Sector
Chemical Sector
Food Sector
Corporate R&D
Ps. 119,161
69,920
458
60,443
Ps. 118,104
65,962
13,256
48,866
Ps. 162,850
41,652
0
45,000
Total
Ps. 249,982
Ps. 246,188
Ps. 249,502
D. Trend Information
Overview:
2004 will doubtless continue to be a year of many challenges, and, accordingly, we have established the following objectives:
•
To improve our financial position by increasing our earnings and completing an increase in capital stock.
•
To continue to reduce our indebtedness, which will improve our financial ratios and lower our financing costs.
•
To recover our profitability by improving our sales volume and operating profit.
•
To further consolidate our administrative structure and achieve a 15% operating-to-sales ratio.
•
To continue defining our core and non-core businesses, and divesting our non-core businesses, which will enhance our
flexibility and competitiveness and allow us to focus on recovering shareholder value. Our flexibility to divest assets is
subject to restrictions in certain of our credit agreements, regardless of whether those assets are pledged as collateral.
We accomplished our first objective in 2004 by successfully completing an increase in capital stock. The proceeds of the capital
increase of $240 million and internally generated funds were used to prepay $162 million of our long-term credit facility and $20
million of our revolving bank credit line and $74 million will be used to redeem the outstanding Notes on June 30, 2004. As of May
2004, our net indebtedness was reduced to $761 million, thereby improving our debt profile and reducing our interest expense. We
plan on using any excess cash to further reduce our indebtedness.
74
We will continue implementing our administrative restructuring and are confident about reducing our sales-to-operating
expenses ratio to 15%.
However, we believe that the recovery of our profitability levels will be affected by the following:
Automotive Sector: The discount programs being established by our customers, together with the significant increases in steel
prices (which is the principal raw material for this sector) and problems encountered with steel supplies, give us no assurances that the
Automotive Sector’s earnings will improve from 2003 levels. We are evaluating whether to sell our low-profit margin (or, in some
cases, negative margin) products or, unless there is an increase in the price of such products, eliminate the sale of such products.
Chemical Sector: During the first half of 2004, the chemicals industry, including the Chemical Sector, was adversely affected by
the increase in oil prices, as well as the considerable increase in raw material prices. The Chemical Sector has been unable to transfer
these cost increases to its customers at the same rate. However, we believe that raw material prices are beginning to stabilize, which
may help the Chemical Sector improve its performance in comparison to the first half of 2004. In addition, we have seen an increase
in the demand of our products due to slightly increased economic activity.
Food Sector: In general, the Food Sector shows some possibilities of continued growth in profitability, which stems from the
implementation of extensive cost and expense controls and an increase in our sales attributable to the promotion of new products and
brands, as well as an increase in price levels for our pork products. However, we cannot assure you that our operations will not
experience increased raw material prices or that the current price levels of our food and pork products will be maintained. The
demand for our products has been growing and is attributable to improved economic conditions.
Real Estate Sector: Generally, we expect a stable year in the Real Estate Sector. We expect to generate value with sales from our
Punta Mita project. We believe that the demand of our real estate projects may be affected if there is an increase in interest rates.
E. Off Balance Sheet Arrangements
We utilize certain off-balance sheet arrangements, none of which are material. We own a 99.99% equity participation in
Fomento Hipotecario, S.A. de C.V., SOFOL (or Limited Purpose Financial Corporation) (“Fomento”). Fomento is a mortgage
company, which is regulated by the Secretaria de Hacienda (Mexican Treasury Department), the Banco de México and the CNBV.
Fomento issues loans for the construction of new homes and the acquisition of real estate properties. Fomento’s mortgages are subject
to Mexican law and regulation by the CNBV and the Secretaria de Hacienda (Mexican Treasury Department).
Fomento obtained a $10 million line of credit from Grupo Financiero Inbursa, S.A. de C.V., which is guaranteed by Desc. As of
December 31, 2003, Fomento had drawn $8.2 million on the line of credit.
75
Fomento is reported under equity in associated companies and unconsolidated subsidiaries. A summary of the balance sheets as
of December 31, 2002 and 2003 of this subsidiary is as follows:
Cash and cash equivalents
Accounts receivable
Total assets
Banks loans
Total liabilities
Total stockholder’s equity
2002
2003
Ps. 13,293
93,619
109,239
86,226
86,627
22,612
Ps. 11,441
98,075
111,389
91,097
91,843
19,546
F. Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2003:
Payments Due By Period
(In millions of Dollars)
Total
Contractual Obligations Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
Long-Term Debt Obligations(1)
Capital (Finance) Lease Obligations
Operating Lease Obligations
Purchase Obligations(2)
Other Obligations(3)
1,009.7
4.6
55.7
103.7
6.7
17.2
0.5
13.3
22.3
6.7
778.5(4)
1.2
24.0
51.4
0.0
214.0
1.5
11.3
15.0
0.0
0.0
1.4
7.1
15.0
0.0
Total
1,180.4
60.0
855.1(4)
241.8
23.5
(1)
(2)
(3)
(4)
Under our bank facilities, the maturity on our outstanding debt could be accelerated if we do not maintain certain covenants. See
also discussion above under the heading “Credit Facilities”.
These purchase obligations arise under supply agreements with Nutrimentos Purina, S.A. de C.V., for the purchase of grain for
our pork operations, and Pemex, for the purchase of natural gas.
These payment obligations relate to the exercise of certain put rights held by Desc’s minority stockholders (see the discussion
below regarding the Nair Put right).
In 2004, we prepaid $256 million of our indebtedness, thereby reducing our future principal payments.
In connection with our acquisition of certain companies in the Food Sector, we entered into the following stockholders
agreements with our partners in those businesses:
•
•
•
Stockholders Agreement, dated July 31, 1998, among JPMCC Belgium (SCA) and Sixty Wall Street Belgium (SCA) (as the
assignees of J.P. Morgan Capital Corporation, collectively, the “JP Group”), Agrobíos, S.A. de C.V. (which has been
merged with and into Desc), Corfuerte and Desc (the “Corfuerte Stockholders Agreement”).
Stockholders Agreement, dated July 31, 1998, among the JP Group, Agrobíos, S.A. de C.V. (which has since been merged
with and into Desc), Authentic Acquisition Corporation and Desc (the “Agrobios Stockholders Agreement”).
Stockholders Agreement, dated December 9, 1998, among Ignacio Gavaldón Guajardo, Conservas Gavaldón, S.A. de C.V.
(“Conservas”), Grupo Pesquero Industrial Zeus, S.A. de C.V. (and together with Mr. Gavaldón and Conservas, collectively
referred to as “Grupo Gavaldón”) and Corfuerte (the “Nair Stockholders Agreement”).
76
In 2003, the JP Group notified Desc that it was exercising its put rights under the Corfuerte Stockholders Agreement. In
addition, Desc agreed to purchase the JP Group’s equity stake in Authentic Acquisition Corporation. As a result, on January 30, 2004,
Desc acquired the JP Group’s 18.6% equity stake in each of Corfuerte and Authentic Acquisition Corporation for a purchase price of
$12.3 million and $2 million, respectively. Desc now owns 96.1% of Corfuerte and 99.9% of Authentic Acquisition Corporation.
The Nair Stockholders Agreement provides that Grupo Gavaldón has the right to exchange its shares in Nair Industrias, S.A. de
C.V., Pesquera Nair, S.A. de C.V. and Propemaz, S.A. de C.V. (collectively, the “Nair Companies”) for shares in Corfuerte (the
“Nair Put”) on or prior to August 14, 2003. Grupo Gavaldón did not exercise the Nair Put. However, on February 26, 2004,
Corfuerte acquired Grupo Gavaldón’s equity holdings in the Nair Companies for a purchase price of $10 million. Corfuerte now
wholly owns the Nair Companies.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Our board of directors is responsible for the management of our business. Our ByLaws provide that the board of directors will
be comprised of no less than 5 and no more than 20 directors as determined by our stockholders at each annual stockholders’ meeting.
Our ByLaws also provide that our stockholders will elect the alternate directors, if any. Our ByLaws require that not less than 25% of
our directors constitute “independent directors” (as defined by the Mexican Securities Law).
The holders of the Series A shares have the right to elect one more than half of the directors on our board. Stockholders or
groups of stockholders holding shares of any one class, which represent at least 10% of our total equity capitalization, have a right to
elect one director of the relevant series of shares for each 10% held. The holders of the Series B shares have the right to elect the
remaining members of our board of directors. Each director is elected to serve a one-year term and remains in office until the person
elected to replace such director takes office. At our April 26, 2004 stockholders’ meeting, our stockholders set the size of our board of
directors at 11 members.
The table below lists the names of our directors who were elected by our stockholders at our annual meeting held on April 26,
2004, their principal occupation, their business experience (including other directorships), the type of director and the period of
service on the board. Except as indicated below, none of our directors holds any offices or positions with Desc. The members of our
board of directors serve a one-year term.
Name of Director
Series A Directors:
Fernando Senderos
Mestre(2)
Alberto Bailleres
González
Principal Occupation
And Positions With Desc
First
Elected
Business Experience
Type(1)
Chairman of the Board of
Directors and Chief Executive
Officer of Desc, S.A. de C.V.
Member of Desc’s Finance and
Planning Committee and
Director of Industrias Peñoles,
S.A. de C.V., Kimberly Clark
de México, S.A. de C.V., Alfa,
S.A. de C.V., Teléfonos de
México, S.A. de C.V. and
Televisa, S.A. de C.V.
Patrimonial /
Related
1973
Chairman of the Board of
Directors of Industrias
Member of the Board of
Directors of Desc, S.A. de
Related
1973
77
Name of Director
Principal Occupation And
Positions With Desc
Business Experience
Type(1)
First
Elected
2004
Peñoles, S.A. de C.V., Grupo
Nacional Provincial, S.A., GNP
Pensiones, S.A. de C.V., Grupo
Palacio de Hierro, S.A. de C.V.,
Profuturo GNP, S.A. de C.V., and
Aseguradora Porvenir GNP, S.A.
de C.V., Valores Mexicanos,
Casa de Bolsa, S.A. de C.V. and a
Trustee of the Instituto
Technologico Autonoma de
Mexico
C.V. and majority shareholder of
Industrias Peñoles, S.A. de C.V.,
Grupo Nacional Provincial, S.A.,
GNP Pensiones, S.A. de C.V.,
Grupo Palacio de Hierro, S.A. de
C.V., and Member of the Board
of Directors of Valores
Mexicanos, Casa de Bolsa, S.A.
de C.V.
Pablo José Cervantes
Belausteguigoitia
Entrepreneur
Member of the Board of
Directors of Desc, S.A. de C.V.
Independent
Federico Fernández
Senderos
President of Acciones Activas,
S.A. de C.V. and President of
Grupo SIM.
Member of the Board of
Directors of Desc, S.A. de C.V.
and Member of Desc’s Finance
and Planning Committee
Patrimonial / Related 1993
Carlos Gómez y Gómez
Chairman of the Board of
Directors of Grupo Financiero
Santander Serfin, S.A. de C.V.,
Banco Santander Mexicano, S.A.,
Banca Serfín, S.A., Casa de Bolsa
Santander Serfín, S.A. and all the
subsidiaries of Grupo Santander
Serfin, S.A. de C.V.
Member of the Board of
Patrimonial / Related 1973
Directors of Desc, S.A. de C.V.,
Member of Desc’s Finance and
Planning Committee and Member
of the Board of Directors of
Cintra, S.A. de C.V., Bolsa
Mexicana de Valores, Club de
Banqueros, A.C., Club de
Industriales, A.C., Grupo Yoreda,
S.A. de C.V., Grupo Ceslo, S.A.
de C.V., Grupo Trimex, S.A. de
C.V., Arena Media
Communications and Grupo
Dupuis, S.A. de C.V.
Ernesto Vega Velasco
Member of the Board of Directors
and Secretary of Desc, S.A. de
C.V., Vice Chairman of the Board
of Directors and President of the
Audit Committee of Wal-Mart de
Mexico, S.A. de C.V.
Member of Desc’s Finance and
Related
Planning Committee, Audit
Committee, and Evaluation and
Compensation Committee and
Member of the Board of
Directors of Grupo Nacional
Provincial, S.A., Profuturo GNP,
S.A. de C.V. and Industrias
Peñoles, S.A. de C.V., Chief
Financial Officer of Desc, S.A.
de C.V. until 1990 and
Corporative Vice President and
CFO of Desc, S.A. de C.V. until
2001.
78
1973
Name of Director
Principal Occupation And
Positions With Desc
Business Experience
Type (1)
First
Elected
Series B Directors:
Rubén Aguilar Monteverde
Entrepreneur
Member of the Board of
Directors of Desc, S.A. de C.V.
and Member of Desc’s Audit
Committee.
Independent
1978
Valentín Díez Morodo
Partner and Director of Grupo
Modelo, S.A. de C.V.
Member of the Board of
Directors of Desc, S.A. de
C.V., Member of the Board of
Directors of Kimberly Clark de
México, S.A. de C.V., Grupo
Financiero Banamex, S.A. de
C.V., Alfa, S.A. de C.V., Grupo
MVS, S.A. de C.V., Grupo
Ferroviario Mexicano, S.A. de
C.V., Grupo México, S.A. de
C.V., Citigroup-Salomon Smith
Barney, Acciones y Valores de
México, S.A. de C.V. and
Avantel, S.A.
Independent
1999
Carlos González Zabalegui
Vice Chairman and Chief
Executive Officer of
Controladora Comercial
Mexicana, S.A. de C.V.
Member of the Board of
Directors of Desc, S.A. de C.V.
and Member of the Evaluation
and Compensation Committee
of Desc, S.A. de C.V.
Independent
1996
Prudencio López Martínez
Chairman of the Board of
Directors of Sanvica, S.A. de
C.V.
Member of the Board of
Directors of Desc, S.A. de C.V.
and Member of Desc’s Audit
Committee
Independent
1973
Luis Téllez Kuenzler
Managing Director at The
Carlyle Group Mexico
Member of the Board of
Directors of Desc, S.A. de C.V.
Member of the Board of Grupo
México, S.A. de C.V., Monex,
Femsa and Global Industries
Ltd. and Executive Vice
President of Desc, S.A. de C.V.
until December 2003
Related
2001
(1)
The Mexican Code of Best Corporate Practices (Codigo de Mejores Practicas Corporativas) provides for the selection of three
types of directors: Independent, Patrimonial and Related. Independent directors are selected for their experience and professional
recognition and are subject to certain independence requirements as specified by the Securities Market Law and Code of Best
Corporate Practices. Patrimonial directors are those who either qualify as a significant stockholder or are designated by a
significant stockholder. Related directors are all those not falling within the previous two categories.
(2)
Fernando Senderos Mestre is the uncle of Federico Fernández Senderos and the brother-in-law of Carlos Gómez y Gómez.
Senior Management
The following table presents information concerning our current senior management:
Name
Current Position
Prior Position
Fernando Senderos Mestre
Chief Executive Officer and
Chairman of the Board of
Directors of Desc
Chief Executive Officer and
Chairman of the Board of
Directors of Desc, S.A. de C.V.
since 1989
79
Years with
Desc
31
Prior Position
Years with
Desc
Name
Current Position
Juan Marco Gutiérrez Wanless
Chief Corporate Officer
Andrés Baños Samblancat
Managing Director, Real Estate
Sector
Chief Executive Officer of the
Real Estate Business Subsidiaries
since 1993
20
Mario Suro Rodríguez
Managing Director, Automotive
Sector
General Manager of Spicer, S.A.
de C.V.
30
Juan René Cárdenas López
Managing Director, Grupo
Porcícola Mexicano
General Manager of Grupo
Porcícola Mexicano, S. A. de C.V.
26
Nicolás Gutiérrez Montero
Managing Director, Chemical
Sector
General Manager of Resirene, S.A.
de C.V.
32
Roger Patrón González
Managing Director, Branded
Products Sector
General Manager of Industrias
Resistol, S.A. de C.V.
25
Arturo D’Acosta Ruiz
Chief Financial Officer
Treasurer, Controller and Director
of Financial Planning of Desc,
S.A. de C.V.
22
Jorge Luis Almada Wright
Chief Strategic Planning Officer
Business Development and
Foreign Trade and Purchasing
Corporate Director of Desc, S.A.
de C.V.
5
Abel Archundia Pineda
Chief Information Technology
Officer
2
Jorge Jáuregui Morales
Chief Human Resources Officer
1
Carlos Rodríguez Castillo
Chief Internal Audit Officer
Controller of the Desc Corporate
Office
25
Ramón F. Estrada Rivero
General Counsel
General Counsel of the Chemical
Sector and the Food Sector
15
—
Statutory Examiner
In addition to electing our directors, our stockholders generally elect a statutory examiner and an alternate examiner at their
annual ordinary meeting. Under Mexican law, the duties of the examiner include, among other things, examining the operations,
books, records and any other documents of Desc and presenting at the annual ordinary stockholders’ meeting a report on the accuracy,
sufficiency and reasonableness of the information presented by the board of directors at that meeting. Under our ByLaws, the
statutory examiner is also authorized to call ordinary or extraordinary general stockholders’ meetings. Under our ByLaws, any
stockholder or group of stockholders that represents 10% of our shares has the right to designate a statutory examiner and an alternate.
This right was not exercised at the April 26, 2004 stockholders’ meeting. Our statutory examiner is José Manuel Canal Hernando, and
his alternate is Daniel del Barrio Burgos.
80
B. Compensation of Directors and Senior Management
For the year ended December 31, 2003, the aggregate compensation of all directors and officers of Desc, S.A. de C.V. as a
group that was paid or accrued by us was approximately Ps. 89,896. This group includes 11 directors, one examiner, one alternate
examiner and 13 officers, one of whom also serves as a director of Desc. We did not set aside or accrue any other funds for pension,
retirement or similar benefits for our directors and executive officers as a group.
C. Board Practices
In accordance with our ByLaws, Mexican Law and the Mexican Code of Best Corporate Practices (Codigo de Mejores
Practicas Corporativas), the committees of our board of directors consist of the Evaluation and Compensation Committee, the Audit
Committee and the Finance and Planning Committee. Each of these committees is to be comprised of no less than 3 and no more than
7 directors, as determined at each annual general stockholders’ meeting, in addition to Desc’s statutory examiner, who must attend
(but not vote at) meetings of the board and of each of its committees. See “— Statutory Examiner” above for more information about
the statutory examiner’s responsibilities. At the April 26, 2004 meeting, our stockholders set the size of the Finance and Planning
Committee at 4 members, the size of the Audit Committee at 3 members and the size of the Evaluation and Compensation Committee
at 3 members.
Evaluation and Compensation Committee: The duties of the Evaluation and Compensation Committee include recommending
criteria to our board of directors for the selection and evaluation of the performance of our executive officers in accordance with
general guidelines established by our board of directors, and analyzing the structure and amount of the compensation of our executive
officers proposed by our Chief Executive Officer and making a recommendation to our board of directors. The current members of
the Evaluation and Compensation Committee are Messrs. Ernesto Vega Velasco, Carlos González Zabalegui and Valentín Díez
Morodo.
Audit Committee: The duties of the Audit Committee include evaluating and recommending to our board of directors candidates
to serve as our external auditors, the terms under which such candidates will serve and the scope of their audit; assisting our board of
directors in its supervision of our external auditors’ compliance with the terms of their engagement; acting as liaisons between our
board of directors and our external auditors; ensuring the independence and objectivity of our external auditors; reviewing our
auditors’ reports and letters and reporting the results of their review to our board of directors; and, when required by our ByLaws,
reviewing (i) the terms of transactions that are not in the ordinary course of business of Desc or its subsidiaries, (ii) the terms of any
purchases or sales conducted by Desc, or any of its subsidiaries for an amount of ten percent or more of our consolidated assets, (iii)
the terms of guarantees of Desc or any of its subsidiaries for an amount of more than thirty percent of our consolidated assets, (iv)
terms of, and approving, any material related party transactions, (v) the terms of any other transactions of Desc or any of its
subsidiaries that represent more than one percent of our consolidated assets, (vi) oversight of Desc’s internal accounting controls,
internal controls over financial reporting and disclosure controls and procedures and (vii) oversight of Desc’s code of ethics. The
Audit Committee must submit an annual report at each annual stockholders’ meeting with respect to its activities during the prior
year. The current members of the Audit Committee are Messrs. Prudencio López Martínez, Rubén Aguilar Monteverde and Ernesto
Vega Velasco. Our board of directors approves, with the evaluation and recommendation of our Audit Committee, all audit and
review services, as well as all tax and other permissible non-audit services (see also discussion in “Item 16C. Principal Accountant
Fees and Services”).
Finance and Planning Committee: The duties of the Finance and Planning Committee include evaluating and, if applicable,
recommending for approval to our board of directors the investment and financing policies proposed by our chief executive officer;
evaluating and recommending general guidelines for our strategic planning; reviewing our annual budget; overseeing the
implementation of our
81
budget and strategic plan; and identifying the financial risks to which we are subject and evaluating our policies to manage those
risks. The current members of the Finance and Planning Committee are Messrs. Fernando Senderos Mestre, Carlos Gómez y Gómez,
Federico Fernández Senderos and Ernesto Vega Velasco.
At our annual stockholders’ meeting held on April 26, 2004, our stockholders approved the dissolution of the Executive
Committee. Our chief executive officer will assume the duties of the Executive Committee, which include supervising the
performance of our subsidiaries; appointing their top tier officers and determining their compensation with the advice of the
Evaluation and Compensation Committee, establishing the premises and guidelines for the growth and development of our Company
and its subsidiaries and deciding on their investments and financing, with the advice of the Finance and Planning Committee.
Our board of directors has six regular meetings scheduled per year and each of the committees has two regular meetings
scheduled per year. See “Item 6A—Directors and Senior Management” above for more information about our directors.
None of our directors has any type of arrangement or agreement with Desc whereby such a director would receive benefits upon
termination of employment.
NYSE Rules
The new NYSE corporate governance listing standards will not apply to us until July 31, 2005. Once these standards become
effective next year, they will allow us to follow Mexican corporate law and corporate governance practices on all matters except the
audit committee’s composition and function as prescribed by SEC Rule 10A-3 and related NYSE listing standards beginning July 31,
2005, so long as we explain the significant differences between the NYSE requirements and Mexican law and governance practices
that we follow. In the very near future we will post on our website (www.desc.com.mx) an explanation of the significant differences
between NYSE governance standards applicable in 2005 and our corporate governance practices that comply with Mexican law and
practice.
D. Employees
The following table sets forth the approximate number of employees, by business sector, at December 31, 2001, 2002 and 2003:
Year ended December 31,
Sector
Automotive
Chemical
Food
Real Estate
Corporate(1)
(1)
2001
2002
2003
8,794
4,083
6,047
155
265
7,280
3,698
4,824
121
401
6,728
2,309
4,446
44
327
At the end of 2002, all the corporate personnel of the four divisions was concentrated in one corporate company.
We employed approximately a total of 13,854 people as of December 31, 2003, of which 4,371 were non-union employees and
7,329 belonged to a union and 2,154 were temporary workers. The majority of these workers are based in Mexico. As a result of our
administrative restructuring and the
82
closing of non-strategic businesses, we reduced our workforce by 8.5% in 2003. The administrative restructuring was a result of a
continuous increase in the operating cost (administrative and sales) to sales, due mainly to the decrease in sales of our businesses, and
it resulted in the layoff of more than 1,000 administrative employees. As a result of our administrative restructuring, we now have a
more flexible and efficient organization.
Each of our operating subsidiaries has entered into a collective bargaining agreement with the unions representing certain of our
employees. These agreements usually have a term of two years and generally provide for an annual review of employees wages and
working conditions. Overall, we consider that our relations with our workers and the diverse unions are very good.
E. Share Ownership by Our Executive Officers and Directors
Share ownership of Fernando Senderos Mestre and certain members of his immediate family and Eneko de Belausteguigoitia
Arocena is set forth in “Major Stockholders” under Item 7. Except as noted in the immediately proceeding sentence and in the
following table, none of our other directors, alternate directors or executive officers is the beneficial owner of more than 1% of any
class of our capital stock:
Name
Federico Fernandez Senderos
Valentin Diez Morodo
Alberto Bailleres Gonzalez
Series A
Series B
Total
30,630,000
0
24,718,633
18,966,017
33,333,333
0
49,596,017
33,333,333
24,718,633
% Series A
% Series B
2.6%
0.0%
2.1%
% Total
1.7%
3.0%
0.0%
2.2%
1.5%
1.1%
Item 7. Major Stockholders and Related Party Transactions
A. Major Stockholders
The following table presents information with respect to the ownership of Desc’s Series A and Series B shares as of April 26,
2004 (except as noted in footnote 5 below), the date of our last annual stockholders’ meeting, by each stockholder known to us to own
beneficially more than 5% of our outstanding Series A and Series B shares and by all of our officers and directors as a group:
Number of Shares Owned
Name
Series A
Series B
Fernando Senderos Mestre(1)(2)
Lucía Senderos de Gómez (1)(3)
Eneko de Belausteguigoitia Arocena(4)
Grupo Financiero Inbursa, S.A. de C.V. and related parties(5)
503,205,141
144,131,635
144,416,199
0
29,007,277
39,979,225
14,855,767
447,284,806
Officers and directors as a group(6)
503,336,941
36,261,459
Percentage Owned
Series A
Name
Series B
Fernando Senderos Mestre(1)(2)
Lucía Senderos de Gómez (1)(3)
Eneko de Belausteguigoitia Arocena
Grupo Financiero Inbursa, S.A. de C.V. and related parties(5)
43.15%
12.36%
12.40%
0.00%
2.60%
3.58%
1.30%
40.10%
Officers and directors as a group(6)
43.16%
3.25%
(1)
Includes shares owned by Mr. Senderos’s immediate family. Lucía Senderos de Gómez is the sister of Fernando Senderos
Mestre and the wife of Carlos Gómez y Gómez, a director of Desc.
83
(2)
(3)
(4)
(5)
(6)
Includes shares owned by SEN, S.A. de C.V., a corporation wholly-owned by Fernando Senderos Mestre. Does not include the
54,862,528 Series A shares and 37,548,412 Series B shares owned by our pension funds, for which Fernando Senderos Mestre
and other officers and directors serve as trustees or members of the investment committee, or shares owned by Lucía Senderos
de Gómez. Does not include approximately 17,213,438 Series B shares currently owned by the trust referred to under Item 6.
“Compensation of Directors and Officers”, as to which Fernando Senderos Mestre has voting control. Does not include
10,000,000 Series A shares and 10,000,000 Series B shares owned by Manuel Senderos Irigoyen, the father of Fernando
Senderos.
Includes 4,979,225 Series B shares owned by Carlos Gómez y Gómez, the husband of Lucía Senderos de Gómez.
Includes 429,608 shares owned by companies controlled by Eneko de Belausteguigoitia Arocena.
The information is based on a Schedule 13D/A filed with the SEC on May 19, 2004 filed by Grupo Financiero Inbursa, S.A. de
C.V. and related parties, including Carlos Slim Helu and other members of his family, which are deemed to have beneficial
ownership over such shares.
Includes shares owned by Fernando Senderos Mestre.
Desc’s major stockholders do not benefit from different voting rights than other stockholders in the same class. See “Item 10.
Additional Information—Share Capital” and “—Voting Rights” for a discussion on the voting rights of each series of Desc’s shares.
As a result of the shares owned by the Senderos family together with additional shares as to which Fernando Senderos Mestre
exercises voting control (see the table above and “Item 6. Directors, Senior Management and Employers — Compensation of
Directors and Officers” for information about these additional shares), the Senderos family has the power to elect a majority of our
board of directors, to control our general management and to determine the outcome of substantially all matters requiring stockholder
approval. Except as provided in the immediately preceding sentence, to our knowledge, we are not directly or indirectly owned or
controlled by another corporation, any government or any other natural or legal person severally or jointly. There is no arrangement
known to us, the operation of which may at any subsequent date result in a change in control of Desc.
As a result of the reclassification of our Series C shares into Series B shares, the voluntary conversion of Series A shares into
Series B shares (and vice versa) and the capital increase in capital stock, which all occurred in 2004 (see the discussion below in Item
8 for additional information), (1) Mr. Senderos’s beneficial of the Series A shares decreased from 61.24% in 2003 to 43.15% in 2004
and his beneficial ownership of the Series B shares increased from .35% in 2003 to 2.60% in 2004, (2) Ms. Senderos de Gomez’s
beneficial ownership of Series A shares increased from 0% in 2003 to 12.36% in 2004 and her beneficial ownership of the Series B
shares decreased from 26.63% in 2003 to 1.30% in 2004, and (3) Mr. de Belausteguigoitia Arocena’s beneficial ownership of the
Series A shares decreased from 14.70% in 2003 to 12.40% in 2004 and his beneficial ownership of the Series B shares decreased
from 1.75% in 2003 to 1.30% in 2004. According to a Schedule 13D filed by Grupo Financiero Inbursa, S.A. de C.V. and other
related parties with the SEC on December 17, 2003, Grupo Financiero Inbursa, S.A. de C.V. beneficially owned 42.8% of our Series
C shares. As of the result of the foregoing, Grupo Financiero Inbursa, S.A. de C.V. now beneficially owns 40.10% of the Series B
shares.
As of April 26, 2004, we had 17 ADS holders of record in the United States, holding approximately 849,971 ADSs, which
represents 1.52% of our outstanding Series B shares. Since a larger number of ADSs are held by the nominee of the Depository Trust
Company, the number of beneficial owners of our ADSs is greater than the number of record holders of the ADSs.
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B. Related Party Transactions
From time to time, we may enter into transactions with parties that have relationships with our officers, directors, significant
stockholders or entities in which we have an ownership interest. We disclose all material transactions that, in our judgment, constitute
related party transactions.
The table below sets forth information regarding loans extended by Fomento to members of our board of directors and our
senior management as of May 2004. These loans were granted in Fomento’s ordinary course of business and were made on market
terms and conditions offered to the public. Fomento is a non-consolidated limited purpose financial corporation, which is regulated by
the Secretaria de Hacienda (Mexican Treasury Department), Banco de México and the CNBV, and is subject to the provisions of the
Ley de Instituciones de Crédito (Mexican Banking Law) and other rules, as applicable. Except for the loans to Messrs. Senderos and
Tellez, all indebtedness described below was incurred prior to July 30, 2002, which is the date the United States Sarbanes-Oxley Act
of 2002 came into effect, and no such loans were renewed or modified after July 30, 2002. Fomento has decided to sell the loans
granted after July 31, 2002 to an unrelated financial institution(s), as soon as commercially practicable.
Name of Loan Recipient
Largest Aggregate
Amount of
Indebtedness
Outstanding During
Period (In Dollars)
Indebtedness
Currently
Outstanding (In
Dollars)
Nature of Loan
Abel Archundia Pineda
Jorge Luis Almada Wright
Andres Baños Samblancat
Luis Téllez Kuenzler
Fernando Senderos Mestre
$
$
$
$
$
$ 156,250
$ 166,168
$ 1,151,680
$ 482,131
$ 581,734
Home Mortgage Loan
Home Mortgage Loan
Commercial Property Loan
Home Mortgage Loan
Home Mortgage Loan
215,000
225,000
1,980,000
550,000
607,000
Interest Rate
TIIE
LIBOR plus 6%
LIBOR plus 6%
LIBOR plus 6%
LIBOR plus 6%
In addition, Desc also entered into the following related party transactions:
Desc and its subsidiaries sold 2 real estate lots and office space in our Arcos Bosques building, having an aggregate sales price
of Ps. 5,740,000, to three companies affiliated with Andres Baños Samblancat, a member of our senior management.
In June 2003, Cantiles de Mita, S.A. de C.V. (“Cantiles”) sold all of the territorial reserves of Club Ecuestre Chiluca, S.A. de
C.V. (“Chiluca”) for $76 million. Prior to May 29, 2003, Desc owned 77.26% of Club Ecuestre Chiluca, S. de R.L. de C.V. (“Club
Ecuestre”) and Fernando Senderos and Lucía Senderos owned the remaining 22.74%. On May 29, 2003, Desc acquired the
Senderos’s 22.74% equity stake in Club Ecuestre and agreed to pay Fernando and Lucía Senderos their pro rata share (based
85
upon their relative equity holdings in Club Ecuestre immediately prior to Desc’s acquisition of the Senderos’s equity stake, as noted
above) of the proceeds of the sale of the Chiluca territorial reserves, with the balance of the proceeds being paid to Desc.
Fernando Senderos and his sister, Lucía Senderos, collectively own 11.6% of Lagos de la Estadia project with Desc owning
39.4% and other partners owning 49%. See Item 4 under the heading “Real Estate” for additional information.
On December 10, 2002, Fernando Senderos acquired a Fours Seasons Villa, located inside the Punta Mita development, which is
worth $1.94 million. During the construction period, he paid 69.1% of the estate’s value, and the balance of $600,000 was paid on
January 27, 2004, when the villa was finally completed. Residents of this Four Seasons development may enter into leasing
agreements with Four Seasons to have their homes rented to guests or used as a model for prospective homeowners and receive up to
$16,000 per month based on the number of times such villa is used. Mr. Senderos has entered into such a leasing agreement.
In connection with our increase in capital stock in March 2004 (see “Item 8. —Significant Changes” for a discussion of the
increase in capital stock), Desc entered into a Share Subscription Collaboration Agreement with Inbursa. Such agreement established
that, Desc was obligated to offer, and Inbursa was obligated to subscribe, subject to certain conditions, on the same terms offered to
our stockholders, for itself or on account of third parties, up to the equivalent of Ps. 2,000 million of the shares not subscribed by our
stockholders in connection with the increase in capital stock. This agreement terminated in accordance with its terms on May 19,
2004. Inbursa is a subsidiary of Grupo Financiero Inbursa, S.A. de C.V. Carlos Slim Helu and certain members of his family
beneficially own, directly and indirectly, a majority of the outstanding voting equity securities of Grupo Financiero Inbursa, S.A. de
C.V.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Financial Statements and other Financial Information
See pages F-1 through F-59 of this annual report, which are incorporated herein by reference.
Our external auditors are Galaz, Yamazaki, Ruíz Urquiza, S.C., which is the Mexican national practice of Deloitte Touche
Tohmatsu. Prior to June 10, 2002, our external auditors were Ruiz, Urquiza y Cía, S.C. (“Ruiz Urquiza”), a former member firm of
Andersen Worldwide, which was subject to the quality control procedures of Arthur Andersen LLP required for foreign associated
firms that are embodied in the requirements of the SEC Practice Section of the American Institute of Certified Public Accountants.
Subsequent to June 9, 2002, Ruiz Urquiza was subject to the quality control procedures of Deloitte & Touche LLP. The change in
external auditors resulted from the integration of the partners and personnel of Ruíz Urquiza with Deloitte Touche Tohmatsu’s prior
Mexican national practice, Galaz, Gomez, Morfín, Chavero, Yamazaki, S.C.
Litigation
In 2003, our former subsidiary Girsa, S.A. de C.V.’s joint venture partner, Uniroyal Chemical Company, Inc. (“Uniroyal”), in
our currently wholly owned subsidiary, ParaTec Elastomers, L.L.C. (“ParaTec”), and Uniroyal’s parent Crompton Corporation
(“Crompton”) were implicated in an investigation by United States, Canadian and European authorities concerning alleged price
fixing and anticompetitive activity in the nitrile butadiene rubber (“NBR”) and other elastomer and rubber chemical markets. In
September 2003, ParaTec was accepted, as part of Crompton’s application, into the Corporate Leniency Program of the U.S.
Department of Justice (“DOJ”) and received a letter of conditional amnesty with respect to allegations of price fixing. As a condition
of the amnesty, ParaTec and its representatives are required to cooperate in the ongoing investigation of the NBR industry and pay
restitution to any person or entity injured as a result of the alleged anticompetitive activity in which ParaTec may have been a
participant. So long as ParaTec observes the conditions of the letter, the DOJ
86
will not bring a criminal prosecution against it. The conditional amnesty granted by the DOJ does not exempt ParaTec from possible
civil lawsuits that any direct or indirect NBR purchaser may file, seeking damages incurred as a consequence of the alleged
anticompetitive activity.
Last January, Canada’s Attorney General and Commissioner of Competition granted ParaTec a provisional guarantee of
immunity from prosecution under Canada’s Competition Act. The immunity is conditional on ParaTec providing the Competition
Bureau and the Attorney General information and evidence in connection with the Commissioner’s inquiry into the NBR industry.
A similar investigation based on the same allegations is still pending in the European Union. Crompton did not include ParaTec
in its application for conditional amnesty in the EU, which application, according to Crompton, was allowed. ParaTec is attempting
on its own to obtain conditional amnesty in that jurisdiction as well, however a final resolution of this matter is still pending.
In December of 2003, a federal antitrust class action suit was commenced in federal court in Pennsylvania by Diamond Holding
Corporation, on behalf of itself and other direct purchasers of NBR, against ParaTec, the parent holding company Desc and other
sellers of NBR, including Uniroyal and its parent Crompton. The action seeks treble damages for alleged damages incurred as a result
of the alleged price fixing scheme. Desc has filed a motion to dismiss all claims against it on the basis that, among other grounds,
Desc is not adequately alleged to be a member of the alleged combination or conspiracy. ParaTec has answered plaintiffs’ amended
consolidated complaint. While denying that it met with any defendants for the purposes of forming and carrying out a combination or
conspiracy, ParaTec admitted that it met with representatives of some of the defendants to discuss the prices of NBR sold in the
United States. ParaTec intends to defend both as to liability and damages, and as to damages will vigorously assert that if and to the
extent there was any improper activity, that activity had no substantial impact on prices. ParaTec has also filed several crossclaims
against Crompton and Uniroyal, which was the majority shareholder of ParaTec during most of the class period, seeking full
indemnification, on the basis of certain contractual and non-contractual claims, for any losses that ParaTec may incur as a result of the
suit, as well as injunctive relief, punitive damages, attorneys’ fees and costs and expenses. In the event that Desc’s motion to dismiss
is unsuccessful, Desc will assert a similar crossclaim.
Desc and ParaTec are also named defendants in a state court civil case commenced in Superior Court of California by
Competition Collision Center L.L.C., on behalf of itself and other indirect purchasers of NBR in California. Plaintiffs seek treble
damages for alleged price fixing and unfair competition in violation of California law. Desc and ParaTec intend to respond similarly
in this action as they did in the federal action, except Desc may also move to dismiss for lack of personal jurisdiction in this state
case.
As of this date, the contingencies related to this matter, including any amounts that will ultimately be paid in judgement or
settlement by Desc and or ParaTec, together with the projected legal fees and expenses, can not be quantified. Any claims against us
and any future claims could have an adverse impact on our financial condition, cash flows or results of operations.
In addition, we are involved in legal proceedings not described in this annual report that are incidental to the normal conduct of
our business. Litigation is subject to many uncertainties, and we cannot predict the outcome of individual matters with assurance. It is
reasonably possible that the final resolution of some of these matters could require us to make expenditures, in excess of established
reserves, over an extended period of time and in a range of amounts that we cannot reasonably estimate. Although the final resolution
of any such matters could have a material effect on our consolidated operating results for a particular reporting period, we believe that
it should not materially affect our consolidated financial position.
87
B. Significant Changes
At stockholders’ meetings held on March 8, 2004, our stockholders approved the:
(i) mandatory conversion of all Series C shares into Series B, on a one-for-one basis (the “Reclassification”). As a result,
the ADSs are now represented by 20 Series B shares. The Reclassication has enabled us to simplify our capital structure
and we expect it will improve the liquidity of our capital stock;
(ii) voluntary conversion of Series A shares into Series B shares, and voluntary conversion of Series B shares into Series A
shares, on a one-for-one basis, at the request of the corresponding stockholders, which was completed on May 19, 2004;
(iii) amendment to our ByLaws in order to allow Mexican and non-Mexican investors to hold Series A shares and our
Series B shares; and
(iv) an increase of Desc’s capital stock of approximately 2.738 billion pesos by issuing an aggregate of 912,719,584 of its
common stock (both Series A and Series B), of which 502,544,745 shares were subscribed by Desc’s stockholders and
410,174,839 shares were sold to Inbursa pursuant to a Stock Subscription Cooperation Agreement dated February 17,
2004. This agreement terminated in accordance with its terms on May 19, 2004.
On May 24, 2004, Desc notified Deutsche Bank Trust Company Americas (“Deutsche Bank”), pursuant to Section 1105 of the
Indenture dated as of October 17, 1997 (the “Indenture”) between Desc, as issuer and guarantor (as successor-in-interest to Dine, the
original issuer of the Notes), and Deutsche Bank, as trustee, that all of the outstanding Notes have been called for redemption on June
30, 2004 (the “Redemption Date”) at a price of 102.9167% of the principal amount together with accrued interest to the Redemption
Date (the “Redemption Price”), in accordance with Section 1101(b) of the Indenture. The Notes will no longer be outstanding after
the Redemption Date. Unless the Company defaults in paying the Redemption Price to the holders of the Notes, interest on the Notes
will cease to accrue on and after the Redemption Date. Thereupon, the only remaining right of the holders of the Notes will be the
receipt of the Redemption Price.
Item 9. The Offer and Listing
Trading Prices of our Shares and ADS
All series of our stock are listed on the Mexican Stock Exchange and our ADSs are listed on the New York Stock Exchange
under the symbol “DES”.
As of April 26, 2004, approximately 849,971 of the Series B shares were held in the form of ADSs. It is not practicable for us to
determine the number of Series B shares beneficially owned by U.S. persons.
88
The table below sets forth for the periods indicated the high and low sales prices of the Series B shares on the Mexican Stock
Exchange in nominal Pesos and the available high and low sales prices of the ADSs on the New York Stock Exchange in Dollars.
These prices are not representative of the prices for the Series A and Series B shares for these periods:
Mexican Stock
Exchange Pesos Per
Series B Share
Prior Five Years:
1999
2000
2001
2002
2003
2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Five Months:
December 2003
January 2004
February 2004
March 2004 (1)
April 2004
(1)
New York Stock
Exchange Dollars Per
ADS(1)
High
Low
High
Low
Ps. 11.24
6.91
4.45
5.76
3.72
Ps. 5.96
3.11
2.68
3.12
2.9
Ps. 4.74
5.76
5.01
3.96
Ps. 3.60
4.27
3.83
3.12
Ps. 3.46
3.66
3.72
3.41
Ps. 2.92
2.93
3.06
2.9
Ps. 3.34
3.67
4.31
4.16
4.07
Ps. 2.90
3.09
3.34
3.64
3.65
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
$ 7.61
7.22
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
$ 6.46
6.22
On March 11, 2004, the Series C shares were mandatorily converted into Series B shares on a one-for-one basis. Prior to the
date, the ADS was represented by 20 Series C shares. Accordingly, there is no price history for the ADS represented by the
Series B shares prior to March 2004.
As of June 29, 2004, the closing sales price of the Series B shares on the Mexican Stock Exchange was Ps. 3.28 and the closing
sales price of the ADSs on the New York Stock Exchange was $5.74.
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange was founded in 1894 and has operated continuously since 1907. The Mexican Stock Exchange is
located in Mexico City and is Mexico’s only stock exchange. The Mexican Stock Exchange is organized as a corporation and its
shares are owned by authorized brokerage firms. These firms are exclusively authorized to trade on the floor of the Mexican Stock
Exchange.
Electronic trading on the Mexican Stock Exchange takes place between the hours of 8:30 a.m. and 3:00 p.m., Mexico City time,
on each weekday other than public holidays. Since January 11, 1999, all trading of equity securities listed on the Mexican Stock
Exchange has been made through the Electronic Negotiation System, an automated, computer-linked system commonly known as
BMV SENTRA Capitales.
The Mexican Stock Exchange publishes a daily official price list that includes information on each listed security. If the
Mexican Stock Exchange considers that the suspension is necessary for the public to be fully informed, trading may be suspended in
the event of disclosure of material non-public information. The Mexican Stock Exchange may also suspend trading of a particular
security as a result of significant price fluctuations during a given trading day (fluctuations exceeding a given price level by
89
more than 15%) or as a result of unusual movements in the price of a security during a period of no more than five consecutive
trading days. The Mexican Stock Exchange may also suspend trading generally as a result of unexpected events or force majeure, or
if unusual market fluctuations arise.
Settlement takes place two trading days after a share transaction is effected on the Mexican Stock Exchange. Deferred
settlements, even if by mutual agreement, are not permitted without the approval of the CNBV. Most securities traded on the Mexican
Stock Exchange, including our shares, are on deposit with S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores, a
privately owned central securities depositary that acts as a clearing house, depositary, custodian, settlement, transfer and registration
institution for Mexican Stock Exchange transactions, eliminating the need for physical delivery of securities.
As of December 31, 2003, approximately 158 Mexican companies were listed on the Mexican Stock Exchange, excluding
mutual funds. During the second half of 2003, the ten most actively traded equity issues represented approximately 71% of the total
volume of the shares traded on the Mexican Stock Exchange, not including public offerings. Although there is substantial public
participation in the trading of securities on the Mexican Stock Exchange, a major part of such activity reflects institutional investors
transactions. There is no formal over-the-counter market for securities in Mexico.
The Mexican Stock Exchange is Latin America’s third largest exchange in terms of market capitalization, but it remains
relatively small and illiquid compared to major world stock markets and is subject to significant volatility. As of December 31, 2003,
the total market value of all shares, excluding mutual funds, listed on the Mexican Stock Exchange was Ps. 1.376 billion.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. ByLaws
Set forth below is a brief summary of certain principal provisions of our ByLaws as of March 16, 2004 and certain provisions of
Mexican law. This description does not purport to be complete and is qualified in its entirety by reference to our ByLaws and the
applicable provisions of Mexican law. For a description of the provisions of our ByLaws relating to our board of directors and the
statutory examiner, see Item 6.
Organization and Register; Purposes
Desc is a corporation (sociedad anónima de capital variable) organized under the laws of Mexico on August 28, 1973. Desc is
registered in the Public Registry of Commerce of Mexico City under the number 8089.
Pursuant to Article Three of our ByLaws, Desc’s general purpose includes promoting and encouraging industrial and tourist
development, participating as a stockholder or partner in any type of Mexican company and acquiring all types of real estate and
rendering all services necessary for the attainment of its purposes.
90
Voting Rights
Each Series A share and Series B share entitles the holder to one vote at any general meeting of our stockholders. The holders of
the Series A shares have the right to elect one more than half of the board of directors. Stockholders or groups of stockholders holding
shares of any one class of shares, which represent at least 10% of our total equity capitalization, have a right to elect one director of
the relevant series for each 10% held. The holders of the Series B shares have the right to elect the remaining members of our board
of directors.
Under Mexican law, the holders of shares of any series are also entitled to vote as a class at a special meeting on any action that
would prejudice the rights of holders of such series, and a holder of such series would be entitled to judicial relief against any such
action taken without such a vote. The determination whether an action requires a class vote on these grounds would initially be made
by our board of directors or other party calling for stockholder action. Any determination that an action does not require a vote at a
special meeting would be subject to judicial challenge by an affected stockholder, and the need for a vote at a special meeting would
ultimately be determined by a court. There are no other procedures for determining whether a proposed stockholder action requires a
class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.
Stockholders’ Meetings
Under Mexican law and Desc’s ByLaws, Desc may hold three types of stockholders’ meetings: ordinary, extraordinary and
special. Ordinary stockholders’ meetings are those called to discuss any issue specified in Article 181 of the Ley General de
Sociedades Mercantiles (the “Mexican Companies Law”) and other issues not reserved for extraordinary stockholders’ meetings. An
ordinary stockholders’ meeting must be held at least annually during the four months following the end of each fiscal year to consider
certain matters specified in Article 181 of the Mexican Companies Law, including, among other things, the approval of the report
prepared by the board of directors on Desc’s financial statements for the preceding fiscal year, the appointment of members of Desc’s
board of directors and statutory examiners and the determination of compensation for members of Desc’s board of directors and
statutory examiners.
Extraordinary stockholders’ meetings are those called to consider the matters specified in Article 182 of the Mexican Companies
Law, including:
•
extension of Desc’s duration or voluntary dissolution;
•
an increase or decrease in Desc’s minimum fixed capital;
•
change in Desc’s corporate purpose or nationality;
•
any transformation, merger or spin-off of Desc;
•
any stock redemption or issuance of preferred stock or bonds;
•
the cancellation of the listing of Desc’s shares with the Registro Nacional de Valores;
•
amendments to Desc’s ByLaws; and
•
other matters for which applicable Mexican law or the ByLaws specifically require an extraordinary meeting.
91
Special stockholders’ meetings are those called and held by stockholders of the same series or class to consider any matter
particularly affecting the relevant series or class of shares.
Under Mexican law, holders of 20% of Desc’s outstanding capital stock may have any stockholder action set aside by filing a
complaint with a Mexican court of competent jurisdiction within 15 days after the close of the meeting at which the action was taken,
which shows that the challenged action violates Mexican law or Desc’s ByLaws. Relief under these provisions is only available to
holders (1) who were entitled to vote on the challenged stockholder action and (2) whose shares were not represented when the action
was taken or, if represented, voted against such action.
Stockholders’ meetings are required to be held in Desc’s corporate domicile, which is Mexico City. Calls for stockholders’
meetings must be made by Desc’s board of directors or statutory examiners or any Mexican court of competent jurisdiction. Desc’s
board of directors or statutory examiners may be required to call a meeting of stockholders by the holders of 10% of Desc’s
outstanding capital stock.
Notice of stockholders’ meetings must be published in the Diario Oficial de la Federación or in a newspaper of major
circulation in Mexico City at least 15 days prior to the meeting. Unless the approval of financial statements is to be discussed at the
meeting, such notice period may be reduced to 5 days if Desc’s board of directors deems such reduction appropriate based on the
urgency of the matters to be discussed at such meeting. Each call of a stockholders’ meeting must set forth the place, date and time of
the meeting and the matters to be addressed at such meeting. Calls of a stockholders’ meeting must be signed by whoever makes such
calls.
In order to attend and vote at a stockholders’ meeting, a stockholder must request and obtain an admission card by depositing its
share certificates (or evidence of deposit thereof in a Mexican bank) with the Secretary of Desc at least one day prior to the meeting.
The stockholders may be represented at a stockholders’ meetings by proxies named through a notarized power of attorney, a proxy
letter or a power of attorney conferred in the form prepared by Desc for a specific meeting.
Quorum
A quorum on a first call of an ordinary stockholders’ meeting is at least 50% of the outstanding shares. In order for a resolution
of the ordinary stockholders’ meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote of the majority
of the shares represented at such meeting is required.
The quorum on a first call for an extraordinary stockholders’ meeting is at least 75% of the outstanding shares. An extraordinary
stockholders’ meeting may be validly held pursuant to a second call with a quorum of at least 50% of the outstanding shares. In order
for a resolution of the extraordinary general meeting to be validly adopted as a result of a first or a subsequent call, the favorable vote
of 50% of the outstanding shares is required.
Withdrawal Rights
The outstanding variable portion of Desc’s capital stock may be fully or partially withdrawn by the stockholders. The minimum
fixed portion of Desc’s capital stock specified in Desc’s ByLaws cannot be withdrawn. A holder of shares representing Desc’s
variable capital stock that wishes to effect a total or partial withdrawal of its shares must notify Desc in an authenticated written
notice to that effect. If notice of withdrawal is received prior to the last quarter of the fiscal year, the withdrawal becomes effective at
the end of the fiscal year in which the notice is given. Otherwise, the withdrawal becomes effective at the end of the following fiscal
year.
92
The redemption of a stockholder’s shares would be made at the lower of: (i) 95% of the value quoted on the Bolsa Mexicana de
Valores, S.A. de C.V. (the “Mexican Stock Exchange”) obtained from the weighted average price per volume of operations done
during the last thirty days during which the shares of Desc have been traded, prior to the date on which the redemption must take
effect, for a period that may not be more than six months; or (ii) the book value of the shares according to the general balance sheet
corresponding to the close of the fiscal year immediately prior to that in which the separation must take effect, previously approved
by the General Ordinary Stockholders Meeting. If the number of days on which the shares have been traded during the period set
forth in the preceding paragraph is less than thirty, the days shall be taken when they were actually traded. If the shares were not
traded in said period, the book value of the shares shall be used.
The redemption shall be done against delivery and cancellation of the respective shares. Since Desc’s inception, no stockholder
has ever exercised its right to withdraw.
Dividends and Distributions
At Desc’s annual ordinary general stockholders’ meeting, Desc’s board of directors must submit to the holders of the Series A
shares and the Series B shares Desc’s financial statements for the preceding fiscal year. Five percent of Desc’s net earnings must be
allocated to a legal reserve fund until such fund reaches an amount equal to 20% of Desc’s capital stock. Prior to the increase in
capital approved by our stockholders on March 8, 2004, Desc’s legal reserve fund satisfied this requirement. Additional amounts may
be allocated to extraordinary, special or additional reserve funds as the stockholders may from time to time determine. The remaining
balance, if any, of net earnings may be distributed as dividends or allocated for the redemption of shares. Any redemption must be
approved in advance at an extraordinary stockholders’ meeting.
Dividends are paid to the registered holder of the relevant share or the duly authorized representative of such holder upon
delivery of the applicable coupon. With respect to share certificates deposited with Indeval, S.A. de C.V., Institución para el Depósito
de Valores (“Indeval”), payment of dividends is made through Indeval in accordance with customary payment procedures. Partially
paid shares may participate in any distribution to the extent that such shares have been paid at the time of the distribution. Desc’s
ability to pay dividends is subject to limitations under our credit agreements and to Mexican legal requirements, which provide that a
corporation may declare and pay dividends only out of the profits reflected in its year-end financial statements (approved by its
stockholders), only if such payment is approved by its stockholders, and then only after the creation of a required legal reserve and the
set off or satisfaction of losses, if any, incurred in previous fiscal years. See “Item 3. Risk Factors Relating to Our Operations—
Dependence on dividends from subsidiaries” and “Risks Relating to Our Controlling Stockholder and Capital Structure—Certain
members of the Senderos family effectively control our management and their interests may differ from those of other security
holders”.
Liquidation Rights
Upon a dissolution of Desc, one or more liquidators must be appointed at an extraordinary stockholders’ meeting to wind up
Desc’s affairs. All fully paid and outstanding shares of capital stock, regardless of class, will be entitled to participate equally in any
distribution upon liquidation. Partially paid shares participate in a liquidation distribution in the same manner as they would in a
dividend distribution.
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Changes in Share Capital
An increase of capital stock may be effected through the issuance of new shares for payment in cash or in kind, by capitalization
of indebtedness or by capitalization of certain items of stockholders’ equity. No increase of capital stock may be effected until all
previously issued shares have been fully paid. A reduction of capital stock may be effected to absorb losses, to redeem shares or to
release stockholders from payments not made. A reduction of capital stock to absorb losses may be effected by reducing the value of
all outstanding shares. A reduction of capital stock to redeem shares may be effected by reimbursing holders of shares pro-rata or
through a drawing before a public broker. Stockholders may also approve the redemption of fully paid shares with retained earnings,
which would be effected by a repurchase of shares on the Mexican Stock Exchange (in the case of shares listed thereon).
Desc’s capital stock may be increased or decreased only by resolution of an extraordinary general stockholders’ meeting and, if
such increase or decrease affects the fixed portion of Desc’s capital, an amendment to Desc’s ByLaws. Any holders of the Series A
shares or the Series B shares would be entitled to vote on an increase or decrease in capital stock.
No stockholder resolution is required for decreases in capital stock based on the exercise of a stockholder’s right to withdraw
variable shares or Desc’s purchase of its shares or for increases based on a resale by Desc of shares it previously purchased.
Preemptive Rights
In the event of a capital increase through the issuance of new shares for payment in cash or in kind, a holder of existing shares
generally has a preferential right to subscribe for a sufficient number of new shares to maintain the holder’s proportionate holdings of
shares.
Except in limited circumstances, preemptive rights must be exercised within the period and under the conditions established for
such purpose by the stockholders’ meeting approving the increase and under Desc’s ByLaws, and in no case may such period be less
than 15 calendar days following the publication of notice of the capital increase in the Diario Oficial de la Federación, provided that
if all stockholders are present or represented at such meeting such publication shall not be required. Otherwise, such rights will lapse.
Under Mexican law, preemptive rights may not be waived in advance by a stockholder and cannot be represented by an instrument
that is negotiable separately from the corresponding share. Holders of American Depositary Shares may exercise preemptive rights
only through the depositary.
Registration and Transfer of the Shares
All of Desc’s series of shares are evidenced by share certificates in registered form, and registered dividend coupons may be
attached to the certificates. Share certificates held by stockholders may have dividend coupons attached. If Desc and Indeval agree,
share certificates deposited with Indeval will have no dividend coupons attached. Dividend coupons may only be presented for
payment by the registered holder of the related share or its duly appointed agent. Stockholders of Desc may either hold their shares
directly, in the form of physical certificates, or indirectly through institutions that have accounts with Indeval. Accounts may be
maintained at Indeval by brokers, banks, other financial institutions or other entities (“Indeval Participants”) approved by the
CNBV. Desc maintains a share registry, and only those persons listed in such registry and those holding certificates issued by Indeval
and any relevant Indeval Participant indicating ownership will be recognized as stockholders by Desc.
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Other Provisions
Liabilities of the members of the board of directors
Under Mexican law, an action for civil liabilities against members of Desc’s board of directors may be initiated by a
stockholders’ resolution. The director against whom such action is brought will cease to be a member of the board immediately upon
the stockholders’ adoption of a resolution demanding responsibility for such civil liabilities. Additionally, stockholders representing
not less than 15% of Desc’s outstanding shares may directly take such action against members of Desc’s board of directors, if (1)
such stockholders have not voted against taking such action at the relevant stockholders’ meeting and (2) the claim in question covers
damage alleged to have been caused to Desc and not merely to the individual plaintiffs. Any recovery of damages with respect to the
action will be for Desc’s benefit and not for the stockholders bringing such action.
Purchase by Desc of its shares
According to Mexican law, Desc may repurchase any Desc shares on the Mexican Stock Exchange at any time at the then
prevailing market price. If Desc repurchases Desc’s shares and holds onto them (i.e., the shares are not cancelled or placed in Desc’s
treasury), Desc must record such repurchase as a charge to Desc’s net worth. If the repurchased shares are placed in Desc’s treasury,
Desc must record such repurchase as a charge to Desc’s stockholders’ equity and no stockholder approval is required. The general
ordinary stockholders’ meeting must expressly approve for each fiscal year the maximum amount of funds that may be used for stock
repurchases, with the sole limitation that such designated amount may not exceed Desc’s net profits, including retained profits. Any
of Desc’s shares that are owned by Desc and are not cancelled or placed in Desc’s treasury may not be represented at any
stockholders’ meeting. Desc may publicly sell any of these repurchased shares, whether owned directly by Desc or held as treasury
shares.
Repurchases in the event of delisting
In accordance with the regulations of the CNBV, Desc’s majority stockholders are obligated to make a public offer for the
purchase of stock held by minority stockholders if the listing of Desc’s stock with the Mexican Stock Exchange is canceled, either by
resolution of Desc or by an order of the CNBV. The price at which the stock must be purchased by the majority stockholders is the
higher of:
•
the average quotation price for the 30 days prior to the date of the offer; or
•
the book value, as reflected in the last quarterly report filed with the CNBV and the Mexican Stock Exchange.
The majority stockholders are not bound to make the repurchase if all Desc’s stockholders agree to waive that right.
Appraisal rights
Whenever a stockholders’ meeting approves a change of our corporate purpose, a change of our nationality, a restructuring from
one type of corporate form to another or a spin-off (escisión), any stockholder who has voted against such change or restructuring has
the right to withdraw from Desc and receive an amount broadly equal to the book value of Desc’s shares (in accordance with Desc’s
latest balance sheet approved by an ordinary general meeting), provided the dissenting stockholder exercises its right to withdraw
during the 15-day period following the meeting at which such change or restructuring was approved.
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Stockholder’s conflicts of interest
Pursuant to Article 196 of the Mexican General Law of Commercial Companies, any stockholder that has a direct or indirect
conflict of interest with respect to a transaction must abstain from discussing and voting with respect to such transaction at the
relevant stockholders’ meeting. A stockholder that votes on a transaction in which its interest conflicts with that of Desc may be liable
for damages if the relevant transaction would not have been approved without such stockholder’s vote.
Director’s conflicts of interest
Pursuant to Article 14 Bis 5 of the Ley del Mercado de Valores (the “Securities Market Law”), any director, the statutory
examiner that attends the Audit Committee meetings or any member of such committee, that has a direct or indirect conflict of
interest with respect to a transaction that is presented to the board of directors or to the Audit Committee must disclose such conflict
to the board of directors or committee and abstain from discussing and voting with respect to such transaction.
Rights of stockholders
The protections afforded to minority stockholders under Mexican law are different from those in the United States and many
other jurisdictions. The substantive law concerning fiduciary duties of directors has not been the subject of extensive judicial
interpretation in Mexico, unlike many states in the United States where duties of care and loyalty elaborated by judicial decisions help
to shape the rights of minority stockholders. Mexican civil procedure does not contemplate class actions or stockholder derivative
actions, which permit stockholders in U.S. courts to bring actions on behalf of other stockholders or to enforce rights of the
corporation itself. Stockholders cannot challenge corporate action taken at a stockholders’ meeting unless they meet certain
procedural requirements, as described above under “Stockholders’ Meetings.” As a result of these factors, in practice it may be more
difficult for Desc’s minority stockholders to enforce rights against us or Desc’s directors or controlling stockholders than it would be
for stockholders of a U.S. company. In 2001, the Mexican government increased minority stockholders’ rights by amending the
Securities Market Law and enacting other regulations to reduce the ownership percentages necessary to exercise minority rights and
permit minority stockholders to sell their shares in the event of a change of control in Desc.
Enforceability of civil liabilities
Desc is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside of the
United States. In addition, all or a substantial portion of our assets and their assets are located in Mexico. As a result, it may be
difficult for investors to effect service of process within the United States on such persons. It may also be difficult to enforce against
them, either inside or outside of the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts
judgments obtained against them in courts in jurisdictions outside of the United States, in any action based on civil liabilities under
the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or
in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
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Exclusive jurisdiction
Our ByLaws provide that legal actions relating to the execution, interpretation or performance of the ByLaws shall be brought
only in the courts of Mexico City, Federal District.
Duration
Our existence under our ByLaws is 99 years from the date of our incorporation.
C. Material Contracts
For the two years preceding the date of this Form 20-F, Desc has not entered into any material contracts, other than contracts
entered into in the ordinary course of business and those described below.
On December 19, 2003, we entered into the Dollar Facility and the Revolving Facility. On December 23, 2003 we entered into
the Peso Facility.
On September 29, 2003, we entered into an Asset Purchase Agreement with Henkel Capital, S.A. de C.V. pursuant to which we
substantially sold our adhesives and waterproofing assets.
In January 2004, we entered into an Asset Purchase Agreement pursuant to which we sold our aluminum wheel business to
Hayes Lemmerz International, Inc. and acquired Hayes Lemmerz International Mexico, Inc.’s equity stake in Steel Wheels, S.A. de
C.V., a manufacturer of steel wheels. As a result, Desc Automotriz now owns 100% of the equity of Steel Wheels, S.A. de C.V.
In June 2003, Cantiles sold all of the territorial reserves of Chiluca for $76 million. Prior to May 29, 2003, Desc owned 77.26%
of Club Ecuestre and Fernando Senderos and Lucía Senderos owned the remaining 22.74%. On May 29, 2003, Desc acquired the
Senderos’s 22.74% equity stake in Club Ecuestre and agreed to pay Fernando and Lucía Senderos their pro-rata share (based upon
their relative equity holdings in Club Ecuestre immediately prior to Desc’s acquisition of the Senderos’s equity stake, as noted above)
of the proceeds of the sale of the Chiluca territorial reserves, with the balance of the proceeds being paid to Desc.
D. Exchange Controls
Exchange Controls
Mexico abolished its exchange control system on November 11, 1991. From November 11, 1991 to October 20, 1992, Banco de
México permitted the rate of exchange between the Peso and the Dollar to fluctuate according to supply and demand within a moving
band. In December 1994, the Mexican government, in response to exchange rate pressures, increased by 15% the upper limit of the
Peso - Dollar exchange rate band, and two days later allowed the Peso to fluctuate freely against the Dollar. By December 31, 1994,
the Peso - Dollar exchange rate, which had been Ps. 3.466 to $1.00 on December 19, 1994, was Ps. 5.000 to $1.00.
Fluctuations in the exchange rate between the Peso and the Dollar affect the Dollar equivalent of the Peso price of securities
traded on the Mexican Stock Exchange, including our shares and, as a result, are likely to affect the market price of our securities.
Fluctuations in the exchange rate can also affect our operating results depending on the terms of our contractual arrangements and the
effect of the fluctuation on the specific industries in which we operate.
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Except for the period from September through December 1982, during the Mexican liquidity crisis, Banco de México
consistently has made foreign currency available to Mexican private sector entities. However, in the event of renewed shortages of
foreign currency, we cannot assure you that Banco de México would continue to make foreign currency available, or that the foreign
currency we need to service foreign currency obligations could be purchased in the open market without substantial additional cost.
Pursuant to the provisions of NAFTA, Mexico remains free to impose foreign exchange controls on investments made in
Mexico, including those made by U.S. and Canadian investors.
Restrictions on Foreign Investment
Foreign investment in the capital stock of Mexican companies is regulated by the 1993 Ley de Inversión Extranjera (the
“Foreign Investment Law”) and the 1998 regulations promulgated under the Foreign Investment Law (the “Foreign Investment
Regulations”). The Foreign Investment Law defines foreign investment as (i) the participation of foreign investors in the capital
stock of Mexican corporations, or investments made in the capital stock of Mexican corporations by a Mexican corporation in which
foreign capital has a majority participation, and (ii) the participation of foreign investors in those activities that are regulated by the
Foreign Investment Law. Foreign investors are defined as individuals or entities that are not Mexican nationals. The Comisión
Nacional de Inversión Extranjera (the “Foreign Investment Commission”), the Dirección General de Inversiones Extranjeras (the
“Foreign Investments Bureau”) and the Registro Nacional de Inversiones Extranjeras (the “National Registry of Foreign
Investments”) of the Ministry of Economy are responsible for the administration of the Foreign Investment Law and the Foreign
Investment Regulations. In order to comply with foreign investment restrictions, Mexican companies typically limit particular classes
of their stock to ownership by Mexican individuals and Mexican corporations in which foreign investment has a minority
participation.
As a general rule, the Foreign Investment Law allows foreign investment in up to 100% of the capital stock of Mexican
companies except for those engaged in restricted industries. With respect to restricted industries, the Foreign Investment Law not only
limits or forbids share ownership but also requires that Mexican stockholders retain the power to determine the administrative control
and the management of those corporations. Restricted industries currently include retail trade in gasoline and distribution of liquid
petroleum gas, radio broadcasting, credit unions, development banks, land transportation of passengers, tourists and freight in Mexico
other than messenger and package delivery services, and the rendering of specified professional and technical services. Desc and its
subsidiaries currently do not engage in any restricted industry, except that Desc owns a limited purpose financing entity where foreign
investment is allowed up to 49%, but since Desc is a Mexican investor, our ownership satisfies the requirements of the Foreign
Investment Law.
E. Taxation
Tax Treaty between the United States and Mexico
The United States and Mexico have signed and ratified a Convention for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income and Protocols thereto. We refer to this Convention as the “Tax Treaty”. The Tax
Treaty is currently in effect and summarized below are the provisions of the Tax Treaty that may affect holders of ADSs, Series B
shares and our Notes who are residents of the United States (as defined in the Tax Treaty).
Mexico has also executed treaties to avoid double taxation with other countries as well as agreements providing for the
exchange of information with respect to tax matters, some of which
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presently are in force. The following summary does not take into account the effect of any such treaties. Readers should consult their
tax advisors as to their entitlement to the benefits afforded by the Tax Treaty or such other treaties.
Mexican Federal Income Tax Considerations for Holders of ADSs and Series B Shares
The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and
administrative rules issued by the Ministry of Finance and Public Credit and the Tax Treaty of the purchase, ownership and
disposition of ADSs or Series B shares by a holder that is not a resident of Mexico, as in effect as of the date hereof. Readers are
cautioned that these laws and regulations are subject to change or differing interpretations, which changes or differing interpretations
could apply retroactively. This summary does not address the tax laws of any state or municipality in Mexico. Readers are cautioned
that this is not a complete analysis or a listing of all potential tax effects that may be relevant to a decision to purchase, hold or
dispose of ADSs or Series B shares.
For purposes of Mexican taxation, an individual is a resident of Mexico if he has established his home or main business location
in Mexico. An individual is deemed to have his main business location in Mexico when (i) more than 50% of his worldwide income
in the calendar year is Mexican sourced or (ii) Mexico is the main center of his professional activity. Individuals of Mexican
nationality are deemed to be Mexican residents for tax purposes, unless proof is submitted to the contrary. A legal entity established
under Mexican law or having its principal offices or management in Mexico is deemed a resident of Mexico. A person having a
permanent establishment in Mexico will be regarded as a resident of Mexico and will be required to pay taxes in Mexico in
accordance with applicable law in respect of all Mexican source income.
Taxation of dividends
Dividends paid either in cash or in any other form to Mexican individuals and to all non-Mexican stockholders, whether
individuals or entities, with respect to the ADSs or the Series B shares represented by ADSs, are not subject to a Mexican withholding
tax.
We will not be subject to any tax in connection with a dividend payment if the amount maintained in our previously taxed net
earnings account (cuenta de utilidad fiscal neta or “CUFIN”) exceeds the dividend payment to be made. However, if the dividend
payment is in an amount greater than our CUFIN balance (which may occur in a year when net profits exceed the balance in such
accounts), then we will be required to pay up to 33% in 2004 and 32% beginning in 2005 on an amount equal to the product of (i) the
portion of the amount which exceeds such balance times (ii) 1.4925 in 2004 and 1.4706 in 2005.
Taxation of capital gains
Gains on the sale or other disposition of ADSs by holders who are not residents of Mexico will not be subject to Mexican tax, if
such disposition takes place over a stock exchange located in a highly liquid market of a country with which Mexico has executed a
treaty to avoid double taxation. Deposits of Series B shares in exchange for ADSs and withdrawals of Series B shares in exchange for
ADSs will not give rise to Mexican taxes.
Gains on the sale of Series B shares by holders who are not residents of Mexico will not be subject to any Mexican tax if (1) the
transaction is carried out through the Mexican Stock Exchange, (2) such disposition takes place over a stock exchange located in a
highly liquid market of a country with which Mexico has executed a treaty to avoid double taxation or (3) the Series B shares are on
the list of publicly-traded shares published by the Ministry of Finance and Public Credit through general rules.
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Under current law, the sale or disposition of Series B shares other than through the Mexican Stock Exchange by holders who are
not residents of Mexico is generally subject to a Mexican tax at a rate of 25% of the gross sales price. However, if the holder is a
resident of a country which is not considered to be a low tax rate country (by reference to a list of low-rate countries published by the
Mexican Ministry of Finance and Public Credit), the holder may elect to designate a resident of Mexico as its representative for
Mexican tax purposes, in which case taxes would be payable at a maximum rate of 3% on the gain on such disposition. The maximum
rate will be gradually reduced by one percent per year until 2005. In 2005 and thereafter, the maximum rate will be 32%. The United
States is not considered to be a low tax rate country. The Tax Treaty exempts United States residents from Mexican capital gains
taxes on dispositions of stock (whether or not those dispositions are carried out through the Mexican Stock Exchange), provided that
(i) during the 12 month period before the disposition, the U.S. resident did not hold, directly or indirectly, an equity interest of 25% or
more in the Mexican company, (ii) less than 50% of the assets of the Mexican company consist of immovable property situated in
Mexico or (iii) the gain is not attributable to a permanent establishment in Mexico of the U.S. resident.
Other Mexican taxes
There are no Mexican inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs or Series
B shares, although gratuitous transfers of Series B shares may in some circumstances cause a Mexican federal tax to be imposed on
the recipient. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of ADSs or Series B
shares.
Mexican Federal Income Tax Considerations for Holders of the Notes
The following is a summary of the principal consequences under current Mexican federal tax laws, the regulations and
administrative rules issued by the Ministry of Finance and Public Credit and the Tax Treaty of the purchase, ownership and
disposition by a Foreign Holder of the Notes. The Notes were issued by Dine, S.A. de C.V. (“Dine”) with the full and unconditional
guarantee of Desc. As a result of Dine’s merger into Desc, Desc has assumed all of Dine’s obligations under the indenture. A
“Foreign Holder” is a holder who (1) is not a resident of Mexico for tax purposes and (2) will not hold Notes or a beneficial interest
in Notes in connection with the conduct of a trade or business through a permanent establishment in Mexico. This summary does not
address the tax laws of any state or municipality in Mexico. Readers are cautioned that this is not a complete analysis or listing of all
potential tax effects that may be relevant to a decision to purchase, hold or dispose of Notes.
The statements of Mexican federal income tax laws that we make below are based on the federal laws of Mexico, the regulations
and administrative rules issued by the Ministry of Finance and Public Credit, as in effect as of the date hereof. We caution that these
laws and regulations and the Tax Treaty are subject to change or differing interpretations, which changes or differing interpretations
could apply retroactively.
Taxation of payments of interest and principal
Under the Mexican Income Tax Law, payments of interest made by Desc to a Foreign Holder in respect of the Notes will be
subject to Mexican withholding taxes assessed at a rate of 4.9% if (i) as is the case, the Notes have been placed through banks or
brokers in a country with which Mexico has executed a treaty to avoid double taxation and such treaty is in force, (ii) as is the case,
the Notes have been registered with the Special Section of the National Registry for Securities and Intermediaries (the
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“Special Section”) and (iii) the issuer provides the information required under general rules issued by the Ministry of Finance and
Public Credit (the “Reduced Rate Regulation”), which is described below. The issuer currently intends to provide this information.
Otherwise, payments of interest made by Desc to Foreign Holders in respect of Notes will be subject to Mexican withholding taxes
imposed at a rate of 10%.
The information requirements under the Reduced Rate Regulation, are generally described below:
•
Desc, as is the case, has timely filed with the Ministry of Finance and Public Credit information relating to the registration
of the Notes in the Special Section and to the issuance of the Notes; and
•
Desc timely files each quarter of the calendar year with the Mexican Ministry of Finance and Public Credit information
representing that no “party related” to Desc, directly or indirectly, is the effective beneficiary of 5% or more of the aggregate
amount of the interest payment, and Desc maintains records evidencing compliance with this requirement.
Under the Mexican Income Tax Law and Reduced Rate Regulation any of the following would be a “party related” to Desc: (1)
stockholders of Desc that own, directly or indirectly, individually or collectively with related persons (within the meaning of the
Mexican Income Tax Law and the Reduced Rate Regulation) more than 10% of Desc’s voting stock or (2) corporations if more than
20% of their stock is owned directly or indirectly, individually or collectively by related persons of Desc.
Apart from the Reduced Rate Regulation, other special rates of Mexican withholding income tax may apply. In particular, under
the Tax Treaty, the Mexican withholding tax is reduced to 4.9% (the “Treaty Rate”) for some holders that are residents of the United
States within the meaning of the Tax Treaty provided they satisfy the circumstances contemplated in the Tax Treaty. However, during
2003, the Tax Treaty did not, generally, have any material effect on the Mexican tax consequences to holders of Notes because, as
described above, with respect to a United States holder, Desc will be entitled to withhold taxes in connection with interest payments
under the Notes at the Reduced Rate so long as the Reduced Rate Regulation requirements described above are met. Holders of the
Notes should consult their tax advisors as to the possible application of the Treaty Rate.
Interest paid on Notes held by a non Mexican pension or retirement fund will be exempt from Mexican withholding tax if the
fund (1) has been duly incorporated as a fund pursuant to the laws of its country of origin, (2) is the effective beneficiary of the
interest paid, (3) is registered with the Ministry of Finance and Public Credit for that purpose, and (4) is exempt from income taxation
in its country of origin and the relevant interest income is exempt from taxes in that country.
Desc has agreed, subject to the exceptions and limitations contained in the indenture under which the Notes were issued, to pay
additional amounts in respect of the Mexican withholding taxes mentioned above to the holders of the Notes as will result in receipt
by such holders of such amounts as would have been received by such holders had no such withholding or deduction been required.
Under the Mexican Income Tax Law, Desc in connection with the Notes, will not be subject to any Mexican income taxes in
respect of payments of principal made to a Foreign Holder.
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Taxation of capital gains
Under the Mexican Income Tax Law it is not clear if a tax will apply to gains resulting from a Foreign Holder’s sale or other
disposition of Notes. We believe, but have not verified, that such tax applies only to the gains resulting from a Foreign Holder’s sale
or other disposition of debt securities placed among the investment public at large in Mexico.
Transfer and other taxes
There are no Mexican stamp, registration, or similar taxes payable by a Foreign Holder in connection with the purchase
ownership or disposition of the Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift, inheritance or similar tax
with respect to the Notes, although gratuitous transfers of the Notes may in some circumstances cause a Mexican income tax to be
imposed on the recipient.
United States Federal Income Tax Considerations – ADSs or Series B Shares
General
Subject to the limitations described below, the following discussion describes the material United States federal income tax
consequences to a U.S. Holder (as defined below) that is a beneficial owner of the ADSs or Series B shares (the “Shares”) and that
holds them as capital assets. For United States federal income tax purposes, a U.S. Holder of ADSs will be treated as the owner of the
Shares that those ADSs represent. Accordingly, this discussion generally treats ownership of ADSs as equivalent to owning Shares
and the United States federal income tax consequences discussed below apply equally to owners of both Shares and ADSs. For
purposes of this summary, a “U.S. Holder” is a beneficial owner of Shares who or that is for United States federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States
federal tax purposes) created or organized in the United States or under the laws of the United States or of any state or the District of
Columbia, (iii) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless
of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
This summary is for general information purposes only. It does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to each person’s decision to purchase Shares. As this is a general summary, prospective owners of
Shares are advised to consult their own tax advisers with respect to the U.S. federal, state and local tax consequences, as well as to
non-U.S. tax consequences, of the acquisition, ownership and disposition of Shares applicable to their particular tax situations.
This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), current and
proposed U.S. Treasury regulations promulgated thereunder, and administrative and judicial decisions, as of the date hereof, all of
which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this
discussion does not address the potential application of the alternative minimum tax or the United States federal income tax
consequences to holders that are subject to special treatment, including:
•
broker-dealers, including dealers in securities or currencies;
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•
insurance companies;
•
taxpayers that have elected mark-to-market accounting;
•
tax-exempt organizations;
•
financial institutions or “financial services entities”;
•
regulated investment companies;
•
taxpayers who hold Shares as part of a straddle, “hedge” or “conversion transaction” with other investments;
•
holders owning directly, indirectly or by attribution at least 10% of our voting power or 10% of the value of our stock;
•
taxpayers whose functional currency is not the Dollar;
•
certain expatriates or former long-term residents of the United States; and
•
taxpayers who acquire Shares as compensation for services.
This discussion does not address any aspect of United States federal gift or estate tax, or state; local or non-United States tax
laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who hold Shares through a
partnership or other pass-through entity. Certain material aspects of United States federal income tax relevant to a beneficial owner
other than a U.S. Holder (a “Non-U.S. Holder”) also are discussed below. Each investor is advised to consult such person’s own
tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of Shares.
Taxation of Dividends Paid on Shares
In the event that we do pay a dividend, and subject to the discussion of the passive foreign investment company, or “PFIC,”
rules below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on the
Shares on the date the distribution is received (which, in the case of ADSs, will be the date of receipt by the Depositary) to the extent
the distribution is paid out of our current or accumulated earnings and profits, as determined for United States federal income tax
purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in the
Shares and, to the extent in excess of such basis, will be treated as a gain from the sale or exchange of the Shares. Distributions of
current or accumulated earnings and profits paid in foreign currency to a U.S. Holder will be includible in the income of a U.S.
Holder in a Dollar amount calculated by reference to the exchange rate on the date the distribution is received (which, in the case of
ADSs, will be the date of receipt by the Depositary), regardless of whether the payment is in fact converted into Dollars on such date.
A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into Dollars subsequent to receipt will
have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the Dollar,
which will generally be U.S. source ordinary income or loss.
Distributions of our current or accumulated earnings and profits will be foreign source passive income for United States foreign
tax credit purposes and will not qualify for the dividends received
103
deduction otherwise available to corporations. U.S. Holders will not be entitled to a deduction or credit for any taxes paid by us on a
distribution. See “Mexican Federal Income Tax Considerations for Holders of ADSs and Series B Shares – Taxation of dividends.”
Dividends paid to non-corporate U.S. Holders after May 5, 2003 and before 2009 may qualify for a reduced rate of taxation of
15% or lower under recently enacted legislation if (i) our Shares or ADSs are tradable on an established securities market in the
United States or (ii) we qualify for benefits under a comprehensive income tax treaty with the United States which includes an
exchange of information program. Our ADSs are currently traded on an established securities market in the United States.
Consequently, dividends paid by us would qualify for the reduced rate under this legislation. A U.S. Holder would not be entitled to
the reduced rate unless the holder satisfies certain eligibility requirements (including certain holding period requirements). The
reduced tax rate for dividends would not apply if we were a PFIC.
Taxation of the Sale or Exchange of Shares
Subject to the discussion of the PFIC rules below, upon the sale or exchange of Shares, a U.S. Holder will recognize capital gain
or loss in an amount equal to the difference between such U.S. Holder’s basis in the Shares, which is usually the Dollar cost of such
shares, and the amount realized on such sale or exchange. Capital gain from the sale or exchange of the Shares held more than one
year is long-term capital gain. Long-term capital gains recognized by non-corporate U.S. Holders after May 5, 2003 and before 2009
may qualify for a reduced rate of taxation of 15% or lower under recently enacted legislation. Gain or loss recognized by a U.S.
Holder on a sale or exchange of Shares generally will be treated as United States source income or loss for United States foreign tax
credit purposes. The deductibility of a capital loss recognized on the sale or exchange of Shares is subject to limitations.
If the Shares are publicly traded, a disposition of Shares will be considered to occur on the “trade date,” regardless of the U.S.
Holder’s method of accounting. A U.S. Holder that uses the cash method of accounting calculates the Dollar value of the proceeds
received on the sale as of the date that the sale settles. However, a U.S. Holder that uses the accrual method of accounting is required
to calculate the value of the proceeds of the sale as of the trade date and, therefore, may realize foreign currency gain or loss, unless
such U.S. Holder has elected to use the settlement date to determine its proceeds of sale for purposes of calculating such foreign
currency gain or loss. In addition, a U.S. Holder that receives foreign currency upon the sale or exchange of the Shares and converts
the foreign currency into Dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the Dollar, which will generally be U.S. source ordinary income or loss.
U.S. Holders generally will not be entitled to claim a foreign tax credit for any Mexican tax incurred on a sale of the Shares
against U.S. tax imposed on any gain from the sale. See “Mexican Federal Income Tax Considerations for Holders of ADSs and
Series B Shares – Taxation of capital gains.”
Passive Foreign Investment Company Considerations
We will be a passive foreign investment company, or PFIC, for United States federal income tax purposes, if 75% or more of
our gross income in a taxable year, including the pro-rata share of the gross income of any company, U.S. or foreign, in which we are
considered to own 25% or more of the shares by value, is passive income. Alternatively, we will be considered to be a PFIC if 50% or
more of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including the
pro-rata share of the assets of any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value,
are held for the production of, or produce, passive income.
104
If we are a PFIC, a U.S. Holder may be subject to adverse United States federal income tax consequences upon receipt of
distributions by us or upon realizing a gain on the disposition of our Shares, including taxation of such amounts as ordinary income
and the imposition of an interest charge on the resulting tax liability as if such ordinary income accrued over the U.S. Holder’s
holding period for the PFIC shares. We believe that we were not a PFIC for 2003 and believe we will not be a PFIC for 2004.
However, there can be no assurances that we will not become a PFIC. U.S. Holders are strongly urged to consult their tax advisors
about the PFIC rules.
Tax Consequences for Non-U.S. Holders of Shares
Except as described in “U.S. Information Reporting and Backup Withholding” below, a Non-U.S. Holder who is a beneficial
owner of Shares will not be subject to United States federal income or withholding tax on the payment of dividends on, and the
proceeds from the disposition of, such Shares, unless:
•
such item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and,
in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent
establishment or, in the case of an individual, a fixed place of business, in the United States; or
•
the Non-U.S. Holder is an individual who holds the Shares as capital assets and is present in the United States for 183 days
or more in the taxable year of the disposition and does not qualify for an exemption.
U.S. Information Reporting and Backup Withholding
U.S. Holders generally are subject to information reporting requirements with respect to dividends paid in the United States on
Shares. In addition, U.S. Holders are subject to U.S. backup withholding (currently at a rate of 28%) on dividends paid in the United
States on Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders are subject to
information reporting and backup withholding (currently at a rate 28%) on proceeds paid from the sale, exchange, redemption or
other disposition of Shares unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or
proceeds upon the sale, exchange, redemption or other disposition of, Shares, provided that such Non-U.S. Holder provides a taxpayer
identification number, certifies to its foreign status, or otherwise establishes an exemption.
Backup withholding is not an additional tax. The amount of any backup withholding will be allowed as a credit against such
U.S. Holder’s or Non-U.S. Holder’s United States federal income tax liability and may entitle such holder to a refund, provided that
the required information is furnished to the U.S. Internal Revenue Service.
United States Federal Income Tax Considerations – The Notes
The following discussion is based upon the provisions of the Code, the applicable U.S. Treasury regulations promulgated or
proposed thereunder, judicial authority and current administrative rulings and
105
practice. Legislative, judicial or administrative changes or interpretations may be forthcoming that may be retroactive and that could
alter or modify the continued validity of the statements and conclusions set forth below. Except with respect to the discussions set
forth below under “— Non-U.S. Holders” and “— Information Reporting and Backup Withholding,” this discussion is limited to the
United States federal income tax considerations applicable to a beneficial owner of a Note who or which is (i) a citizen or resident of
the United States, (ii) a corporation (or other entity treated as a corporation for United States federal tax purposes) created or
organized in the United States or under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the
income of which is includible in gross income for United States federal income tax purposes regardless of its source or (iv) a trust, if a
court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust (for purposes of this section relating to the Notes, a “U.S.
Holder”). Certain aspects of United States federal income taxation relevant to a beneficial owner of a Note other than a U.S. Holder
(for purposes of this section relating to the Notes, a “Non-U.S. Holder”) are also discussed below. This discussion does not address
all aspects of United States federal income taxation that might be relevant to particular holders in light of their personal investment
circumstances or status, nor does it discuss the consequences to holders subject to special treatment under the United States federal
income tax laws, including:
•
broker-dealers, including dealers in securities or currencies;
•
insurance companies;
•
taxpayers that have elected mark-to-market accounting;
•
tax-exempt organizations;
•
financial institutions or “financial services entities”;
•
taxpayers who hold Notes as part of a straddle, “hedge” or “conversion transaction” with other investments;
•
certain expatriates or former long-term residents of the United States; and
•
U.S. Holders whose functional currency is not the Dollar.
The discussion does not address any special rules that may apply if the Holder receives principal in installment payments or if a
Note is called before the maturity date. This discussion does not address any aspect of United States federal gift or estate tax, or state,
local or non-United States tax laws. Additionally, the discussion does not consider the tax treatment of partnerships or persons who
hold Notes through a partnership or other pass-through entity. Holders are urged to consult their own tax advisors regarding the U.S.
federal, state, local, foreign and other tax considerations of the acquisition, ownership and disposition of the Notes.
Except as otherwise indicated below, this discussion is generally limited to the tax consequences to beneficial owners of the
Notes that are initial holders of the Notes that hold the Notes as capital assets (within the meaning of Section 1221 of the Code) and
that purchased the Notes at the “issue price.” For this purpose, the “issue price” of a Note is the first price at which a substantial
amount of the Notes were sold to the public for money (excluding sales to bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers).
106
Each investor is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such
person of purchasing, holding or disposing of Notes.
Stated Interest on Notes
Stated interest on a Note will be taxable to a U.S. Holder as ordinary income either at the time it accrues or is received in
accordance with the U.S. Holder’s method of accounting for United States federal income tax purposes.
Additional Amounts
Assuming that the contingency that we will pay Additional Amounts (the amount of interest provided in the Notes to prevent
any net reduction for withholding taxes determined using the withholding tax rate applicable to the U.S. Holder) is remote or
incidental (within the meaning of applicable U.S. Treasury regulations), a U.S. Holder will treat the gross amount of any Additional
Amounts as ordinary interest income at the time such amount is received or accrued in accordance with such U.S. Holder’s method of
accounting for United States federal income tax purposes. Consequently, the amount a U.S. Holder will include in gross income with
respect to a Note could exceed the amount of cash received by the U.S. Holder should Additional Amounts be due under the Notes.
Withholding Taxes
Any foreign withholding taxes paid at the rate applicable to a U.S. Holder will be treated as foreign taxes eligible for credit
against such U.S. Holder’s United States federal income tax liability, at the election of the U.S. Holder, subject to generally applicable
limitations and conditions (including that the U.S. Holder claim any applicable treaty benefits). Alternatively, such taxes are eligible
for deduction in computing such U.S. Holder’s taxable income. Stated interest and Additional Amounts will constitute foreign source
income for foreign tax credit purposes. Such income will generally constitute “high withholding tax interest” for U.S. foreign tax
credit purposes, unless the rate applicable to the U.S. Holder is below 5%, in which case such income generally will constitute
“passive income”. The calculation of foreign tax credits involves the application of complex rules that depend on a U.S. Holder’s
particular circumstances. Accordingly, investors are urged to consult their tax advisors regarding their ability to claim a credit for any
foreign withholding taxes paid with respect to the Notes.
Sale, Exchange or Redemption
Unless a non-recognition provision applies, the sale, exchange, redemption (including pursuant to an offer by us) or other
disposition of a Note will be a taxable event for United States federal income tax purposes. In that event, a U.S. Holder will recognize
gain or loss equal to the difference between (i) the amount of cash plus the fair market value of any property received upon that sale,
exchange, redemption or other taxable disposition (other than amounts attributable to accrued interest) and (ii) the U.S. Holder’s
adjusted tax basis in the Note. A U.S. Holder’s tax basis in a Note generally will equal the Dollar cost of the Note to the U.S. Holder.
Gain or loss recognized by a U.S. Holder of a Note should be capital gain or loss and will be long-term capital gain or loss if the
Note has been held by the U.S. Holder for more than one year at the time of sale, exchange, redemption or other disposition. Longterm capital gains recognized by non-corporate U.S. Holders after May 5, 2003 and before 2009 may qualify for a reduced rate of
taxation of 15% or lower under recently enacted legislation.
107
Any gain realized by a U.S. Holder on the sale, exchange or redemption of a Note generally will be treated as U.S. source
income for U.S. foreign tax credit purposes. Any loss realized upon such a sale, exchange, redemption or other disposition of a Note
generally will be treated as a U.S. source loss except to the extent such loss is attributable to accrued but unpaid interest.
Non-U.S. Holders
Subject to the discussion below under “—Information Reporting and Backup Withholding,” a Non-U.S. Holder of a Note
generally will not be subject to United States federal income or withholding tax on payments, including stated interest and Additional
Amounts in respect of a Note, and gain realized on the sale, exchange, redemption or other disposition of a Note unless (i) that
income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States (or in the case of
a treaty resident, attributable to a permanent establishment in the United States) or (ii) in the case of a gain, the Non-U.S. Holder of a
Note is a nonresident alien individual who holds a Note as a capital asset and is present in the United States for 183 days or more in
the taxable year of the sale, exchange, redemption or other disposition and certain other conditions are satisfied.
Information Reporting and Backup Withholding
Payments of interest and principal on a Note and the proceeds from the sale of a Note paid to a U.S. Holder (other than a
corporation or other exempt recipient) will be reported to the U.S. Internal Revenue Service. A U.S. Holder may be subject to U.S.
backup withholding (currently at the rate of 28%) with respect amounts paid on a Note and the proceeds from the sale of a Note
unless such U.S. Holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this
fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and
otherwise complies with the applicable requirements of the backup withholding rules.
Interest on a Note paid within the United States to a Non-U.S. Holder is subject to information reporting and possible backup
withholding unless certain documentation requirements are satisfied. Interest on a note paid outside the United States to a Non-U.S.
Holder through a U.S. person or a U.S. related person (as defined below) is subject to information reporting and possible backup
withholding unless certain documentation and other requirements are satisfied. The payment of principal on a Note and the proceeds
from the disposition of a Note by a Non-U.S. Holder to or through the U.S. office of any broker, U.S. or foreign, or the non-U.S.
office of a U.S. person or a U.S. related person, will be subject to information reporting and possible backup withholding unless (i)
the owner certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption and (ii) the broker does not
have actual knowledge that the holder is a U.S. Holder or that the conditions of any other exemption are not, in fact, satisfied. A “U.S.
related person” is a person with certain enumerated U.S. relationships.
Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules will be creditable against
the Holder’s United States federal income tax liability, subject to satisfaction of certain procedural requirements. Holders of Notes
should consult their tax advisors to determine whether they qualify for exemption from U.S. withholding and the procedure for
obtaining an exemption, if applicable.
F. Dividends
Not applicable.
108
G. Statements by Experts
Not applicable.
H. Documents on Display
We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations
of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference
Room located at 450 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the
internet at the SEC’s website at http://www.sec.gov.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Our business activities require that we hold or issue financial instruments, principally debt obligations, that expose us to market
risk caused by movements in currency exchange rates and interest rates. To hedge these risks, we sometimes utilize derivative
instruments. All financial instruments held by us are for purposes other than trading.
Market Risk
Our exposure to market risk associated with changes in interest rates relates primarily to debt obligations. Our policy is to
manage our interest rate risk through a combination of fixed and floating rate debt issues. With respect to floating rate debt, we
sometimes use interest rate swap contracts to reduce our interest rate exposure. Approximately 69% of our debt is denominated in
Dollars.
The table below provides information as of December 31, 2003 about our financial instruments that are sensitive to changes in
interest rates, exchange rates and commodity prices. For these debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. The fair value of long-term debt is based on the quoted market prices for
the same or similar issues, as well as on the present value of future cash flows. The rates used to discount the future cash flows of debt
instruments are the London inter-bank offered rate or LIBOR and the Mexican TIIE rates that match the remaining life of the
instrument.
Fixed Rate Debt (1)
Dollardenominated
Weighted average
interest rate
Peso-denominated
Weighted average
interest rate
2004
2005
Ps. 162
Ps. 104
8.29%
8.29%
2006
Ps.
106
2007
Ps.
922
8.29%
Ps. 1,086
8.29%
Ps. 1,196
8.73%
8.73%
Thereafter
Ps.
209
2003
Total
2003
Fair Value
2002
Total(5)
2002
Fair Value
Ps. 1,503
Ps. 1,730 Ps. 2,327 Ps. 2,655
Ps. 2,281
Ps. 2,705 Ps. 2,195 Ps. 2,608
Ps. 6,769
Ps. 7,307 Ps. 6,357 Ps. 6,552
Ps. 1,247
Ps. 1,373 Ps. 1,329 Ps. 1,329
8.29%
Floating Rate Debt
(2)
Dollardenominated
Weighted average
interest rate(3)
Peso-denominated
Weighted average
interest rate(4)
Interest Rate
Derivative (5)
Variable to fixed
swaps
Average pay rate
Average receive
rate
Exchange Rate
Derivative
Variable to fixed
Ps. 273
Ps. 88
4.01%
Ps. 6
Ps.
8.24%
5.64%
6
9.35%
Ps. 2,864
Ps.
6.89%
414
10.18%
Ps. 1,736
Ps.
7.62%
411
Ps. 1,808
Ps.
8.19%
410
11.07%
12.02%
(68.1)
(1.4)
7.10%
11.40%
10.30%
5.00%
Ps.
(69.5)
Ps. (76.6)
swaps
Average pay rate
Average receive
rate
Commodities
Derivatives (6)
Variable to fixed
swaps
Average pay rate
Average receive
rate
(1)
Ps. 11.00 Ps. 11.00
6.30
NA
Ps. 6.30
Ps. 6.30 Ps. (5.50) Ps. (54.50)
NA
Fixed interest rates are weighted averages as contracted by Desc, included $74 million outstanding Notes on June 30, 2004.
109
(2)
(3)
(4)
(5)
(6)
Floating interest rates are based on market rates as of December 31, 2003 plus the weighted average spread for Desc and its
subsidiaries.
Market rates for Dollar-denominated debt are based on the LIBOR curve.
Market rates for Peso-denominated debt are based on the TIIE.
Fair value refers to accrued net interest expenses/income as of each year.
All the commodities derivatives refer to natural gas.
A hypothetical, instantaneous and unfavorable change of 100 basis points in the average interest rate applicable to floating rate
liabilities held at December 31, 2003 would increase our interest expense in 2004 by approximately Ps. 80,160 or 16.3%, over a 12month period of 2004, assuming no additional debt is incurred during such period.
In the event of a 10% devaluation of the Peso against the Dollar, and assuming that 70% of our debt is denominated in Dollars,
the impact on our balance sheet would be approximately $67 million.
Derivative Financial Instruments
Desc’s internal control system includes policies and procedures to manage its exposure to fluctuations in foreign currency
exchange rates using derivative financial instruments. These instruments are traded only with authorized institutions and trading
limits have been established for each institution. Desc does not carry out transactions with derivative financial instruments for the
purpose of speculation.
The derivative financial instruments we currently use are primarily hedge contracts to reduce our exposure to exchange rate
fluctuations. Premiums paid are amortized over the term of the derivative financial instrument using the unpaid balance of the liability
being hedged. See Note 4 to the Financial Statements for additional information regarding our derivative financial instruments.
See also the discussion in Item 5 above regarding exchange rate translations and our treasury policy.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
110
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
At stockholders’ meetings held on March 8, 2004, our stockholders approved the mandatory conversion of all the Series C
shares into Series B shares, on a one-for-one basis, and approved an amendment to our ByLaws to permit both Mexican and nonMexican investors to hold both the Series A shares and Series B shares. See Item 10. “Share Capital” and “Voting Rights” for
additional information about these shares.
Item 15. Controls and Procedures.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in
this report is recorded, processed, summarized and reported on a timely basis. Our chief executive officer and chief financial officer,
with the assistance of other members of management, performed an evaluation of our disclosure controls and procedures as of
December 31, 2003. Based on that evaluation, they concluded that our disclosure controls and procedures were effective as of
December 31, 2003, to achieve their intended objectives.
There have not been any changes in our internal control over financial reporting during fiscal year 2003 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [RESERVED]
Item 16A. Audit Committee Financial Expert.
Our board of directors has determined that Messrs. Prudencio López Martínez, Rubén Aguilar Monteverde and Ernesto Vega
Velasco are our “audit committee financial experts” (as defined in Item 16A of Form 20-F). See Item 6 above under the heading
“Directors and Senior Management” for additional information regarding our Audit Committee.
Item 16B. Code of Ethics.
On February 18, 2003, our board of directors had adopted a written code of ethics, which is applicable to all our employees,
including members of our board of directors, our chief executive officer, our chief financial officer, our controller and other senior
officers. We believe that this Code now substantially complies with the elements set forth in Item 16B of the Form 20-F. This code is
publicly available on our website at: http://www.desc.com.mx/i/externos/otros/Desc Code of Ethics.pdf. Our Audit Committee is
planning to consider whether to adopt a separate code of ethics which is applicable to our chief executive officer, chief financial
officer and controller and other members of senior management performing similar functions.
Item 16C. Principal Accountant Fees and Services.
Our principal accountant is Galaz, Yamazaki, Ruiz Urquiza, S.C., which is a member firm of Deloitte Touche Tohmatsu
(“Deloitte”).
111
Deloitte billed us the following fees for professional services in each of the last two fiscal years:
Year ended December 31,
2002
2003
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Ps.12,659.9 Ps.12,996.9
3,151.1
3,015.5
481.9
471.5
9,844.1
—
Total
Ps.26,137.0 Ps.16,483.9
“Audit Fees” are the aggregate fees billed by Deloitte for the audit of our consolidated and annual financial statements.
“Audit-Related Fees” comprises fees billed for the audit of other attestation services subject to regulatory requirements, as well
as advisory services associated with our financial reporting.
“Tax Fees” are fees for professional services rendered by Deloitte for tax compliance, tax advice on actual or contemplated
transactions, tax consulting associated with international transfer prices and expatriate employee tax services.
“All Other Fees” are fees mainly related to advisory services rendered prior to May 6, 2003 and in connection with the
implementation of accounting software.
Audit Committee’s Pre-Approval Policies and Procedures
Our Audit Committee is responsible for evaluating and recommending to our board an auditor and all audit and permissible nonaudit services to be provided by the auditor. Our Audit Committee likewise evaluates and recommends to our board of directors the
auditors for our subsidiaries within the consolidated entity. Under Mexican law, the board of directors alone has the authority to select
auditors and their services, with the advice and recommendation of the audit committee. Our board of directors has the authority to
approve all such auditors and services. Our board of directors pre-approves all audit and permissible non-audit services provided by
all auditors for the consolidated entity on an annual basis, setting forth in detail the particular services or categories that are preapproved in advance and the budget for each service or category of services. Any service proposal not included in this list of preapproved services and/or categories of services that is submitted by any of our outside auditors (including auditors for any subsidiary
within the consolidated entity) must be evaluated and recommended by our Audit Committee and then approved by our board.
Item 16D. Exemptions From the Listing Standards for Audit Committees.
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
112
PART III
Item 17. Financial Statements.
We have responded to Item 18 in lieu of responding to this item.
Item 18. Financial Statements.
You can find our Financial Statements on F-1 through F-66.
Independent auditors’ report
Consolidated balance sheets as of December 31, 2002 and 2003
Consolidated statements of income for the years ended December 31, 2001, 2002 and 2003
Consolidated statements of stockholders’ equity for the years ended December 31, 2001, 2002 and 2003
Consolidated statements of changes in financial position for the years ended December 31, 2001, 2002 and 2003
Notes to consolidated financial statements
Reports of other independent public accountants
F-1 to F-2
F-3 to F-4
F-5 to F-6
F-7 to F-8
F-9 to F-11
F-11 to F-52
F-53 to F-59
Item 19. Exhibits
1.1 English translation of Registrant’s ByLaws (incorporated by reference to the exhibit to the Form 8-A filed by the Registrant
with the SEC on March 16, 2004).
2.1 The total amount of long-term debt securities of Desc, S.A. de C.V. authorized under any instrument does not exceed 10% of
the total assets of Desc, S.A. de C.V. on a consolidated basis. We hereby agree to furnish to the SEC, upon its request, a copy of any
instrument defining the rights of holders of long-term debt of Desc, S.A. de C.V. or of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.
2.2 Credit Agreement, dated as of December 19, 2003, among Desc, S.A. de C.V., each of the lenders party thereto from time to
time that is a signatory thereto and Citibank, N.A., as administrative agent.
2.3 Guaranty Agreement, dated as of December 23, 2003, between each of the guarantors party thereto and Citibank, N.A., as
administrative agent.
2.4 Consent, Waiver and First Amendment to the Credit Agreement, dated as of April 27, 2004, among Desc, S.A. de C.V., each
of the lenders party thereto from time to time and Citibank, N.A., as administrative agent.
4.1 English translation of the Convenio de Colaboracion en la Subscripcion de Acciones (Stock Subscription Cooperation
Agreement) between Inversora Bursátil, S.A. de C.V., Casa de Bolsa, Grupo Financiero Inbursa and Desc, S.A. de C.V., dated as of
February 17, 2004.
4.2 English translation of Partnership Interests Purchase Agreement, dated May 29, 2003, between Fernando Senderos Mestre
and Desc, S.A. de C.V.
4.3 English translation of Partnership Interests Purchase Agreement, dated May 29, 2003, between Lucía Senderos and Desc,
S.A. de C.V.
113
4.4 Asset Purchase Agreement, dated as of January 15, 2004, among Desc Automotriz, S.A. de C.V., Hayes Wheels de Mexico,
S.A. de C.V., Hayes Wheels Aluminio, S.A. de C.V., Inmobiliaria el Puente, S.A. de C.V., Hayes Wheels Acero, S.A. de C.V.,
Administracion y Control Hayes, S.A. de C.V., Hayes Lemmerz International, Inc., Hayes Lemmerz International – Mexico, Inc. and
Hayes Lemmerz Aluminio, S. de R.L. de C.V. (portions of this exhibit have been omitted pursuant to a request for confidential
treatment).
4.5 First Amendment to Asset Purchase and Sale Agreement, dated as of September 30, 2003, between Desc, S.A. de C.V. and
Henkel Capital, S.A. de C.V. (portions of this exhibit have been omitted pursuant to a request for confidential treatment).
4.6 Asset Purchase and Sale Agreement, dated as of September 29, 2003, between Desc, S.A. de C.V. and Henkel Capital, S.A.
de C.V. (portions of this exhibit have been omitted pursuant to a request for confidential treatment).
8.1 Significant subsidiaries owned, directly or indirectly, by Desc as of December 31, 2003, as defined in Regulation S-X,
§210.1-02(w): See “Organizational Structure” in “Item 4. Information on the Company.”
12.1 Certification of the Chief Executive Officer of Desc pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of the Chief Financial Officer of Desc pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1 Certification pursuant to 18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
114
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20 F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
Desc, S.A. de C.V.
By:
/s/ Arturo D’Acosta Ruiz
Name: Arturo D’Acosta Ruiz
Title: Chief Financial Officer
Dated: June 30, 2004
Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Desc, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Desc, S.A de C.V. and subsidiaries (collectively referred to as the
“Company”) as of December 31, 2002, and 2003, and the related consolidated statements of income (loss), changes in stockholders’
equity and changes in financial position for the years then ended, all expressed in thousands of Mexican pesos of purchasing power as
of December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of the chemical and food segments, which statements reflect total assets constituting 42% of
consolidated total assets as of December 31, 2002, and 2003, and total revenues constituting 53% and 49%, respectively, of
consolidated total revenues for the years then ended. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of such
other auditors.
We conducted our audits in accordance with auditing standards generally accepted in Mexico and with the standards of the Public
Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
As mentioned in Notes 1b. and 11 to the accompanying consolidated financial statements, in December 2003 the Company
satisfactorily concluded negotiations to restructure a significant portion of its short and long-term debt.
As mentioned in Note 4a. to the accompanying consolidated financial statements, as of December 31, 2003 the Company early
adopted the provisions of new Bulletin C-15, “Impairment of the Value of Long-lived Assets and their Disposal”, which establishes
that an impairment loss has occurred if the present value of estimated net future cash flows of a cash generating unit is less than the
book value of long-lived assets, tangible or intangible. The effect in thousands of pesos derived from the application of this principle
was the recognition of Ps.712,457 of impairment in the value of certain property, plant and equipment and Ps.898,891 of impairment
in the value of the goodwill of certain subsidiaries. The charge to 2003 results was Ps.1,384,294, net of a reduction of Ps.227,054 in
the related deferred income tax liability.
F-1
In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all
material respects, the financial position of Desc, S.A. de C.V. and subsidiaries as of December 31, 2002, and 2003, and the results of
their operations, changes in their stockholders’ equity and changes in their financial position for the years then ended in conformity
with accounting principles generally accepted in Mexico.
Our audits also included:
•
Auditing the adjustments to convert the consolidated financial statements of Authentic Acquisition Corporation and
subsidiaries into Mexican pesos and accounting principles generally accepted in Mexico for purposes of consolidation.
•
Auditing the restatement of the 2001 financial statements into constant Mexican pesos.
Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted
in the United States of America. The application of the latter would have affected the determination of income for each of the three
years in the period ended December 31, 2003, and the determination of stockholders’ equity at December 31, 2003 and 2002, to the
extent summarized in Note 24.
Our audits also comprehended the translation of the Mexican peso amounts into U.S. dollar amounts and, in our opinion, such
translation has been made in conformity with the basis stated in Note 2a. The translation of the financial statement amounts into U.S.
dollars and the translation of the financial statements into English have been made solely for the convenience of readers in the United
States of America.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
A member firm of Deloitte Touche Tohmatsu
/S/
CPC Luis Javier Fernández Barragán
Mexico City
March 26, 2004
(April 30, 2004 with respect to Note 21)
F-2
Desc, S.A. de C.V. and Subsidiaries
Consolidated balance sheets
As of December 31, 2002 and 2003
Expressed in thousands of constant Mexican pesos (Ps.) and thousands of U.S. dollars ($)
2002
2003
2003
Assets
Current assets:
Cash and cash equivalents
Notes and accounts receivable, net
Inventories, net
Prepaid expenses
Discontinued operations
Ps. 2,501,563
3,825,351
3,193,122
56,777
102,009
Total current assets
Ps.
719,967
4,270,341
3,120,436
78,212
8,346
$
64,284
381,287
278,615
6,983
745
9,678,822
8,197,302
731,914
4,290,528
3,828,312
341,820
1,048,481
93,616
13,684,423
11,813,121
1,054,762
Goodwill, net
1,381,563
594,673
53,097
Other assets, net
1,286,888
1,222,279
109,134
147,481
30,822
2,752
Ps.30,469,705
Ps.26,734,990
$2,387,095
Ps. 3,641,828
2,087,713
106,412
1,777,136
62,482
Ps.
$
Land held for development and real estate projects
Trade receivables - long-term
—
Property, plant and equipment, net
Discontinued operations
Total
Liabilities and stockholders’ equity
Current liabilities:
Bank loans and current portion of long-term debt
Notes and accounts payable to suppliers
Income taxes and employee profit sharing
Other payables and accrued liabilities
Discontinued operations
Total current liabilities
440,553
1,617,571
225,177
1,731,975
13,366
39,336
144,429
20,105
154,643
1,193
7,675,571
4,028,642
359,706
Long-term debt
9,051,649
11,360,011
1,014,305
Deferred income taxes
1,339,115
880,749
78,640
183,762
16,408
577,887
375,609
33,537
18,644,222
16,828,773
1,502,596
(Continued)
Related parties - long-term
—
Other long-term liabilities
Total liabilities
F-3
2002
Stockholders’ equity:
Capital stock
Paid-in surplus
Retained earnings
Reserve for repurchase of shares
Cumulative effect of initial recognition of deferred income taxes
Cumulative effect of restatement
Adjustment of additional employee retirement liability
Majority stockholders’ equity
Minority interest
Total stockholders’ equity
Total
2003
2003
11,715,914
1,170,390
19,766,314
996,847
(1,887,308)
(23,690,416)
(154,105)
11,715,914
1,170,390
17,525,927
996,847
(1,887,308)
(23,036,402)
(147,158)
1,046,082
104,501
1,564,843
89,006
(168,513)
(2,056,859)
(13,139)
7,917,636
3,907,847
6,338,210
3,568,007
565,921
318,578
11,825,483
9,906,217
884,499
Ps. 30,469,705
Ps. 26,734,990
$ 2,387,095
(Concluded)
The accompanying notes are part of these consolidated financial statements.
F-4
Desc, S.A. de C.V. and Subsidiaries
Consolidated statements of income (loss)
For the years ended December 31, 2001, 2002 and 2003
Expressed in thousands of constant Mexican pesos (Ps.)
and thousands of U.S. dollars ($), except per share information
Net sales
Cost of sales
Gross income
Operating expenses:
Administrative
Selling
Operating income
Other (expenses) income:
Impairment of fixed assets
Depreciation of idle plant
Amortization of goodwill
Goodwill write-off from Club Ecuestre Chiluca,
S.A. de C.V.
Amortization of preoperating expenses and
patents
Loss on sale of shares
Special item - severance payments
Income from the technology fund
Income (loss) on sale of assets
Recovery of taxes
Other, net
Integral financial result:
Interest income
Interest expense
UDIS variation
Exchange gain (loss), net
Monetary position gain
Income (loss) from continuing operations before
provisions and equity in associated companies and
unconsolidated subsidiaries.
2001
2002
2003
2003
Ps.22,092,872
Ps.20,360,380
Ps.21,755,055
$1,942,450
16,284,573
15,572,154
17,024,252
1,520,050
5,808,299
4,788,226
4,730,803
422,400
2,229,370
1,616,673
2,222,587
1,484,339
2,318,689
1,569,650
207,029
140,150
3,846,043
3,706,926
3,888,339
347,179
1,962,256
1,081,300
842,464
75,221
(14,140)
(2,631)
(95,097)
(1,263)
(235)
(8,491)
(59,280)
(5,293)
(101,205)
(75,515)
(85,418)
—
(50,988)
(7,539)
(79,992)
—
(112,077)
(12,324)
(250,708)
37,016
4,544
13,991
(39,199)
(37,496)
(6,073)
—
29,114
(27,494)
51,434
(6,272)
—
(18,086)
(121,131)
23,336
(69,575)
47,474
(69,639)
—
(1,615)
(10,815)
2,084
(6,212)
4,239
(6,218)
(620,895)
(135,306)
(378,769)
(33,819)
126,211
(1,076,283)
(109,282)
336,046
374,976
68,192
(865,104)
(120,648)
(770,354)
414,082
42,136
(1,076,072)
(93,847)
(529,668)
305,978
3,762
(96,079)
(8,379)
(47,293)
27,320
(348,332)
(1,273,832)
(1,351,473)
(120,669)
(327,838)
(887,778)
(79,267)
(Continued)
993,029
F-5
2001
Provisions for:
Current income taxes
Deferred income taxes
Employee profit sharing
2002
2003
2003
478,682
(572,760)
159,161
226,091
(83,149)
108,783
341,958
(279,890)
103,918
30,532
(24,990)
9,279
65,083
251,725
165,986
14,821
11,252
1,005
Equity in associated companies and unconsolidated
subsidiaries
(125,376)
(5,406)
Income (loss) from continuing operations
Income (loss) form discontinued operations
Change in accounting principle
Extraordinary item
802,570
(253,863)
—
(309,998)
(584,969)
(629,868)
—
—
(1,042,512)
22,896
(1,384,294)
—
(93,083)
2,044
(123,600)
—
Ps. 238,709
Ps.(1,214,837)
Ps.(2,403,910)
$ (214,639)
Ps.
45,446
193,263
Ps.(1,084,545)
(130,292)
Ps.(2,240,387)
(163,523)
$ (200,038)
(14,601)
Ps. 238,709
Ps.(1,214,837)
Ps.(2,403,910)
$ (214,639)
Ps.
0.39
Ps.
(0.28)
Ps.
(0.55)
$
(0.05)
Discontinued operations
Ps.
(0.16)
Ps.
(0.40)
Ps.
0.01
$
—
Change in accounting principle
Ps.
—
Ps.
—
Ps.
(0.87)
$
(0.08)
Extraordinary items
Ps.
(0.20)
Ps.
—
Ps.
—
$
—
Majority net income (loss)
Ps.
0.03
Ps.
(0.68)
Ps.
(1.41)
$
(0.13)
Net consolidated income (loss) for the year
Allocation of consolidated net income:
Majority stockholders’ interest
Minority stockholders’ interest
Income (loss) per share:
Income (loss) from continuing operations
Weighted average shares outstanding (000’s)
1,588,614
1,588,687
1,588,687
1,588,687
(Concluded)
The accompanying notes are part of these consolidated financial statements.
F-6
Desc, S.A. de C.V. and Subsidiaries
Consolidated statements of stockholders’ equity
For the years ended December 31, 2001, 2002 and 2003
Expressed in thousands of constant Mexican pesos (Ps.) and thousands of U.S. dollars ($)
Capital Stock
Number of
shares
Ps.11,698,057
Ps.1,169,800
1
—
59
—
590
—
—
(448,185)
—
—
—
—
—
—
—
—
—
45,446
—
—
Balances, December 31, 2001
Dividends declared
Comprehensive income (loss)
1,369,079,376
—
—
17,798
—
—
1,369,079,376
17,798
—
—
Cumulative
effect of initial
recognition of
deferred
income taxes
Cumulative
effect of
restatement
Ps.(1,887,308)
Ps.(23,338,038)
11,698,116
—
—
1,170,390
—
—
21,279,795
(428,936)
(1,084,545)
996,847
—
—
11,698,116
1,170,390
19,766,314
996,847
Adjustment of
additional
employee
retirement
liability
Ps.
—
—
—
—
—
—
—
—
—
—
Balances, December 31, 2001
Dividends declared
Comprehensive income
(loss)
(1,887,308)
—
Balances, December 31, 2002
(1,887,308)
—
Ps.996,847
Ps.17,797
81,106
—
—
Ps.21,682,534
Restatement
1,368,998,270
Balances, January 1, 2001
Increase in capital stock due
to merger
Dividends declared
Decrease in minority
interest due to
restructuring and sales
Comprehensive income
(loss)
Reserve for
repurchase
of shares
Historical
Balances, January 1, 2001
Increase in capital stock due to
merger
Dividends declared
Decrease in minority interest
due to restructuring and
sales
Comprehensive income (loss)
Balances, December 31, 2002
Retained
earnings
Paid-in
surplus
Majority
stockholders’
equity
Minority
interest
Total
stockholders’
equity
Ps.10,339,689
Ps.5,426,438
Ps.15,766,127
650
(448,185)
—
—
(402,055)
650
(850,240)
(652,094)
(652,094)
(768,530)
—
(723,084)
(356,039)
(1,079,123)
(24,106,568)
—
—
—
9,169,070
(428,936)
4,016,250
(121,073)
13,185,320
(550,009)
416,152
(154,105)
(23,690,416)
(154,105)
F-7
(822,498)
7,917,636
12,670
3,907,847
(809,828)
11,825,483
Capital Stock
Number of
shares
Purchase of minority shareholding
interests
Comprehensive income (loss)
Historical
—
—
Paid-in
surplus
Restatement
—
—
—
—
Reserve for
repurchase
of shares
Retained
earnings
—
—
—
(2,240,387)
—
—
Balances, December 31, 2003
1,369,079,376
Ps.17,798
Ps.11,698,116
Ps.1,170,390
Ps.17,525,927
Ps.996,847
Balances, December 31, 2002
Purchase of minority shareholding
interests
Comprehensive income (loss)
1,369,079,376
$
$
$
$
$
Balances, December 31, 2003
1,369,079,376
1,589
—
—
—
—
Cumulative
effect
of initial
recognition of
deferred
income
taxes
Purchase of minority shareholding
interests
Comprehensive income (loss)
1,044,493
$
—
—
—
—
1,589
Cumulative
effect of
restatement
104,501
$
—
—
1,044,493
$
Adjustment of
additional
employee
retirement
liability
—
654,014
—
(200,038)
104,501
$
Majority
stockholders´
equity
—
6,947
1,764,881
—
—
1,564,843
$
89,006
Total
stockholders’
equity
Minority
interest
—
(1,579,426)
89,006
(314,101)
(25,739)
(314,101)
(1,605,165)
Balances, December 31, 2003
Ps.(1,887,308)
Ps.(23,036,402)
Ps.(147,158)
Ps. 6,338,210
Ps.3,568,007
Ps. 9,906,217
Balances, December 31, 2002
Purchase of minority shareholding
interests
Comprehensive income (loss)
$
$
$
$
$
$
Balances, December 31, 2003
$
(168,513)
—
—
(168,513)
(2,115,254)
—
58,395
$
(2,056,859)
The accompanying notes are part of these consolidated financial statements.
F-8
(13,758)
—
619
$
(13,139)
706,945
—
(141,024)
$
565,921
348,921
(28,045)
(2,298)
$
318,578
1,055,866
(28,045)
(143,322)
$
884,499
Desc, S.A. de C.V. and Subsidiaries
Consolidated statements of changes in financial position
For the years ended December 31, 2001, 2002 and 2003
Expressed in thousands of constant Mexican pesos (Ps.) and thousands of U.S. dollars ($)
Operating activities:
Income (loss) from continuing operations
2001
2002
2003
2003
Ps. 802,570
Ps. (584,969)
Ps. (1,042,512)
$ (93,083)
Add (deduct)-Items which do not require (generate)
resourcesDepreciation and amortization
Depreciation of idle plant
Impairment of fixed assets
Capitalized integral financial cost
Equity in associated companies and
unconsolidated subsidiaries
Amortization and write-off of goodwill
Deferred income taxes
Non-cash items from discontinued operations
1,310,465
75,517
101,205
(5,838)
125,376
85,418
(572,760)
114,055
Changes in operating assets and liabilitiesNotes and accounts receivable
Inventories
Prepaid expenses
Real estate assets available for sale
Decrease in current assets due to sale of assets of
Industrias Resistol, S.A. de C.V.
Current assets from discontinued operations
Notes and accounts payable to suppliers, other
payables and accrued liabilities
Income taxes and employee profit sharing
Current liabilities from discontinued operations
123,283
235
1,263
—
(11,252)
154,377
(279,890)
20,634
(1,005)
13,784
(24,991)
1,842
2,036,008
853,149
238,878
21,328
1,147,934
604,575
24,718
(19,610)
(53,954)
53,604
20,869
19,610
(617,634)
29,530
(21,435)
—
(55,147)
2,637
(1,914)
—
—
79,055
—
281,360
270,216
93,663
24,127
8,363
71,941
196,350
(31,511)
(140,601)
(291,010)
(34,037)
(308,988)
118,765
(69,750)
(27,588)
10,604
(6,228)
(144,159)
(505,633)
(45,146)
(629,868)
—
—
22,896
(1,384,294)
—
2,044
(123,600)
—
79,122
(1,628,153)
(145,374)
(253,863)
—
(309,998)
Net resources generated by (used in)
operations
1,380,750
2,631
14,140
—
5,406
79,992
(83,149)
57,813
2,073,452
Discontinued operations
Change in accounting principle
Extraordinary items
1,319,529
7,539
50,988
—
3,545,599
(Continued)
F-9
2001
Financing activities:
Proceeds from debt
Payments of debt
Effect of the variance on short-term bank loans,
current portion of long-term debt and long-term
debt
Related parties - long-term
Other long-term liabilities
Deferred income taxes
Increase in capital stock due to merger
Dividends paid
Dividends paid to minority interest
Adjustment of additional employee retirement
liability
Decrease in minority stockholders’ interest due to
restructuring and sale
Net resources (used in) generated by
financing activities
Investing activities:
Land acquisition
Cost of land sold
Investment in real estate projects
Cost of real estate projects sold
Trade receivables - long-term
Investments in shares
Cumulative effect of change in accounting policy
of goodwill
Sale of shares of subsidiaries
Cash and cash equivalents of subsidiaries sold
Purchase of minority shareholdings
Acquisitions of property, plant and equipment
Net book value of retirements of property, plant
and equipment
Net book value of retirements of property, plant
and equipment of Industrias Resistol, S.A. de
C.V.
Cumulative effect of change in accounting policy in
property plant and equipment
Net increase of investment properties
Other assets
Investing activities of discontinued operations
Net resources generated by (used in)
investing activities
Net increase (decrease) in cash and cash
equivalents
Net decrease in cash and cash equivalents from
discontinued operations
Cash and cash equivalents:
Balance at beginning of year
Balance at end of year
2002
2003
2003
(1,384,338)
(508,058)
4,852,720
(2,654,645)
7,097,310
(7,505,534)
633,700
(670,149)
(558,659)
—
(231,462)
(516,591)
650
(228,323)
(402,055)
(598,238)
—
322,197
252,283
—
(440,469)
(121,073)
(484,689)
124,482
(202,278)
(178,476)
—
(206,315)
—
(43,277)
11,115
(18,061)
(15,936)
—
(18,420)
—
—
(652,094)
(4,480,930)
(154,105)
—
1,458,670
6,947
619
—
—
(1,348,553)
(120,409)
(7,154)
282,278
(761,902)
137,552
—
(260,854)
(3,142)
64,777
(405,757)
368,978
—
29,137
—
987,434
(518,224)
232,085
(1,048,481)
—
—
88,165
(46,271)
20,722
(93,616)
—
—
1,574,561
(79,368)
—
(785,151)
—
—
—
—
(1,117,412)
898,891
—
—
(314,101)
(802,625)
80,260
—
—
(28,045)
(71,664)
401,998
35,893
453,156
40,462
(94,961)
3,718
—
(28,349)
242,140
66,469
712,457
—
75,861
116,659
63,614
—
6,773
10,416
675,094
(520,714)
1,195,110
106,709
(1,781,596)
(159,074)
666,375
—
—
(260,237)
(13,919)
262,445
—
1,017,078
(8,288)
1,766,929
1,492,773
Ps. 1,492,773
Ps. 2,501,563
—
Ps.
—
2,501,563
223,358
719,967
$ 64,284
(Concluded)
The accompanying notes are part of these consolidated financial statements.
F-10
Desc, S.A. de C.V. and Subsidiaries
Notes to consolidated financial statements
As of December 31, 2001, 2002 and 2003
Expressed in thousands of constant Mexican pesos (Ps.) and thousands of U.S. dollars ($)
1. Principal activities and significant events
Activities- Desc, S.A. de C.V. (“DESC”) is the controlling stockholder of a group of companies engaged mainly in the
manufacture and sale of autoparts, chemicals and food. It is also engaged in the acquisition, sale and development of real estate.
Significant events(a) The economic slowdown recorded in the last few years had a significant impact in the United States of America and
Mexico, with adverse consequences on the results of DESC, primarily in the automotive and chemical sectors. For this
reason, during 2002 and 2003 DESC decided to reviewing its investment portfolio and realigning its operating structure to
reflect market conditions. Therefore, during 2002 DESC decided to close the following non-strategic businesses: spark
plugs and electric parts from the automotive sector, the natural pigments business in the chemicals sector, and in the food
sector the hog raising operation in the Bajio region and the shrimp farming business, which was donated to the Instituto
Tecnológico de Estudios Superiores de Monterrey; it also began a downsizing program which continued during 2003,
during which period the group’s work force was reduced by 15.1% (see Notes 17 and 18).
(b)
In December 2003 the Company satisfactorily concluded the agreement with bank creditors to refinance syndicated loans
and a significant part of the Company’s short-term debt. The total amount of the restructured debt was approximately
$667,000 ($445,700 and Ps.1,223,000 of long-term loans and $112,000 of revolving credit and letters of credit), which
represents around 63% of the Company’s consolidated debt. The terms of the negotiation include maturity of the debt after
five years and a grace period of 30 months as of January 2004 for payment of principal. The interest rates obtained for the
dollar debt are LIBOR rate plus a variable interest margin, while the rate for the Mexican peso debt is TIIE (Interbank
interest rate) plus a variable interest margin (see Note 11).
(c)
Continuing with the programs mentioned in subsection a) above, the following resolutions were adopted at the
Stockholders’ Ordinary General and Special Meeting held on April 28, 2003:
i.
Merge DESC with Industrias Resistol, S.A. de C.V. with DESC surviving as the merged company. Such merger
went into effect for accounting and tax purposes as of September 29, 2003, DESC sold basically all of the assets of
the aforementioned subsidiary engaged in the manufacture and sale of adhesives and waterproofing materials as of
September 30, 2003. As a result of such asset sale, the Company generated a loss of Ps.11,013 which is recorded in
the statement of income (loss) under the heading “Other expenses”.
ii.
Merge DESC with Industrias Ruiz Galindo, S.A. de C.V., with DESC surviving as the merged company. Such
merger went into effect for accounting and tax purposes as of May 1, 2003, for which reason as of this date
Industrias Ruiz Galindo, S.A. de C.V. ceased to exist as a legal entity.
F-11
2. Basis of presentation
a.
Convenience translation - U.S. dollar amounts shown in the financial statements have been included solely for the
convenience of users and are translated at the exchange rate for December 31, 2003 of 11.1998 Mexican pesos per U.S.
dollar. Such translation should not be interpreted as a representation that the Mexican peso amounts have been, could have
been, or could in the future be, translated into U.S. dollars at this or any other exchange rate. The statements of income in
U.S. dollars generated monthly by the Company for local purposes are determined based on historical amounts for each
month and are converted at the average exchange rates of the respective months, for which reason they differ from the
accompanying consolidated statement of income (loss).
b.
Basis of consolidation- The accompanying consolidated financial statements include those of DESC and the subsidiaries in
which there is stockholding and administrative control. All significant intercompany transactions and balances have been
eliminated in the accompanying consolidated financial statements.
The Company’s principal subsidiaries are:
Automotive segmentDesc Automotriz, S.A. de C.V. and Subsidiaries Chemical segment (“GIRSA”)Industrias Negromex, S.A. de C.V.
Paratec, S.A. de C.V.
Industrias Resistol, S.A. de C.V.
Quimir, S.A. de C.V.
Resirene, S.A. de C.V.
Rexcel, S.A. de C.V.
Nhumo, S.A. de C.V.
Dynasol Elastómeros, S.A. de C.V.
Food sectorAgrokén, S.A. de C.V. and subsidiaries
Corfuerte, S.A. de C.V. and subsidiaries (“CORFUERTE”)
Authentic Acquisition Corporation and Subsidiaries
Real estate segment (“DINE”)Cantiles de Mita, S.A. de C.V.
Cañada Santa Fe, S.A. de C.V.
Promociones Bosques, S.A. de C.V.
Inmobiliaria Dine, S.A. de C.V.
Club Ecuestre Chiluca, S.A. de C.V.
2002
2003
99.9%
99.9%
99.9%
99.9%
99.9%
99.9%
99.9%
60%
50.1%
99.9%
99.9%
—
—
99.9%
99.9%
99.9%
60%
50.1%
99.9%
77.6%
81.3%
99.9%
96.1%
99.9%
100%
73%
100%
100%
77.26%
100%
73%
100%
100%
—
To simplify the Company’s administrative structure, DESC was merged with GIRSA and DINE on November 29, 2001
and April 25, 2002, respectively, with DESC surviving as the merged company. Additionally Club Ecuestre Chiluca, S.A.
de C.V. and Paratec, S.A. de C.V. were merged into Cantiles de Mita, S.A. de C.V. and Industrias Negromex, S.A. de C.V.
in June and September 2003, respectively.
F-12
The equity in net income (loss) and changes in stockholders’ equity of those subsidiaries that were acquired or sold, has
been included in the financial statements as of or up to the date on which the transactions took place and was restated in
terms of the purchasing power of the Mexican peso as of December 31, 2003.
Investments in shares of associated companies and unconsolidated subsidiaries are recorded using the equity method based
on the financial statements prepared using same accounting policies as the Company, and are included under the “Other
assets” heading in the balance sheets.
c.
Sale of certain assets of Industrias Resistol, S.A. de C.V. - As mentioned in Note 1c, on September 29, 2003 the merger of
Industrias Resistol, S.A. de C.V. into DESC went into effect for accounting and tax purposes. On September 30, 2003
DESC sold basically all the assets of such subsidiary engaged in the manufacture and sale of adhesives and mortar proofing
materials suspending its operations in such businesses. Consequently, the consolidated financial statements include the
results of the subsidiary Industrias Resistol, S.A. de C.V. as of December 31, 2001 and 2002, and for the period from
January 1 through September 30, 2003. Following is a summary of the condensed statements of income of such subsidiary
for the aforementioned periods:
Net sales
Cost of sales
Operating expenses
Integral result of financing
Other expenses
Income tax provision
Net income (loss)
2001
2002
2003
Ps. 938,193
(447,531)
(246,094)
(108,069)
(43,223)
30,920
Ps. 916,097
(479,852)
(268,414)
(111,259)
(101,387)
23,306
Ps. 694,173
(389,837)
(183,665)
(73,056)
(89,795)
(68,565)
Ps. 124,196
Ps. (21,509)
Ps.(110,745)
d.
Purchase of minority interests of CORFUERTE and AAC - As mentioned in Note 20, on November 11, 2003 the
minority shareholders of the subsidiaries CORFUERTE and AAC formally notified their decision to exercise the sale
option of their shares to DESC, which was formalized on January 29, 2004. Consequently, as of November 11, 2003 the
shareholding of DESC in such subsidiaries increased from 77.6% to 96.1% and from 81.3% to 99.9%, respectively. The
amount paid was $14,311 (Ps.156,194) and is recorded as a liability in “Other payables and accrued liabilities”. The
difference between the book value of the shares acquired and the amount paid was recorded through adjustments to the
goodwill recorded when the subsidiaries were originally acquired.
e.
Conversion of financial statements of foreign subsidiaries- The financial statements of foreign subsidiaries, whose
operation is not integrated into that of the Mexican companies (foreign entity), are restated using the national inflation
index of the respective country and are converted to Mexican pesos at the exchange rate in effect at the end of the year.
The financial statements in local currency of foreign companies whose operations are integrated with those of the Mexican
companies are converted at the exchange rates in effect at the transaction closing or origin, depending on whether they are
monetary or nonmonetary items, and are restated by using the Mexican National Consumer Price Index (NCPI). The
conversion effects of the foreign entity are recorded in stockholders’ equity in the “Cumulative restatement effect” account.
Additionally, the conversion
F-13
effects of the integrated transactions are recorded in results of the year in net comprehensive financing cost, within the
“Monetary position gain” account. Such effects are not material.
f.
Comprehensive income (loss)- Comprehensive income (loss) is comprised of the net consolidated income for the period
plus (less) any gains or losses that under specific accounting regulations are recorded directly in stockholders’ equity, such
as the gain or loss from holding nonmonetary assets. In 2001, 2002 and 2003 other comprehensive income is comprised of
the gain or loss from holding nonmonetary assets and the effect of translation of foreign subsidiaries and, in 2002 and
2003, the adjustment of additional employee retirement liability.
g.
Reclassifications- Certain amounts in the consolidated financial statements at December 31, 2001 and 2002 have been
reclassified in order to conform to the presentation of the consolidated financial statements at December 31, 2003.
F-14
3. Summary of financial data by business segment
The presentation below sets forth certain financial information regarding the Company’s industry segments. Intersegment transactions have been eliminated.
Total assets by industry are those assets that are used in the operations of each industry segment. Corporate assets are principally cash and long-term investments.
2001
Automotive
Chemicals
Food
Real estate
Corporate
2002
Automotive
Chemicals
Food
Real estate
Corporate
2003
Automotive
Chemicals
Food
Real estate
Corporate
Total
assets
Total
liabilities
Capital
expenditures
Depreciation
and
amortization
570,316
30,725
(143,282)
(48,583)
(170,467)
Ps.10,230,142
7,535,897
5,920,482
5,578,556
950,479
Ps. 4,976,365
3,399,607
1,679,157
1,152,632
5,822,473
Ps. 333,071
261,237
185,422
771,809
2,668
Ps. 737,349
398,191
182,281
39,112
29,049
Ps.
238,709
Ps.30,215,556
Ps.17,030,234
Ps.1,554,207
Ps.1,385,982
Ps. 644,084
341,415
102,380
84,913
(91,492)
Ps.
(43,445)
(228,835)
(576,144)
(38,193)
(328,220)
Ps. 9,550,708
7,457,870
5,379,833
6,202,016
1,879,278
Ps. 3,838,190
3,552,223
886,477
268,089
10,099,243
Ps. 776,994
278,867
31,358
433,876
5,216
Ps. 738,041
357,598
173,306
23,407
34,716
Ps.20,360,380
Ps.1,081,300
Ps.(1,214,837)
Ps.30,469,705
Ps.18,644,222
Ps.1,526,311
Ps.1,327,068
Ps. 7,820,304
7,868,456
3,883,594
1,968,953
213,748
Ps. 226,670
202,924
123,985
412,329
(123,444)
Ps. (391,865)
(493,956)
(1,059,688)
(68,383)
(390,018)
Ps. 7,984,504
6,942,505
4,338,087
6,124,230
1,345,664
Ps. 1,948,068
3,174,673
306,617
1,262,428
10,136,987
Ps. 556,810
159,225
79,968
438,223
86,623
Ps. 750,105
354,575
176,773
38,775
63,153
Ps.21,755,055
Ps. 842,464
Ps.(2,403,910)
Ps.26,734,990
Ps.16,828,773
Ps.1,320,849
Ps.1,383,381
Operating
income
Ps.10,157,225
7,334,118
3,693,349
887,107
21,073
Ps.1,144,371
549,791
174,927
159,438
(66,271)
Ps.
Ps.22,092,872
Ps.1,962,256
Ps. 8,731,810
7,211,861
3,581,989
799,283
35,437
Impairment
of fixed assets
2001
Automotive
Chemicals
Food
Real estate
Corporate
Net
consolidated
income (Loss)
Net
Sales
Change in
accounting
principle
Interest
expense
Interest
income
6,699
49,859
7,559
—
37,088
Ps. 197,558
382,988
147,205
125,155
223,377
Ps. 61,309
30,245
11,781
42,871
(19,995)
Ps.
—
—
—
—
—
Ps.
Ps.101,205
Ps.1,076,283
Ps.126,211
Ps.
—
Ps. 309,998
Ps.
Extraordinary
item
—
13,609
—
—
296,389
Provision
for
current
income
taxes
Ps. 484,389
292,829
3,201
35,475
(337,212)
Ps. 478,682
2002
Automotive
Chemicals
Food
Real estate
Corporate
2003
Automotive
Chemicals
Food
Real estate
Corporate
Ps. 10,387
32,294
8,307
—
—
Ps.
84,585
134,176
53,474
99,932
492,937
Ps. 22,187
9,085
6,721
15,660
14,539
Ps.
—
—
—
—
—
Ps.
—
—
—
—
—
Ps. 463,785
71,844
4,071
—
(313,609)
Ps. 50,988
Ps. 865,104
Ps. 68,192
Ps.
—
Ps.
—
Ps. 226,091
Ps.
Ps.
Ps.
Ps. (482,280)
(3,123)
(898,891)
—
—
Ps.
—
—
—
—
—
Ps. 297,286
121,517
4,978
41,910
(123,733)
Ps.(1,384,294)
Ps.
—
Ps. 341,958
—
—
14,097
—
43
Ps. 14,140
56,498
135,380
33,726
74,920
775,548
Ps.1,076,072
5,568
10,782
6,533
2,873
16,380
Ps. 42,136
F-15
4. Significant accounting policies
The accounting policies followed by DESC and subsidiaries (the “Company”) are in conformity with accounting principles
generally accepted in Mexico (“Mexican GAAP”), but do not conform with accounting principles generally accepted in the
United States of America (“US GAAP”), see Notes 23 and 24 for an explanation and reconciliation of those differences.
Mexican GAAP requires which require management to make certain estimates and use certain assumptions to determine the
valuation of some of the balances included in the financial statements and to make the disclosures required for inclusion therein.
Although actual results may differ from those estimates, management believes that the estimates and assumptions used were
appropriate in the circumstances. The significant accounting policies followed by the Company are as follows:
a.
Adoption of accounting principles-The Company early adopted the provisions of new Bulletin C-15, “Impairment in the
value of long-lived assets and their disposal” (“C-15”). C-15 establishes, among other issues, that in the presence of
indicators of impairment of a long-lived asset in use, whether tangible or intangible, including goodwill, entities must
determine the possible loss from impairment, unless they have evidence clearly demonstrating that such indicators are of a
temporary nature. To calculate the loss from impairment requires the determination of the recovery value, now defined as
the higher of the net selling price of a cash generating unit and its use value, which is the present value of future net cash
flows, at an appropriate discount rates. In the provisions prior to C-15, net future cash flows referenced to the purchasing
power in effect at the evaluation date were used, without requiring the discounting of such flows. The effect derived from
the application of this new principle was the recognition of Ps.712,457 of impairment in the value of certain property, plant
and equipment and Ps.898,891 of impairment in the value of the goodwill of certain subsidiaries. The charge to 2003
results was Ps.1,384,294, net of a reduction of Ps.227,054 in the related deferred income tax liability, presented in the
statement of income under the heading “Change in accounting principle”.
Beginning January 2003, the Company adopted the provisions of the following Mexican bulletins:
•
Bulletin C-8, “Intangible Assets” (C-8), went into effect. This bulletin establishes that project development costs
should be capitalized if they fulfill the criteria established for recognition as assets. Any preoperating costs incurred
after the effective date of this Bulletin should be recorded as an expense, unless they meet certain criteria. The
unamortized balance of capitalized preoperating costs under the former Bulletin C-8 will continue to be amortized.
During the year ended December 31, 2003, there was no adverse effect derived from the application of new Bulletin
C-8.
•
Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments” (C-9), which establish
additional guidelines clarifying the accounting for liabilities, provisions and contingent assets and liabilities, and
establish new standards for the use of present value techniques to measure liabilities and accounting for the early
settlement of obligations. During the year 2003, there was no adverse effect derived from the application of new
Bulletin C-9.
•
Bulletin E-1, “Agriculture” (E-1), which establishes the rules for valuing, presenting and disclosing biological assets
and agricultural products, which includes the administration carried out by a related party with the respect to
biological transformation of live animals or plants (biological assets) that are destined to be sold as an agricultural
product or as a comprehensive part of a biological asset. Bulletin EF-16
1 requires biological assets and agricultural products to be valued at their fair market value, less the estimated costs at the
point of sale. Bulletin E-1 also states that when the fair market value cannot be determined in a reliable and objective
manner, the aforementioned assets should be valued at production cost, less accumulated depreciation. Crop production in
progress as of December 31, 2003 is valued at cost. The effects derived from the application of E-1 in the consolidated
financial statements as of December 31, 2003 were not material.
b.
Recognition of the effects of inflation- The companies restate all of their financial statements in terms of the purchasing
power of the Mexican peso as of the end of the latest period, thereby comprehensively recognizing the effects of inflation.
The prior year amounts presented herein differ from those originally reported in terms of Mexican pesos of the respective
year. Consequently, all financial statement amounts are comparable, both for the current and the prior year, because all are
stated in terms of Mexican pesos of the same purchasing power.
c.
Temporary investments- Temporary investments are stated at the lower of acquisition cost plus accrued yields, or at
market value, yields are recorded in the statement of income (loss).
d.
Inventories and cost of sales- Inventories are originally recorded at their acquisition or manufacturing cost and restated to
their specific net replacement cost without exceeding net realizable value. Substantially all subsidiaries compute cost of
sales using the replacement cost at the time of sale.
e.
Land held for development and real estate projects- Undeveloped land represents land reserves that, together with
developed land and ongoing and completed projects held for sale, are considered non-current inventories. They include
acquisition, development and construction costs and are restated in U.S. dollars based on the slippage of the market
exchange rate for the purpose of showing values in accordance with the current situation of the real estate market.
If the Mexican NCPI had been used to restate land held for development, developed land and real estate projects, their net
value at December 31, 2002 and 2003 would have increased by Ps.873,621 and Ps.609,431, respectively, and the cost of
land sold for the years ended December 31, 2001, 2002 and 2003 would have increased by Ps.143,681, Ps.121,277 and
Ps.130,249, respectively.
The Company capitalizes the integral financing cost on debt used to finance real estate projects in progress, in addition to
their construction and development costs. During 2001, 2002 and 2003, the Company did not have real estate projects
whose integral financing cost was subject to capitalization.
f.
Property, plant and equipment- This item is recorded at acquisition cost and is restated by using NCPI factors. For foreign
fixed assets, their acquisition cost is restated for inflation of the country of origin and the fluctuation of the Mexican peso
against such currency is considered.
If the restatement of all property, plant and equipment had been calculated using the NCPI, the net value of fixed assets as
of December 31, 2002 and 2003 would have increased by Ps.1,905,377 and Ps.1,501,083, respectively, and the
depreciation as for the years ended December 2001, 2002 and 2003 would have increased by Ps.212,913, Ps.210,416 and
Ps.44,702, respectively.
F-17
The companies capitalize the integral financing cost on debt used to finance construction in progress and the installation of
equipment, until they are placed in service. During 2001 the integral financing cost capitalized was Ps.5,838 During 2002
and 2003, the Company did not have construction in progress whose net comprehensive financing cost was subject to
capitalization.
Depreciation of property, plant and equipment is calculated using the straight-line method applied to month-end balances
based on the average restated value of the year deducted from a salvage value, which, depending on the heading, fluctuates
between 5% and 10% of its restated value, and their estimated useful lives.
g.
Impairment of fixed assets- The amounts shown in the accompanying consolidated statements of income (loss) basically
refer to the reduction in value of property and machinery of some productive facilities, in order to reflect their realizable
value in accordance with the current situation of such businesses.
h.
Financial instruments - Financial assets and liabilities resulting from any type of financial instrument, except for
investments in financial instruments held to maturity, are presented in the balance sheet at fair value. The effects of the
valuation of a financial asset or liability are recognized in results of operations of the respective period. Investments in
financial instruments held to maturity are valued at acquisition cost. The costs and yields of financial instruments are
recognized in results of the period in which they occur.
i.
Derivative financial instruments - These instruments are traded only with authorized institutions and trading limits have
been established for each institution. The Company does not carry out transactions with derivative financial instruments for
the purpose of speculation.
The derivative financial instruments currently used by the Company are primarily hedge contracts to reduce its exposure to
exchange rate and interest rate fluctuations. Premiums paid are amortized over the term of the derivative financial
instrument using the unpaid balance of the liability being hedged.
Derivative financial instruments identified as hedges are valued by applying the same valuation criteria used for the assets
or liabilities hedged, and the effects of their valuation are recognized in results of operations, net of costs, expenses, or
revenue from the assets or liabilities whose risks are being hedged. The financial assets or liabilities generated by these
instruments are presented in the balance sheet as a reduction of the liabilities or assets whose risks are being hedged.
j.
Goodwill- Up to 2003, the goodwill resulting from acquisitions made in excess of book value is restated by applying the
NCPI amortized over periods ranging from five to 20 years, the terms over which the benefits from the investment will be
realized. Due to the early adoption of new Bulletin C-15, goodwill is subject to the impairment of long-lived assets
calculation.
k.
Other assets – Costs incurred in the development phase that meet certain requirements and that the Company has
determined will have future economic benefits are capitalized and amortized based on the straight-line method over five
years. Those disbursements that do not meet such requirements are recorded in results of the period in which they are
incurred. Intangible assets with indefinite lives are not amortized because they can be renewed at a reduced cost, however,
their value is subject to impairment tests. Preoperating costs incurred after January 1, 2003, are recorded directly in results
of the period in which they are incurred. Preoperating expenses incurred and capitalized up to December 31, 2002 are
amortized using the straight-line method over five years.
F-18
l.
Impairment of long-lived assets in use- The Company reviews the book value of long-lived assets in use tangible and
intangible, in the presence of any indicator of impairment that might indicate that such book value might not be
recoverable, considering the higher of the present value of future net cash flows or the net selling price, in the event of their
eventual disposal. The impairment is recorded considering the amount by which the book value exceeds the higher of the
aforementioned values.
m.
Provisions – Provisions are recognized for obligations that result from a past event, that are probable to result in the use of
economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the
effect of the discount is significant.
n.
Income tax, asset tax and employee profit sharing - Income tax (ISR) and employee statutory profit sharing (PTU) are
recorded in results of the year in which they are incurred. Deferred income tax assets and liabilities are recognized for
temporary differences resulting from comparing the book and tax values of assets and liabilities, plus any future benefits
from tax loss carryforwards. Deferred income tax assets are reduced by any benefits that, in the opinion of management,
will probably not be realized. Deferred PTU is derived from temporary differences between the book result and income for
PTU purposes and is recognized only when it can be reasonably assumed that they will generate a liability or benefit, and
there is no indication that this situation will change in such a way that the liabilities will not be paid or benefits will not be
realized
The asset tax paid that is expected to be recoverable is recorded as an advance payment of income tax and is presented on
the balance sheet with deferred ISR.
o.
Employee retirement obligations- The liability from seniority premiums, pensions and retirement payments, which is
similar to a pension, is recorded as accrued, and is calculated by independent actuaries based on the projected credit unit
method, at real interest rates. Therefore, the liability is being recognized which, at present value, is expected to cover the
obligation for these benefits at the estimated retirement date of all the Companies’ employees. Severance payments are
charged to results when they are determined to be payable.
p.
Foreign currency balances and transactions - Foreign currency transactions are recorded at the applicable exchange rate
in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican
pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component
of net comprehensive financing cost (income) in the consolidated statements of income.
q.
Restated stockholders’ equity- This item consists of monetary position result accumulated through the first restatement of
the financial statements and the gain (loss) from holding monetary assets, because price levels increased above (below)
inflation.
r.
Revenue recognition - Revenues of the subsidiaries of the autoparts, chemical and food sectors are recognized when the
inventories are delivered or shipped to customers and customers assume responsibility for them.
F-19
The real estate sector recognizes the revenues and costs from sales of urbanized plots of land in results when the sales are
formalized and the deposits securing the transaction are received. The individual assignment of the cost of the land and real
estate project takes into consideration the relative selling price of the total project so as to maintain the same profit margin
throughout the project.
Revenues and costs from real estate projects are recorded originally as a deferred credit for construction commitments and
as real estate projects in process and are recognized in results based on the “percentage of completion” method. Therefore,
revenue is matched with costs incurred to reach the stage of completion to terminate the project. If the latest estimated
costs determined exceed the total revenues contracted, the respective provision is charged to results of the year.
s.
Integral financial result- This represents the net effect of interest earned and incurred, exchange gains and losses and
monetary position gain or loss on, which is the result of maintaining monetary assets and liabilities whose real purchasing
power is modified by the effects of inflation.
t.
Income per share- Basic income (loss) per ordinary share is calculated by dividing net income (loss) of majority
stockholders by the sum of the weighted average number of shares outstanding during the year plus retroactive
consideration of the bonus element of the 2004 capital increase mentioned in Note 21.
5. Cash and cash equivalents
Cash
Restricted cash
Cash equivalents
Technology and trust funds to be used within three months
2002
2003
Ps. 436,715
—
1,748,116
316,732
Ps.243,663
16,400
459,904
—
Ps.2,501,563
Ps.719,967
As part of the sale of the assets of Industrias Resistol, S.A. de C.V., the Company received Ps.53,539 in cash with formal
restrictions as to its availability, of which Ps.16,400 represents short-term restricted cash, and Ps.37,139 on a long term basis,
recorded under the heading “Other assets”.
As of December 31, 2002 the technology and training funds held in trust, which would be exercised within three months during
2003 were classified as cash.
F-20
6. Notes and accounts receivable
Trade
Less- Allowance for doubtful accounts
Other debtors
Recoverable taxes
Other receivables
2002
2003
Ps.2,882,150
(58,847)
Ps.3,492,644
(109,596)
2,823,303
3,383,048
84,467
301,969
615,612
109,665
412,578
365,050
Ps.3,825,351
Ps.4,270,341
The movements of the allowance for bad debts are as follows:
2002
2003
Balance at the beginning of the year
Provision for the year
Provision used in the year
Restatement of initial balance
Ps. 56,080
15,377
(15,808)
3,198
Ps. 56,600
68,306
(17,557)
2,247
Balance at the end of the year
Ps. 58,847
Ps.109,596
During 2002 and 2003, certain subsidiaries sold commercial paper without recourse at an average financial cost of 9.23% and
9.08% for Mexican pesos, respectively, and 3.62% and 3.86% for U.S. dollars, respectively, and terms ranging between 4 and 89
days in 2002 and between 4 and 74 days in 2003, with two financial institutions. As of December 31, 2002 and 2003, the
balances of commercial paper sold without recourse were Ps.520,883, and Ps.493,486, respectively (equivalent to $46.5 and
$44.1 million, respectively).
Trade receivables - long-term - Certain real estate sector have long-term trade receivables in US dollars, which are recorded at
present value at a 3% discount rate with the following maturities:
2005
2006
2007 and thereafter
Ps. 295,399
311,312
441,770
Ps.1,048,481
F-21
7. Inventories
Finished goods and work-in-process
Raw materials, supplies and other
2002
2003
Ps.1,978,504
1,236,041
Ps.2,001,478
1,153,483
Less- Allowance for slow-moving items
3,214,545
(55,568)
3,154,961
(61,416)
Advances to suppliers
3,158,977
34,145
3,093,545
26,891
Ps.3,193,122
Ps.3,120,436
Movements in the reserve for obsolete and slow-moving inventories are as follows:
2002
2003
Balance at the beginning of the year
Provision for the year
Provision used in the year
Restatement of the initial balance
Ps. 73,050
33,770
(52,428)
1,176
Ps. 53,447
53,049
(47,201)
2,121
Balance at the end of the year
Ps. 55,568
Ps. 61,416
8. Land held for development and real estate projects
Land held for development
Real estate projects-in-progress
Developed land
Advances to contractors
Other
2002
2003
Ps. 982,148
1,462,090
1,817,782
23,271
5,237
Ps.1,035,260
1,511,118
1,254,485
26,283
1,166
Ps.4,290,528
Ps.3,828,312
9. Property, plant and equipment
Buildings and installations
Machinery and equipment
Vehicles
Furniture and fixtures
Other
Accumulated depreciation
Projects-in-progress
Land
F-22
2002
2003
Annual
Depreciation
Rate (%)
Ps. 6,121,907
17,110,130
283,735
427,064
527,123
Ps. 6,056,109
16,758,770
413,807
402,681
536,749
2 to 31.5
3.8 to 31.8
9 to 33.3
10 to 30
3.5 to 33
24,469,959
(12,908,484)
24,168,116
(13,845,357)
11,561,475
916,816
1,206,132
10,322,759
462,993
1,027,369
Ps. 13,684,423
Ps. 11,813,121
Temporarily idle assets amount to Ps.332,316 and Ps.66,800 in 2002 and 2003, respectively, and permanently idle assets to
Ps.198,378 and Ps.544,458 in 2002 and 2003, respectively.
Certain subsidiaries entered into a machinery sale agreement (without obligation to repurchase) with a financial institution. On
that date, a machinery lease agreement covering the same machinery was executed (see Note 19).
Date of contract
June 29, 2001
December 19, 2002
March 27, 2003
August 19, 2003
Term
Amount
Leases payment
Interest rate
5 years
7 years
7 years
7 years
$18.7 million
$11.0 million
$3.1 million
$21.2 million
Quarterly
Quarterly
Quarterly
Quarterly
1.5%
3.7%
3.7%
3.4% to 3.7%
Investment properties as of December 31, 2002 and 2003 are comprised as follows:
Buildings
Accumulated depreciation
Land
2002
2003
Ps. 340,079
(171,788)
190,734
Ps. 217,500
(104,952)
77,997
Ps. 359,025
Ps. 190,545
The annual average rate of depreciation of buildings in 2002 and 2003 was 2.4%. As of December 31, 2003 the fair value of
investment properties is Ps.209,658.
As of December 31, 2003, property, plant and equipment of certain subsidiaries are pledged against the Company’s long-term
bank debt (see Note 11).
10. Other payables, accrued liabilities and business reserves and contingencies
2002
Accounts and notes payable to contractors
Other debtors
Ps.
Account payable to minority investors
2003
24,606
322,317
—
Warranty reserves
Business reserves and contingencies
Expense provisions
Advances from customers
Royalties and technical assistance
Dividends payable
Taxes payable
Interest payable
Other
F-23
Ps.
36,365
366,110
156,194
38,213
438,359
166,065
14,465
31,477
208,328
229,590
105,886
197,830
91,845
92,125
162,611
56,291
15,384
2,013
407,253
116,941
228,843
Ps.1,777,136
Ps.1,731,975
Movements of the restructuring and contingencies reserve are as follows:
2002
2003
Balance at the beginning of the year
Reserve for the year
Reserve used in the year
Restatement of the initial balance
Ps. 665,443
108,741
(373,756)
37,931
Ps. 421,621
100,961
(447,195)
16,738
Balance at the end of the year
Ps. 438,359
Ps. 92,125
a.
The Company recorded a restructuring reserve in the year ended December 31, 2001 which has been increased and used in
accordance with the project for realigning its operating restructure. The balance as of December 31, 2003 will be exercised
during 2004, for the termination of the project mentioned above and the definitive close of Bioquimex, S.A. de C.V.
(natural pigments business)
b.
On January 7, 2003, the Company’s subsidiary Fenoquimia, S.A. de C.V. was notified of a new ancillary claim filed by
Sales Nacionales, S.A. de C.V., in which the latter quantifies the aforementioned damages and monetary losses in the
amount of Ps.159,804. Such claim was answered by Fenoquimia, S.A. de C.V.; however, on December 11, 2003, the
Company reached an agreement with its counterparty to conclude this dispute, with a one-time payment of Ps.54,480 in
cash and real estate assets, for which there was a provision recorded in prior years within the restructuring and
contingencies reserve.
c.
Certain subsidiaries are engaged in lawsuits as plaintiffs and defendants in the regular course of operations. These lawsuits
always involve uncertainty, and some of them may result in adverse judgments for the companies. While it is impossible to
determine the amount involved in pending lawsuits, management believes that based on the facts any resulting liability
would not materially affect the financial position or results of operations of the companies.
F-24
11. Bank loans and long-term debt
Bank loans and long-term debt are as follows:
2002
Maturity
2003
Interest Rate
Amount
Maturity
Interest Rate
Amount
LIBOR + 1.625 to
LIBOR +4
TIIE + 1.125 to
TIIE + 4.5
LIBOR + 1.375 to
LIBOR +4
—
—
—
Ps.4,992,311
Syndicated loanDESC $445.7 million
—
—
—
2006 to 2008
DESC Ps.1,223 million
—
—
—
2006 to 2008
DESC $100 million
—
—
—
2006
DESC $97.17 million
DESC $177.83 million
DESC Ps.1,300 million
Medium-term promissory notesDESC 680,569 million UDIS
2005
2007
2007
LIBOR + 1.375
LIBOR + 1.625
TIIE + 0.9
Ps.1,046,778
1,915,699
1,351,610
2006 and 2007
9% and 8.20%
2,282,519
—
—
—
2006 and 2007
2002
Maturity
International
Finance
CorporationChemical
segment
$6.57
million
Chemical
segment
$90
million
LoansDESC $15
million
DESC $35
million
Secured bondsDESC
(formerly
DINE)
$73
million
Secured
syndicated
loans-
9% and 8.20%
1,222,553
1,119,980
—
—
—
2,281,268
2003
Interest Rate
Amount
Maturity
Interest Rate
Amount
2003 to 2006
Variable
204,681
2004 to 2006
LIBOR + 2.125
73,599
2003 to 2009
Variable and fixed
1,131,128
2004 to 2009
Variable and fixed
1,007,982
2003 and 2004
3.85%
161,590
—
—
—
2003 and 2004
3.75%
377,043
—
—
—
2007
8.75%
786,952
2007
8.75%
818,157
Desc
Automotriz
$4.23
million
Desc
Automotriz
$0.5
million
Other loans
payable inMexican
pesos
Foreign
currency
Less- Current
portion
2003
7.34%
45,527
—
—
—
2004
LIBOR + 1
16,159
2004
LIBOR + 1
5,600
2003 to 2010
Variable
31,179
2004 to 2010
Variable
24,189
2003 to 2010
Variable
362,995
2004 to 2010
Variable
61,038
9,713,860
11,606,677
662,211
246,666
Ps.9,051,649
Ps. 11,360,011
F-25
As of December 31, 2002 and 2003, the LIBOR rate was 1.38% and 1.46% respectively, and the Mexican Interbank rate (TIIE)
was 8.45% and 7.9% respectively.
Long-term debt maturities as of December 2003 are as follows:
2005
2006
2007
2008
2009 and thereafter
Ps.
198,918
4,469,882
4,264,706
2,258,496
168,009
Ps.11,360,011
The current portions of long-term debt and short-term bank loans are as follows:
Current portion of long-term debt
Other loans payable in- Foreign currency
2003
2002
Ps. 662,211
2,979,617
Ps.246,666
193,887
Ps.3,641,828
Ps.440,553
Debt refinancing- As mentioned in Note 1, during December 2003, an agreement was satisfactorily reached with the bank
creditors to refinance the Company’s syndicated loans and most of its short-term debt. The most important terms of the financial
restructuring signed on December 23, 2003 are indicated below:
a.
Syndicated loan of $445.7 million at the LIBOR interest rate plus a variable margin depending on the index obtained in the
consolidated debt to operating profit financial ratio, less depreciation and amortization, which fluctuates between 1.625 and
4.000, with maturities between 2006 and 2008. As of December 31, 2003, the variable margin is 3.5. The interest will be
payable on a monthly or quarterly basis.
b.
Syndicated loan of Ps.1,223 million, at an interest rate equal to TIIE plus a variable margin depending on the index
obtained in the consolidated debt to operating profit financial ratio, less depreciation and amortizations, which fluctuates
between 1.125 and 4.000, with maturities from 2006 to 2008, respectively. As of December 31, 2003 the variable margin
determined is 3.5. The interest will be payable on a monthly basis.
c.
Credit of $112 million, divided into two tranches, (i) $100 million revolving credit, at the LIBOR interest at rate plus a
variable margin depending on the index obtained in the consolidated debt to operating profit financial ratio, less
depreciation and amortization, which fluctuates between 1.375 and 3.50, and (ii) $12 million credit letters, both with
maturity in 2006. As of December 31, 2003 the Company has applied dispositions against the tranche of $100 million, and
the variable interest margin determined is 3.0. The interest will be payable on a monthly or quarterly basis.
As part of the conditions negotiated, the operating subsidiaries and certain holding subsidiaries were considered jointly and
severally liable and guarantors for the debt, and a package of concrete guarantees was created consisting of fixed assets,
accounts receivable of the real estate sector and stock in certain subsidiaries.
F-26
The financing received establishes certain restrictions for the Company, with which the Company has complied. The most
important restrictions are:
•
Maintain the interest coverage ratio in excess of 2.25. At the close of 2003 the ratio is 2.91.
•
Maintain the ratio of total debt of subsidiaries to consolidated debt below 0.20. At the close of 2003 the ratio is 0.11.
•
Maintain the ratio of consolidated debt to operating profit, plus depreciation to amortization, at below 5.35 based on
nominal pesos and U.S. dollars. At the close of 2003 the ratio is 4.96.
•
Maintain the ratio of consolidated debt to total capitalization below 0.55. At the close of 2003 the ratio is 0.53.
•
Certain restrictions on the establishment of new liens.
•
Restriction on the sale and investments in assets, as well as lease transactions.
•
Restriction on the sale of assets, except when performed at market value and the proceeds obtained are used to pay the
debt.
•
Certain restrictions applicable to dividend declarations.
Medium-term promissory notes- In October 1999 and July 2000, the Company issued medium-term promissory notes
equivalent to 324,000,000 and 356,568,600 units of investment (“UDIS”), respectively. The UDI value as of December 31, 2003
was 3.352003, which is equal to Ps.1,086,049 and Ps.1,195,219, respectively. The issues bear quarterly interest of 9% and
8.20%, respectively, and mature in 2006 and 2007, respectively. There are no restrictions on the promissory notes.
International Finance Corporation- As a result of the merger between DESC and GIRSA, on December 14, 2001, a contract to
transfer the debt was executed by the subsidiaries of the chemical sector of DESC and International Finance Corporation (IFC),
through which GIRSA transferred to the subsidiaries of the chemical sector the loans obtained from IFC, as follows:
a.
Loan of $6.57 million executed between GIRSA and IFC subdivided into two (A and C) loans bearing semiannual interest
at LIBOR plus 2.125. The repayment of loan A will have the following installment on February 15, 2004 and loan C in
semiannual payments for two years as of the payment date of loan A.
b.
Loan of $90 million executed between GIRSA and IFC subdivided into two loans, generating interest at LIBOR plus 3.75
for the $38.6 million loan and 10.35% for the $51.4 million loan. Payments on such loans will be made in equal
semiannual installments for six years beginning March 15, 2003.
The financing received establishes certain restrictions for GIRSA, with which the Company has complied. The most important
restrictions are:
•
Maintaining a liquidity ratio equal to or higher than 1.1.
•
Limitations on the disposal of property, plant and equipment.
F-27
•
Consolidated short-term debt shall not exceed 20% of the consolidated net sales of the immediately preceding year.
Issuance of secured bonds - On October 9, 1997, DINE issued long-term bonds guaranteed by DESC in international markets at
8.75% annual interest, with principal and interest due and payable on October 9, 2007. As a result of the merger between DESC
and DINE, DESC acquired the obligations related to the issue of such bonds.
At December 31, 2003 the book value of the bonds issued by DINE is $73 million and fair value $70.8. million.
12. Related parties
Club Ecuestre Chiluca, S.A. de C.V., a 77.26% subsidiary of the Company, sold all of its territorial reserves for $79.4 million.
Prior to the sale of such reserves, the Company acquired the remaining 22.74% interest from minority shareholders (which in
turn are the Company’s main shareholders) at their commercial value, which will be paid on the same terms and conditions as
the realization of the account receivable; i.e., four annual payments from December 2004 to 2007. Therefore, such balance is
presented in the balance sheets as a long-term liability. The difference between the purchase price of the minority interest and
the book value of the shares acquired is included in other expenses for the year ended December 31, 2003 as “Goodwill writeoff from Club Ecuestre Chiluca, S.A. de C.V.”
13. Employee retirement benefits
The liability for employee benefit obligations relates to the pension plan, which will cover the pension and seniority premiums
due upon retirement of the Company’s employees. The amount resulting from independent actuarial calculations using the
projected unit credit method, is as follows:
Projected benefit obligation (“PBO”)
Plan assets
Unrecognized transition liability
Unrecognized variances in assumptions
Net projected benefit asset (liability) under Mexican GAAP
Fund withdrawals
Net projected benefit asset (liability) under U.S. GAAP
2002
2003
Ps.1,028,836
577,885
Ps. 898,873
367,578
(450,951)
(303,849)
824,288
(531,295)
(192,262)
655,633
69,488
31,639
(67,924)
25,382
Ps. 101,127
Ps. (42,542)
As of December 31, 2002 and 2003, the amount of the accumulated benefit obligation (“ABO”), (equal to the PBO without
projecting the wages to the retirement date) in certain subsidiaries, exceeds the amount of current funds by Ps.255,487 and
Ps.252,649, respectively. Consequently, this amount was recognized as an additional liability under the heading of “Other long
term liabilities” creating a deferred asset charge and the difference net of deferred income tax of Ps.154,105 and Ps.147,158,
which was recorded in the “Adjustment to the additional liability for employee retirement obligations” account, within
stockholders’ equity, because as of December 31, 2002 and 2003, the amount of the additional liability exceeds the algebraic
sum of the unrecognized transition liability, plus previous services rendered and plan modifications.
F-28
The subsidiaries have established irrevocable trust funds to cover accrued employee benefits. The contributions made in 2001
and 2002, based on actuarial computations, were Ps.143,207 and Ps.23,241, respectively. The Company follows the funding
recommendations of its actuaries. At December 31, 2003 the balance of these funds is Ps.367,578, which consists of the
Company’s common stock shares and certain fixed-rate investments.
The number and series of common stock shares of the Company held by the trusts at December 31, 2003 were as follows:
Series A
Series B
Series C
32,917,520
2,381,315
20,147,735
The market value of the Company’s shares held at December 31, 2003 was Ps.191,229. During 2003 the trusts sold 267,400
shares of the Company’s stock.
The cost of employee benefits is as follows:
2001
2002
2003
Ps. 73,776
62,078
8,773
34,907
Ps. 59,055
51,738
13,926
26,406
Ps. 47,613
50,263
(19,823)
88,905
Effect of early personnel reduction
Less- Actual return on plan assets
179,534
—
45,607
151,125
—
41,413
166,958
49,645
40,095
Net result for the period under Mexican GAAP
Amortization of fund withdrawals
133,927
(5,620)
109,712
(5,428)
176,508
(5,156)
Service cost
Financial cost
Amortization of transition liability
Amortization of variances in assumptions
Net result for the period under US GAAP
Ps.128,307
Ps.104,284
Ps.171,352
Interest rates utilized in the actuarial calculations recommended by the Mexican Association of Consultant Actuaries for 2001,
2002 and 2003 were as follows:
Investment yield rate
Interest rate
Salary increase rate
7.0%
5.0%
1.5%
F-29
The changes in the projected benefit obligation are as follows:
2002
2003
Opening balance
Service cost
Financial cost
Effect of early personnel reduction
Actuarial result
Ps. 1,101,629
59,055
51,738
—
(183,586)
Ps.1,028,836
47,613
50,263
(49,465)
(178,374)
Final balance
Ps. 1,028,836
Ps. 898,873
The changes in the net projected asset (liability) were as follows:
2002
2003
Opening balance
Provision for the year
Contributions to the fund
Payments for reduction of personnel
Actuarial gain
Ps. 156,479
(109,712)
23,241
(77,404)
76,884
Ps. 69,488
(176,508)
—
(130,009)
169,105
Final balance
Ps. 69,488
Ps. (67,924)
The changes in the fund were as follows:
2002
2003
Opening balance
Contributions to the fund
Yield on fund assets
Variation in the value of fund assets
Payments for reduction of personnel
Ps. 652,873
23,241
41,413
(62,238)
(77,404)
Ps. 577,885
—
40,095
(120,393)
(130,009)
Final balance
Ps. 577,885
Ps. 367,578
As of December 31, 2003, the fair value of the fund assets amounts Ps.367,578.
The amortization periods are as follows:
Remaining Years
Transition liability
Variances in assumptions
15 to 21
16 to 28
F-30
14. Stockholders’ equity
During a Stockholders’ Ordinary and Extraordinary General Meeting held on April 28, 2003, the stockholders approved the
following:
1.
The merger of DESC and Industrias Resistol, S.A. de C.V., with DESC as the surviving company. Such merger became
effective for accounting and tax purposes on September 29, 2003.
2.
The merger of DESC and Industrias Ruiz Galindo, S.A. de C.V., with DESC as the surviving company. Such merger
became effective for accounting and tax purposes on May 1, 2003; therefore, as of such date Industrias Ruiz Galindo, S.A.
de C.V. ceased to exist as a legal entity
During a Stockholders’ Ordinary and Extraordinary General Meeting held on April 25, 2002, the stockholders approved the
following:
1.
Payment of cash dividends of 29 Mexican cents for each of the outstanding shares, equivalent to Ps.397,033, whose
restated amount is Ps.428,936, payable in four quarterly payments in July and October 2002 and January and April 2003.
2.
Merger of DESC and DINE, with DESC as the surviving company. Such merger became effective for accounting and tax
purposes on May 1, 2002; therefore, as of such date DINE ceased to exist as a legal entity.
F-31
As of December 31, 2001, 2002, and 2003 capital stock is represented by:
Number of Shares
Fixed portionNominative Series “A” shares (without withdrawal rights and which must
represent at least 51% of voting stock)
Variable portionNominative Series “B” shares (with withdrawal rights and which may not
represent more than 49% of voting stock)
Series “C” shares (with voting restrictions)
Amount
587,479,900
Ps. 7,637
506,257,866
275,341,610
6,581
3,580
1,369,079,376
Ps.17,798
Series “A” and “B” shares may only be acquired by Mexican citizens or Mexican entities with an exclusion clause for foreign
investors. Series “C” shares may be freely subscribed.
This shareholding structure was modified, as indicated in Note 21.
Stockholders’ equity, except restated paid-in capital and tax retained earnings, will be subject to a tax at the rate in effect when
the dividend is distributed. In 2003, the rate was 34% and will be reduced by one percentage point each year until reaching 32%
in 2005. Any tax paid on such distribution, may be credited against the income tax payable of the year in which the tax on the
dividend is paid and the two fiscal years following such payment.
The annual net income of each Company is subject to the legal requirement that 5% thereof be transferred to a legal reserve each
year, until the reserve equals 20% of capital stock. This reserve may not be distributed to stockholders during the existence of
the Company, except in the form of a stock dividend.
During the years ended 2001 and 2002 the Company distributed restated retained earnings of Ps.448,185 and Ps.428,936,
respectively as dividends, reducing total equity to an amount lower than restated capital stock, which for accounting purposes
represents a capital reduction.
The balances of the stockholders’ equity tax accounts as of December 31 are:
Contributed capital account
Net tax income account
Total
2002
2003
Ps. 9,105,963
4,394,401
Ps. 9,105,963
4,190,160
Ps.13,500,364
Ps.13,296,123
15. Transactions and balances in foreign currency
The Company valued its foreign currency assets and liabilities, represented mainly by U.S. dollars, at the exchange rates
effective at December 31, 2002 and 2003 of 10.3613 and 11.1998 Mexican pesos per U.S. dollar, respectively, as the Company
expects to use foreign currency assets to settle foreign currency liabilities.
F-32
As of December 31, 2002 and 2003, monetary assets and liabilities denominated in foreign currency were as follows:
Monetary assets
Current
Long-Term
2002
2003
$ 351,852
—
$ 263,297
93,616
351,852
356,913
Current monetary liabilitiesInterest-free
Interest-bearing
136,047
344,786
137,618
38,826
Long-term liabilities
480,833
521,120
176,444
716,223
1,001,953
892,667
$ (650,101)
$(535,754)
Net monetary liability position in foreign currency
During the years ended December 31, 2001, 2002 and 2003, the Company had the following transactions in foreign currency,
which were translated into Mexican pesos at the exchange rate in effect at the date of each transaction. Foreign currency
transactions were as follows:
Direct export sales
Indirect export sales under agreement
Sales of foreign subsidiaries
2001
2002
2003
$ 706,150
119,234
132,640
$ 597,601
181,728
122,710
$ 595,227
141,973
123,271
958,024
902,039
860,471
(439,051)
(92,770)
(405,591)
(104,281)
(394,403)
(102,690)
(531,821)
(509,872)
(497,093)
426,203
392,167
363,378
5,150
(77,691)
4,359
(32,893)
1,012
(52,652)
(72,541)
(28,534)
(51,640)
(6,997)
(5,307)
(8,187)
LessPurchases of inventories
Purchases and expenses of foreign subsidiaries
Interest earned
Less- Interest expense
Technical assistance
Net
$ 346,665
$ 358,326
$ 303,551
As of March 26, 2003, the unaudited foreign exchange position was similar to that at yearend, and the exchange rate was
11.0130 Mexican pesos per U.S. dollar.
16. Income and asset taxes and employee statutory profit sharing
The Company is subject to income taxes (“ISR”) and tax on assets (“IMPAC”). ISR is computed by taking into consideration
the taxable and deductible effects of inflation, such as depreciation calculated on restated constant prices and the deduction of
purchases instead of cost of sales, which permit the deduction of current costs, and taxable income is increased or reduced on
F-33
certain monetary assets and liabilities through the annual adjustment for inflation, which is similar to the monetary position
result. ISR is calculated in terms of currency when the transactions occurred and not in terms of the currency at yearend. Up to
2001, the income tax rate was 35%, with the obligation to pay this tax each year at the 30% rate, with the remaining 5% payable
when income is distributed.
The tax rate was 35% in 2002 and 34% in 2003 and reduces by one percentage point each year until reaching 32% in 2005. The
deduction for employee statutory profit-sharing (“PTU”) and the obligation to withhold taxes on dividends paid to individuals or
foreign residents were also eliminated.
IMPAC is calculated by applying 1.8% to the Company’s asset position, as defined in the law, and is payable only to the extent
that it exceeds ISR payable for the same period. If in any year IMPAC exceeds the ISR payable, the IMPAC payment for such
excess may be reduced by the amount by which ISR exceeded IMPAC in the three preceding years and any required payment of
IMPAC can be credited against the excess of ISR over IMPAC during the next 10 years
Some subsidiaries in the agribusiness sector have authorization to pay income and asset taxes under a simplified scheme based
on cash receipts and disbursements. Other subsidiaries have the right to a 50% reduction in their taxable income depending on
their activities.
DESC is subject to ISR and IMPAC with its subsidiaries on a consolidated basis in the proportion in which the Company holds
the voting stock of its subsidiaries at the balance sheet date. As of January 1, 2002, the proportion is calculated based on the
average daily equity percentage that DESC holds of its subsidiaries during the year. The tax results of the subsidiaries are
consolidated at 60% of such proportion. Estimated payments of ISR and IMPAC of both DESC and its subsidiaries are made as
if the Company did not file a consolidated tax return.
Employee profit sharing has been determined based on the individual results of each operating company, rather than on a
consolidated basis.
F-34
Tax loss carryforwards and recoverable asset tax- As of December 31, 2003, the Company has tax loss carryforwards for
income tax purposes and recoverable asset taxes, which will be indexed for inflation through the year applied or recovered, in
the following restated amounts:
Maturity
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Tax
loss
carryforwards
Recoverable
asset taxes
Ps. 315,781
196,277
32,039
98,881
88,875
144,859
1,387,334
669,858
333,727
1,072,752
Ps. 27,231
21,289
24,084
22,713
20,619
50,850
63,858
72,864
67,266
141,161
Ps.4,340,383
Ps.511,935
On December 12, 2003, the Company won the lawsuit involving the deduction of the loss from the sale of shares obtained in
2000, as an operating tax loss; consequently, as of that date such loss is presented within tax loss carryforwards.
F-35
Deferred income taxes- The tax effects of the temporary differences that generated deferred tax liabilities (assets) are as
follows:
Property, plant and equipment
Inventories
Land held for development and real estate projects
Reserves and provisions
Tax loss carryforwards
Recoverable asset tax
Allowance for doubtful tax loss carryforwards and recoverable asset taxes
Other
2002
2003
Ps. 1,865,513
539,177
677,907
(186,313)
(1,446,973)
(409,432)
325,693
(26,457)
Ps. 1,466,891
400,042
659,391
(147,103)
(1,388,923)
(511,935)
519,289
(116,903)
Ps. 1,339,115
Ps.
880,749
The reconciliation of the statutory and effective ISR rates expressed as a percentage of income before provisions, discontinued
operations and extraordinary items is as follows:
Statutory rate
Add (deduct) the effect of permanent differencesNondeductible items
Non-taxable income
Monetary gain position
Adjustment for inflation
Income related to subsidiaries subject to the simplified tax system
Allowance for tax loss carryforwards and asset tax
Other
Effective rate
F-36
2001
2002
2003
35.0%
35.0%
34.0%
15.0%
(12.8)%
(8.7)%
10.6%
1.8%
—
(51.4)%
(30.8)%
29.0%
63.4%
(81.1)%
(98.8)%
39.7%
(26.2)%
20.2%
10.0%
(10.6)%
2.0%
(21.8)%
(14.6)%
(9.5)%
(43.6)%
(7.0)%
17. Discontinued operations
As mentioned in Note 1, the Company decided to shut down the spark plugs and automotive electrical parts businesses of the
autoparts segment, the natural pigments business in the chemicals sector, in the food sector the hog raising operation located in
the Bajio region, and the shrimp business was disposed of by means of donation. A summary of the combined statements of
income of the discontinued operations for the years ended December 31, 2001, 2002 and 2003 is as follows:
Revenues from discontinued operations
Costs and expenses
Integral financial result
Other (income) expense
Current and deferred income tax and employee profit sharing
Net income (loss) from discontinued operations
2001
2002
2003
Ps. 588,732
717,309
Ps. 405,814
948,433
Ps. 124,771
153,225
(11,560)
39,664
26,835
115,430
(1,364)
(107,372)
97,182
(55,016)
57,386
Ps.(629,868)
Ps. 22,896
Ps.(253,863)
18. Extraordinary item
The extraordinary item, net of the related income tax effects, represents a provision for restructuring expenses.
19. Lease commitments
As of December 31, 2002 and 2003, the Company had operating leases for equipment commitments equal to Ps.447,797 and
Ps.623,875 whose maturity dates are as follows:
Maturity
2003
2004
2005
2006
2007
2008
2009
2010
2002
2003
Ps.108,195
96,743
82,626
68,871
23,386
21,816
46,160
—
Ps.
—
149,892
142,943
125,041
68,938
57,759
45,894
33,390
Ps.447,797
Ps.623,857
Lease expenses recorded in the statements of income (loss) during 2001, 2002 and 2003 amounted Ps.42,853, Ps.30,673 and
Ps.108,195, respectively.
20. Financial instruments
The Company has contracted exchange rate forwards and calls on U.S. dollar debts, fixing the exchange rate to hedge against
exchange losses on U.S. dollar loans. The exchange result of the forward or call is recorded in the integral financing result, by
offsetting the exchange result from the liability hedged, while the asset generated is deducted from the hedged liability. As of
December 31, 2003, the Company has four contracts to buy and sell U.S. dollars for a total amount of $2,141 maturing during
2004.
The Company also has interest rate swaps to manage the interest rate risk on its variable interest debt. The Company has entered
into interest rate swaps in which it pays amounts calculated based
F-37
on fixed interest rates and receives amounts calculated based on variable interest rates. The difference between such amounts is
recorded in the integral financing result, offsetting the effect of the variable interest rate on the hedged loans. The asset
generated in the swap is deducted from the payable interest hedged.
Some of the Company’s subsidiaries contracted forwards with Pemex Gas y Petroquímica Básica to protect themselves from
natural gas price volatility for the period from January 2002 to December 2003.
The Company purchased insurance coverage against natural gas market prices increases above the maximum price it selected by
paying a premium. The maximum price level was 8.705 U.S. dollars per million units of energy “MMBTU” and the minimum
price was 4.245 U.S. dollars per “MMBTU”. If the reference price exceeds the maximum price a discount will be included in its
invoice, while if it is below the minimum price, the invoice will be issued for the respective minimum price. Given that the
insurance contract represents a contractual obligation, guaranteed with the fixed gas price of 4.00 U.S. dollars per MMBTU, the
Company records the respective effects in results as the MMBTU amounts committed are consumed, and it has not recorded the
effect of the potential gain or loss if the gas price premium were settled at present value. At December 31, 2003, the net loss
recorded for this transaction was Ps.10,393.
The market value of the derivative contracts mentioned above is estimated based on quoted market prices to terminate the
contracts at the reporting date. As of December 31, 2003 the market value of the financial instruments is Ps.47,405, and the net
loss recorded during the year for the forwards, calls and swaps was Ps.124,928.
Sales options in the food sector- With regard to the 1998 acquisition of CORFUERTE and AAC, companies in the food sector,
the Company executed contracts known as “puts” with its minority shareholders so that at a given date and amount, DESC
would undertake to acquire the shareholding packages of such minority shareholders.
On November 11, 2003, the minority shareholders of CORFUERTE and AAC formally notified their decision to exercise their
put options to DESC, which was formalized on January 29, 2004. Accordingly, as of the date, the shareholding percentage of
DESC in such subsidiaries increased from 77.6% to 96.1% and from 81.3% to 99.9%, respectively. The amount paid was
$14,311 (Ps.156,194) and is recorded in the consolidated balance sheets as a liability under the heading of “Other payables and
accrued liabilities.”
21. Subsequent events
Resolutions adopted at stockholders’ meetings- At a Stockholders’ Special Meeting and a Stockholders’ Ordinary and
Extraordinary Meeting held on March 8, 2004, the following resolutions were adopted:
a.
The mandatory conversion of the totality of the Series “C” shares into Series “B” shares, and the cancellation of the
inscription of the Series “C” shares in the National Securities Registry. This agreement went into effect on March 16, 2004.
As of that date, the American Depositary Shares (ADS), which are registered with the Securities and Exchange
Commission (SEC), and are traded in the New York Stock Exchange, Inc. (NYSE), will represent 20 Series “B” shares.
F-38
b.
The voluntary conversion of the Series “A” shares into Series “B” shares and the voluntary conversion of Series “B” shares
into Series “A” shares, by those shareholders who so request. The Series “A” shares have not been and will not be
registered under the 1933 Securities Act, or under any other applicable law in jurisdictions other than Mexico.
Consequently, the voluntary conversion will be offered only in Mexico and the US shareholders of DESC will not be able
to participate.
c.
The amendments to the corporate bylaws of DESC, which include the elimination of the restrictions on foreigners holding
Series “A” and “B” shares.
d.
Proposal to perform a capital stock increase in the amount of Ps.2,738 million ($248 million), through the issuance of
912,719,584 new ordinary shares at a subscription price of three pesos per share.
With regard to the proposed capital increase, DESC entered into a Share Subscription Collaboration Agreement with Inversora
Bursátil, S.A. de C.V. Casa de Bolsa, Grupo Financiero Inbursa (“Inbursa”). Such agreement established that DESC was
obligated to offer, and Inbursa was obligated to subscribe the unsubscribed shares after the shareholders did not exercise their
entire right for first refusal. The subscriptions of Inbursa would be done at the same price of three pesos, subject to certain
conditions, for itself or on account of third parties up to the equivalent of Ps. 2,000 million. The rights of first refusal to such
subscription were offered only in Mexico.
Capital stock increase- On April 7, 2004, the capital stock was fully subscribed and paid in the amount of Ps.2,738,159 through
the issuance of 912,719,584 new ordinary shares at a subscription price of three pesos per share.
Upon expiration of the rights of first refusal, 502,544,745 shares were subscribed by the stockholders of the Company, and the
remaining 410,174,839 shares were subscribed by Inbursa.
As of April 7, 2004, capital stock is represented by:
Fixed portionNominative Series “A” shares (without withdrawal rights and which
must represent at least 51% of voting stock)
Variable portionNominative Series “B” shares (with withdrawal rights and which may not
represent more than 49% of voting stock)
Number of Shares
Amount
1,166,108,597
Ps.15,159
1,115,690,363
14,504
2,281,798,960
Ps.29,663
Series “A” shares may only be acquired by Mexican citizens or Mexican entities with an exclusion clause for foreign investors.
Series “B” shares may be freely subscribed.
Prepayment of debt. – With the proceeds from the aforementioned increase in capital stock, on April 30, 2004 the Company
prepaid $146.7 million of its debt. The debt prepayment was distributed $126.7 million towards syndicated loans denominated in
Mexican pesos and US dollars refinanced on December 2003 and $20 million towards the revolving credit line contracted due to
the refinance of debt. Additionally the Company is negotiating the prepayment of the balance of the long-term secured bond
maturing in 2007 in the amount of $73 million on June 30, 2004.
F-39
Purchase of minority shareholdings. – In December 1998, CORFUERTE executed a “put” agreement with the minority
stockholders of its subsidiaries Nair Industrias, S.A. de C.V., Pesquera Nair, S.A. de C.V. y Propemaz, S.A. de C.V.
(collectively NAIR) to exchange shares of NAIR for shares of CORFUERTE. The minority stockholders did not exercise their
option to exchange shares, and instead they executed a purchase sale agreement dated February 26, 2004. Pursuant to such
agreement CORFUERTE acquired 40% of the shares of NAIR Ps. 93,364 increasing the shareholding percentage of
CORFUERTE in such subsidiaries to 100%.
Close of operations of Fenoquimia, S.A. de C.V. - On February 17, 2004, the Company decided to begin closing down the
operation of Fenoquimia, S. A. de C. V., which is engaged in the production and sale of phenol.
The condensed financial position Fenoquimia, S. A. de C. V. as of December 31, 2002 and 2003, and the results of its operations
for the years ended December 31, 2001, 2002 and 2003, are shown below:
2002
Current assets
Property, plant and equipment
Other assets
Ps.
Current liabilities
Long-term debt
Net
2003
5,156
38,433
42,869
Ps. 34,217
36,436
46,782
86,458
316,465
16,150
117,435
384,429
15,533
332,615
399,962
Ps.(246,157)
Ps.(282,527)
2001
2002
2003
Net sales
Cost of sales
Operating expenses
Net comprehensive financing cost
Other revenues and expenses- Net
Income tax
Ps. 313,277
(431,489)
(50,216)
(4,822)
(102,898)
(4,804)
Ps. 91,454
(129,623)
(15,812)
(29,374)
(10,944)
7,735
Ps.109,447
(83,656)
(10,014)
(30,039)
(66,459)
8,001
Net loss
Ps.(280,952)
Ps. (86,564)
Ps. (72,720)
Joint investment with Hayes Lemmerz, Int. - On January 15, 2004 Desc Automotriz, S.A. de C.V. concluded its joint
investment with Hayes Lemmerz, Int. (“HLI”). To do this, the assets of the aluminum wheel rim plant were sold to HLI and
40% of the shares owned by HLI, were acquired for $1.00, so that now Desc Automotriz, S.A. de C.V. owns 100% of the shares
of the Company that manufactures steel wheel rims. As of December 31, 2003, the Company adjusted the net realizable value of
the fixed assets of the aluminum plant, which generated a charge to results for the year of Ps.114,200, net of taxes. In 2004 the
dissolution of the joint investment will be recorded as an item of stockholders’ equity.
F-40
22. New accounting principles
In May 2003, the IMCP issued Bulletin C-12, “Financial Instruments of a Debt or Equity Nature or a Combination of Both” (C12), whose application is mandatory for financial statements of periods beginning on or after January 1, 2004, although early
adoption is encouraged. C-12 is the compilation of the standards issued by the IMCP with respect to the issue of debt or equity
financial instruments, or a combination of both, and includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between liabilities and stockholders’ equity and establishes the
rules for classifying and valuing the components of debt and equity of combined financial instruments in the initial recognition.
Subsequent recognition and valuation of liabilities and stockholders’ equity of the financial instruments is subject to the
standards issued previously in the applicable bulletins. The Company believes that the effects of adopting this new accounting
principle will not have significant effects on its consolidated financial position and results of operations.
23. Differences between Mexican GAAP and US GAAP.
The consolidated financial statements of the Company are prepared in accordance with Mexican GAAP, which differs in certain
significant respects from US GAAP. A reconciliation of the reported majority net income (loss), majority stockholders’ equity
and comprehensive income to US GAAP is presented in Note 24. It should be noted that this reconciliation to US GAAP does
not include the reversal of the restatement of the financial statements for the effects of inflation as required by Bulletin B-10,
“Recognition of the Effects of Inflation in Financial Information”, of Mexican GAAP. The application of this bulletin represents
a comprehensive measure of the effects of price-level changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting in Mexican pesos for both Mexican and US accounting
purposes.
The principal differences between Mexican GAAP and US GAAP included in the reconciliation that affect the consolidated
financial statements of the Company are described as follow:
a.
Differences in classification- Certain items require a different classification in the balance sheet or income statement
under US GAAP. These include:
•
Under Mexican GAAP advances to suppliers are recorded as inventories. Under US GAAP advances to suppliers are
classified as prepaid expenses.
F-41
•
b.
The impairment of goodwill and other long-lived assets, gain or loss on the disposal of fixed assets, all severance
payments and employee profit sharing must be included in operating expenses under US GAAP.
Cash flow information- Under Mexican GAAP, the Company presents a consolidated statement of changes in financial
position in accordance with Bulletin B-12, “Statement of Changes in Financial Position”, which identifies the generation
and application of resources by the differences between opening and final financial statement balances in constant Mexican
pesos. Bulletin B-12 also requires that monetary and foreign exchange gains and losses be treated as cash items for the
determination of resources generated by operations.
In accordance with US GAAP, Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash
Flows”, is applied without including the effects of inflation. The statement of cash flows in Note 24g does not include the
reversal of the restatement of the financial statements for the effects of inflation. This restatement represents a
comprehensive measure of the effects of price-level changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting in Mexican pesos for both Mexican and US GAAP
purposes (see Note 24g).
c.
Deferred income taxes and employee profit sharing- The Company follows SFAS No. 109, “Accounting for Income
Taxes”, for US GAAP purposes, which differs from Mexican GAAP as follows:
•
Under Mexican GAAP, deferred taxes are classified as non-current, while under US GAAP the classification is based
on the classification of the related asset or liability.
•
Under Mexican GAAP the effects of inflation on the deferred tax balance generated by monetary items are recognized
in monetary position result. Under US GAAP the deferred tax balance is classified as a nonmonetary item. As a result,
the consolidated income statement differs with respect to the presentation of monetary position gain (loss) and deferred
income tax provision.
•
Under Mexican GAAP, the change in statutory income tax rate approved early in 2002 was considered in the
calculation of deferred taxes at December 31, 2001. Under US GAAP, a change in statutory tax rate may not be
considered until the enactment date, which was January 1, 2002.
•
Under Mexican GAAP deferred employee profit sharing is calculated using the deferral method by considering only
those temporary differences that arise during the year and which are expected to reverse within a defined period, while
under US GAAP the same liability method is applied as that used for deferred income taxes.
The differences in the restatement of imported machinery and equipment and the pension plan under Mexican GAAP have
a different treatment than under US GAAP. As a consequence, the related deferred income tax presented under Mexican
GAAP is different from the effect calculated under US GAAP.
F-42
The tax effects of temporary differences that generated deferred tax liabilities (assets) under SFAS No. 109 are as follows:
Deferred income taxes-
Property, plant and equipment
Inventories
Land held for development and real estate projects
Reserves and provisions
Tax loss carryforwards
Recoverable asset tax
Other
Allowance for doubtful tax loss carryforwards and recoverable
asset taxes
2002
2003
Ps. 2,378,810
539,177
969,596
(186,313)
(1,446,973)
(409,432)
46,139
Ps. 1,662,357
400,042
856,662
(151,135)
(1,388,923)
(511,935)
(13,394)
325,693
519,103
Ps. 2,216,718
Ps. 1,372,777
Deferred employee profit sharing -
Property, plant and equipment
Inventories
Reserves and provisions
Unrealized exchange losses
Other
d.
2002
2003
Ps. 763,962
184,371
(15,339)
(4,816)
41,017
Ps. 446,271
163,163
(36,049)
(7,694)
19,428
Ps. 969,196
Ps. 585,119
Cost of pension plans and other employee benefits- Under Mexican GAAP, the recording of liabilities for employee
benefits is substantially the same as under SFAS No. 87, “Employers’ Accounting for Pensions”. The Company’s
independent actuaries have prepared a study of pension costs under US GAAP.
The Company has no postretirement health care insurance or other benefit plans, other than the pension plans referred to in
Note 13. Therefore, SFAS No. 106, “Employers’ Accounting for Post-retirement Benefits Other Than Pensions”, does not
have any effect on the Company.
During 1992, the Company withdrew Ps. 91,823 from plan assets covering pension and seniority premiums for employees
of certain subsidiaries, as the plans were overfunded. The amount of the withdrawal was recorded as income under
Mexican GAAP, however, for purposes of SFAS No. 87, the amount must be amortized over the average remaining
working life of the employees, which as of that date was approximately 17 years.
The accumulated actuarial gains and losses were generated by the differences in the assumptions used for the actuarial
calculations at the beginning of the year versus the actual behavior of those variables at the end of the year. At December
31, 2003 and 2002, the projected benefit obligation in some subsidiaries was less than the accumulated benefit obligation
reduced by the amount of the plan assets at fair value, resulting in an additional liability, which is recorded as an intangible
asset included in other assets.
The trust assets consist of fixed income and variable funds, valued at market. As of December 31, 2003 and 2002, the
pension plan assets are invested in the following financial instruments:
2003
2002
Fixed Rate:
Traded securities
20%
44%
Federal Government instruments
37%
19%
43%
100%
37%
100%
Variable Rate:
Public traded shares in BMV
The Company has a policy of maintaining at least 30% of the trust assets in Federal Government instruments. Objective
portfolio guidelines have been established for the remaining 70%, and investment decisions are being made to comply with
those guidelines to the extent that market conditions and available funds allow.
During 2002 the Company made a Ps. 23.2 million contribution to the plan, while in 2003 no contributions were made. It is
expected that more than Ps. 30 million will be contributed to the plan during 2004.
e.
Minority interest- Under Bulletin B-8 of Mexican GAAP, minority interest must be included as a component of
stockholders’ equity. Under US GAAP, minority stockholders’ interest in subsidiaries is presented between liabilities and
stockholders’ equity in the consolidated balance sheet. Consequently, unlike US GAAP, under Mexican GAAP minority
stockholders’ interest in the income of subsidiaries is not presented as an expense in the consolidated statement of income
F-43
f.
Technology funds- The technology fund was recorded under cash and cash equivalents at year ended 2002. The Company
utilized this fund during 2003. Under US GAAP those funds must be classified as other assets.
g.
Land held for development and real estate projects restatement- Undeveloped and developed land of the real estate
business and the real estate projects are considered as inventories, since they are held for sale. They were restated in US
dollars using the inflation rate of the U.S. Under US GAAP, these assets and the corresponding cost of land sold during the
year would be restated using the NCPI.
h.
Machinery and equipment restatement- Since 1997, the Company has restated its fixed assets of foreign origin based on
the internal inflation rate of the country of origin and the period end exchange rate. Under US GAAP, these fixed assets
would be restated using the NCPI.
i.
Financial instruments- In conformity with Mexican GAAP, on January 1, 2001, Bulletin C-2 went into effect in Mexico.
In conformity with US GAAP, beginning in 2001, SFAS No.133, “Accounting for Derivative Instruments and Hedging
Activities”, became effective. SFAS No.133 requires recognition of all derivative financial instruments together with the
corresponding item hedged at fair value, whether they are assets or liabilities, in the balance sheet.
Changes in the fair value of derivative financial instruments are recognized in the results of the year (fair value hedges) or
in other components of comprehensive income (cash flow hedges), if it is demonstrated that such instruments are closely
related to the hedged item through statistical effectiveness calculations. Upon expiration of the derivative instruments the
corresponding gain or loss is recognized in the results of the year.
The Company has derivative financial instruments covering swaps for interests rate and exchange rates that hedge financial
liabilities, which should not be adjusted to fair value under Mexican GAAP (see Note 20).
j.
Goodwill
Under Mexican GAAP, the following accounting for goodwill was followed:
i.
Food sector –The excess generated by acquisitions made at a price above book value of the subsidiaries acquired in
the Food sector, is amortized by the straight-line method over 20 years. Also, a part of such excess was restated up
to 1997 using NCPI factors.
ii.
Automotive sector - In 2001, Desc Automotriz increased its share ownership in VELCON, its subsidiary, at a cost
above its book value. The resulting goodwill from this acquisition will be amortized over four years.
Under US GAAP, the Company adopted the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets”, in 2002,
which resulted in an adjustment for the impairment of the goodwill in the food sector of Ps.1,331,081, and a reduction in
the amortization expense applied to the income statements for the years ended 2002 and 2003 of Ps. 79,992 and Ps. 95,097,
respectively.
F-44
Due to the early adoption of the provisions of new Bulletin C-15 under Mexican GAAP as mentioned in Note 4a, the
Company applied impairment tests to its long-lived assets, both tangible and intangible, on substantially the same basis as
for US GAAP purposes. An additional impairment of Ps. 432,190 resulted under US GAAP due to the cash flow discount
rates.
2001
2002
2003
Reported net income (loss) under US GAAP
Add: Amortization of goodwill under Mexican
GAAP
Ps.(133,908)
Ps.(2,178,062)
Ps.(350,876)
Adjusted net income (loss) under US GAAP
Ps. (48,491)
Ps.(2,178,062)
Ps.(350,876)
Ps.
Ps.
Ps.
85,418
Reported net income (loss) per share under US
GAAP
Add: Amortization of goodwill under Mexican
GAAP
(0.08)
—
0.05
Adjusted net income (loss) per share under US
GAAP
Ps.
(0.03)
(1.37)
—
—
Ps.
(1.37)
(0.22)
—
Ps.
(0.22)
k.
Negative goodwill- In September 1997, Agrobios, S.A. de C.V. (a subsidiary merged into DESC in 1999) acquired 94.3%
of the shares of CORFUERTE, a company engaged in the manufacture and distribution of processed food. The book value
(substantially equivalent to the fair value of the net assets acquired) exceeded cost of the shares by Ps.10,642, which under
Mexican GAAP is being amortized to income over five years using the straight-line method. Under US GAAP purchase
accounting, after considering the deferred tax asset not recorded under Mexican GAAP for the subsidiary, the excess was
Ps.403,360, which was offset against the fair value of the fixed assets acquired and will be recognized in income as a
reduction of the related annual depreciation over a 13 years period.
l.
Capitalized financing costs- Under Mexican GAAP, the Company capitalizes the integral financing cost related to
construction in progress, including the exchange losses and monetary position gain. Under US GAAP, only interest
expense may be capitalized on US dollar-denominated debt, and only interest expense, net of the related monetary position
gain, may be capitalized on Mexican peso-denominated debt.
m.
Capitalized preoperating expenses- Under Mexican GAAP, certain subsidiaries capitalized preoperating expenses of
Ps.42,222 related to new production lines. Such expenses will be amortized over the term in which the new production
lines are fully operational. Under US GAAP, in conformity with Statement of Position (SOP) 98-5 issued by American
Institute of Certified Public Accountants, such costs are expensed as incurred.
n.
Future impact of recently issued accounting standards - SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities” (“SFAS No. 149”) - In April 2003 the FASB issued SFAS No. 149, which amends
and clarifies financial accounting and reporting for derivative instruments, including certain derivative
F-45
instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in this statement
improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new
standard will be effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this statement should be
early applied.
The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates.
The Company does not anticipate that this new standard will have a significant impact on its financial position or results of
operations.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) - In January 2003, the FASB issued
FIN 46. FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to
certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 was effective immediately for all variable interests held by the Company in a variable interest entity created
after January 31, 2003. For a variable interest held by the Company in a variable interest entity created before February 1,
2003, the Company will be required to apply the provisions of FIN 46 as of December 31, 2004. The Company does not
currently have any variable interests in a variable interest entity.
o.
Convenience translation-U.S. dollar amounts shown in the financial statements have been included solely for the
convenience of users and are translated from Mexican pesos, as a matter of arithmetic computation only, at the rate quoted
by Banco de México for December 31, 2002 of 11.1998 Mexican pesos per U.S. dollar. Such translation should not be
interpreted as a representation that the Mexican peso amounts have been, could have been, or could in the future be,
translated into U.S. dollars at this or any other exchange rate.
F-46
24. Reconciliation of Mexican GAAP to US GAAP
a)
Reconciliation of majority net income2001
Net income applicable to majority stockholders’ interest
under Mexican GAAP
US GAAP adjustments:
Deferred income taxes
Deferred income taxes under Mexican GAAP
Deferred employee profit sharing
Amortization of withdrawn pension fund assets
under SFAS No. 87
Additional depreciation on foreign origin fixed
assets restated using the NCPI
Restatement of cost of land for development and
real estate projects using the NCPI
Reduction in depreciation expense of CORFUERTE
Goodwill of POLIFOS
Goodwill of VELCON
Amortization of capitalized exchange loss, net of
gain on monetary position
Capitalization of preoperating expenses
Adjustment of the market value of derivative
financial instruments
Effects of inflation on US GAAP adjustments
Effects of US GAAP on minority stockholders’
interest adjustments
Other
Ps.
45,446
2003
Ps.(1,084,545)
Ps.(2,240,387)
$ (200,038)
64,488
(83,149)
(59,800)
775,345
(279,890)
354,404
69,228
(24,990)
31,644
5,620
5,428
5,156
460
(37,548)
(87,523)
(128,206)
(11,447)
(6,032)
(14,518)
22,597
(1,547)
22,406
2,363
—
16,311
(130,249)
101,019
—
16,224
(11,630)
9,019
—
1,449
25,711
109,523
3,031
6,780
35,893
7,673
3,204
685
—
173,955
(68,223)
114,399
20,818
56,868
1,859
5,078
(863,797)
4,493
208,771
12,290
79,866
(19,398)
7,131
(1,731)
(179,354)
157,572
895,523
79,959
(1,331,081)
79,992
898,891
95,097
80,260
8,491
(179,354)
(1,093,517)
1,889,511
168,710
Ps. (133,908)
Ps.(2,178,062)
—
—
Weighted average shares outstanding (000’s)
Net loss per share under US GAAP
2003
958,592
(572,760)
16,357
Change in accounting policyAdjustment for impairment of the goodwill
Amortization of goodwill
Net loss under US GAAP
2002
1,588,614
Ps.
F-47
(0.08)
Ps. (350,876)
1,588,687
Ps.
(1.37)
$ (31,328)
1,588,687
Ps.
(0.22)
1,588,687
$
(0.02)
b)
Majority stockholders’ equity reconciliation-
Majority stockholders’ equity under Mexican GAAP
US GAAP adjustments:
Deferred income taxes
Deferred income taxes under Mexican GAAP
Deferred employee profit sharing
Withdrawal of pension fund assets under SFAS No. 87
Adjustment for changes to the method for the restatement of land held
for development and real estate projects, foreign machinery and
goodwill
Additional depreciation on foreign fixed assets restated using the NCPI
Restatement of cost of land held for development and real estate
projects sold using the NCPI
Reduction in depreciation expense of Corfuerte
Goodwill of VELCON
Capitalized exchange loss net of monetary position gain
Adjustment of market value of derivative financial instruments
Capitalization of preoperating expenses
Adjustment for impairment of goodwill
Amortization of goodwill
Effects of US GAAP adjustments on minority stockholders’ interest.
Other
2002
2003
2003
Ps. 7,917,636
Ps. 6,338,210
$ 565,921
(2,216,718)
1,339,115
(969,196)
(31,639)
(1,372,777)
880,749
(585,119)
(25,382)
(122,572)
78,641
(52,244)
(2,266)
2,962,087
(300,438)
2,386,009
(428,663)
213,040
(38,274)
(121,277)
(33,614)
20,165
(401,701)
(68,223)
(32,195)
(1,331,081)
79,992
123,509
27,076
(251,533)
67,403
36,390
(365,808)
(47,405)
(24,524)
(432,190)
175,089
203,383
7,596
(22,459)
6,018
3,249
(32,662)
(4,233)
(2,190)
(38,589)
15,633
18,160
679
223,218
19,931
Ps. 6,561,428
$ 585,852
(954,138)
Majority stockholders’ equity under US GAAP
Ps. 6,963,498
F-48
c)
Reconciliation of changes in stockholders’ equity under US GAAP2002
2003
2003
Stockholders’ equity at beginning of year
Net loss under US GAAP
Effect of restatement
Adjustment for changes to the method for the restatement of
land held for development and real estate projects, foreign
machinery and goodwill
Dividends declared
Adjustment of additional employee retirement liability
Ps. 9,963,556
(2,178,062)
737,761
Ps.6,963,498
(350,876)
369,703
$621,752
(31,328)
33,010
(976,716)
(428,936)
(154,105)
(427,844)
—
6,947
(38,201)
—
619
Stockholders’ equity at end of year
Ps. 6,963,498
d)
Ps.6,561,428
$585,852
Comprehensive income (loss) under US GAAP2001
2002
2003
2003
Net loss under US GAAP
Adjustment of additional employee retirement
liability
Result from holding nonmonetary assets for
adjustments under US GAAP
Ps.(133,908)
Ps. (2,178,062)
Ps. (350,876)
$(31,328)
Comprehensive loss under US GAAP
e)
—
(154,105)
6,947
619
(317,087)
(238,955)
(58,141)
(5,191)
Ps.(450,995)
Ps. (2,571,122)
Ps. (402,070)
$(35,900)
Condensed consolidated balance sheets under US GAAP-
Assets
Current assets
Land held for development and real estate projects
Accounts receivable, long-term
Property, plant and equipment
Goodwill
Other assets
Discontinued operations
Total assets
F-49
2002
2003
2003
Ps. 9,327,945
5,099,960
14,825,512
315,356
1,612,349
147,481
Ps. 8,197,302
4,461,705
1,048,481
12,587,136
373,877
1,205,436
30,822
$ 731,914
398,375
93,616
1,123,871
33,382
107,630
2,752
Ps.31,328,603
Ps.27,904,759
$2,491,540
(1)
2002
2003
2003
Liabilities and stockholders’ equity
Current liabilities (1)
Long-term debt
Deferred income taxes and employee profit sharing
Other long-term liabilities
Minority stockholders’ equity in subsidiaries
Majority stockholders’ equity
Ps. 8,233,669
9,051,649
2,627,816
667,633
3,784,339
6,963,498
Ps. 4,416,397
11,360,011
1,570,141
632,158
3,364,624
6,561,428
$ 394,328
1,014,305
140,194
56,443
300,418
585,852
Total liabilities and stockholders’ equity
Ps.31,328,603
Ps.27,904,759
$2,491,540
Includes current portion of deferred income taxes and employee profit sharing.
f)
Condensed consolidated statements of loss under US GAAP
Net sales
Cost of sales
Gross profit
Operating expenses (1)
Operating income
Other (expenses) income, net
Financing integral result
(Provision) benefit for income
taxes and tax on assets
Equity in associated companies
and unconsolidated subsidiaries
Discontinued operations
Change in accounting principle
2001
2002
2003
2003
Ps. 22,092,872
(16,576,275)
5,516,597
(4,401,833)
1,114,764
(34,257)
(148,667)
Ps. 20,360,380
(15,687,138)
4,673,242
(3,958,485)
714,757
52,478
(1,156,402)
Ps. 21,755,055
(17,190,528)
4,564,527
(4,312,238)
252,289
(76,195)
(1,237,894)
$ 1,942,450
(1,534,896)
407,554
(385,028)
22,526
(6,803)
(110,528)
395,459
(125,376)
(278,771)
—
Minority interest
Net consolidated loss
(1)
(1,057,060)
Ps.
(133,908)
(161,603)
433,387
38,696
(5,406)
(629,868)
(1,331,081)
11,252
22,896
—
1,005
2,044
—
243,389
21,732
339,063
Ps. (2,178,062)
Ps.
(350,876)
$
(31,328)
Includes extraordinary items of Ps.309,998 in 2001, impairment of fixed assets of Ps.485,403 in 2003 and non-operating items
under Mexican GAAP in the three years.
F-50
g)
Consolidated statements of cash flows under US GAAP-
Operating activities:
Net loss under US GAAP
Items to reconcile net income to net cash generated by
operations
Depreciation and amortization
Depreciation of idle plant
Cost of land and real estate projects sold
Loss (income) on sale of property plant and
equipment
Allowance for doubtful accounts
Capitalized integral financing cost
Impairment loss of fixed assets
Equity in associated companies and
unconsolidated subsidiaries
Amortization of goodwill
Changes in accounting polices
Deferred income taxes
Discontinued operations
Effects of inflation
Exchange loss
Changes in working capital
Current assets
Current assets of discontinued operations
Land acquisition
Investment in real estate projects
Notes and accounts payable to suppliers,
other payables and accrued liabilities
Interest payable
Income taxes and employee profit sharing
payable
Current liabilities from discontinued
operations
Net cash generated by operating activities
Financing activities:
Payments of bank loans and current portion of
long-term debt
Proceeds from long-term debt
Payments of long-term debt
Effect of the variance on short-term bank loans,
current portion of long-term debt and long-term
debt
Effects of inflation
Other long-term liabilities
Dividends paid to minority interest
Minority interest
Increase in capital stock due to merger
Dividends paid
2001
2002
2003
2003
Ps. (133,908)
Ps. (2,178,062)
Ps. (350,876)
$ (31,328)
1,345,967
77,563
425,862
(4,299)
13,357
(7,410)
101,205
125,376
64,368
1,418,724
8,157
411,350
1,508,712
2,875
1,349,768
134,709
257
120,517
27,494
15,377
—
50,988
69,575
68,306
—
499,543
6,212
6,099
—
44,603
(374,933)
114,055
374,976
382,018
5,406
—
1,331,081
(196,848)
57,814
(414,082)
1,160,482
(11,252)
—
—
(1,228,018)
20,634
(305,978)
756,032
(1,005)
—
—
(109,646)
1,842
(27,320)
67,504
3,558,929
79,055
(7,154)
(761,902)
(5,100)
281,360
(3,142)
(405,757)
(514,281)
93,663
—
(518,224)
(45,919)
8,363
—
(46,271)
(2,106,649)
(15,944)
297,252
(57,467)
(297,933)
(11,055)
(26,602)
(987)
196,350
(291,010)
118,765
10,604
(31,511)
(34,037)
(49,116)
(4,385)
3,415,306
1,479,981
1,201,140
107,247
(610,619)
—
(1,663,794)
(1,383,704)
4,737,067
(2,315,769)
—
6,341,278
(7,505,534)
—
566,196
(670,149)
(558,659)
374,976
(238,835)
(402,055)
(1,057,060)
650
228,323
(598,238)
414,082
362,051
(121,073)
(339,063)
—
(440,469)
(484,689)
305,978
(35,475)
—
(243,389)
—
(206,315)
(43,277)
27,320
(3,167)
—
(21,732)
—
(18,421)
F-51
2001
Adjustment of additional employee
retirement liability
Decrease in minority stockholders’ interest
due to restructuring and sale
Net cash generated by (applied to)
financing activities
Investing activities:
Accounts receivable, long-term
Investment in shares
Sale of shares of subsidiaries
Cash and cash equivalents of subsidiaries
sold
Purchase of minority shareholdings
Acquisition of property, plant and
equipment
Proceeds from sale of property plant and
equipment
Proceeds from sale of property pant and
equipment of Industrias Resistol, S.A. de
C.V.
Capitalized financing integral cost
Net increase of investment properties
Real estate assets available for sale
Other assets
Investing activities of discontinued
operations
Net cash generated by (used in)
investing activities
Net increase (decrease) in cash and cash
equivalents
Net increase in cash and cash equivalents from
discontinued operations
Cash and cash equivalents
Balance at the beginning of the year
2002
—
2003
(154,105)
652,094
—
2003
6,947
620
—
—
5,035,813
160,778
(1,821,199)
(162,610)
(260,854)
1,574,561
29,137
(1,048,481)
—
—
(93,616)
—
—
—
(314,101)
—
(28,045)
(802,625)
(71,664)
234,951
332,423
29,681
(28,349)
40,461
—
—
—
37,336
10,416
(79,368)
(785,151)
(1,117,412)
670,674
1,572
—
—
189,165
166,734
453,155
—
—
—
418,165
3,718
66,469
116,659
(648,471)
(844,805)
(75,4304,384)
(1,464,864)
(130,793)
1,314,317
306,190
992,288
13,918
8,288
1,520,940
1,200,832
Ps.1,200,832
Ps. 2,184,831
Ps.
719,967
$
64,284
Ps. 837,289
Ps.
Ps.
327,111
$
29,207
Interest paid
Ps.1,015,642
Ps. 1,095,797
Ps. 1,065,017
$
95,092
Leases paid
Ps.
Ps.
Ps.
$
9,660
Balance at the end of the year
Supplemental cash flow disclosures:
Income taxes, asset taxes and employee
profit sharing paid
42,853
******
F-52
645,360
30,673
—
—
2,184,831
108,195
195,077
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Authentic Acquisition Corporation
We have audited the consolidated balance sheets of Authentic Acquisition Corporation (a 99.9% owned subsidiary of DESC,
S.A. de C.V.) and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003 (not separately presented
herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Authentic Acquisition Corporation and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for
goodwill.
/s/ Ernst & Young LLP
Orange County, California
January 23, 2004
F-53
Report of Independent Registered Public Accounting Firm
To the Stockholders’ Meeting of
DESC, S.A. de C.V.:
We have audited the combined balance sheets of the Companies comprising the Chemical Sector of DESC, S. A. DE C. V.1
(formerly GIRSA, S. A. DE C. V. and Subsidiaries), as of December 31, 2003 and 2002, and the related combined statements of
income, of changes in stockholders’ equity and of changes in financial position for the years ended December 31, 2003, 2002 and
2001. These combined financial statements are the responsibility of the Companies Management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Mexico and with the standards of the
Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the combined financial statements are free of material misstatement and that they were
prepared in conformity with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by Management, as well as evaluating the overall combined financial
statements presentation. We believe that our audits provide a reasonable basis for our opinion.
As mentioned in Note 3b to the combined financial statements, in 2003 the Companies Management adopted the guidelines of
Bulletin C-15 “Impairment in the Value of Long-Lived Assets and their Disposal” issued by the Accounting Principles Board of the
Mexican Institute of Public Accountants. The effect in thousands of pesos derived from the application of this principle was the
recognition of Ps. 5,577 of impairment in the value of property, plant and equipment. The charge to 2003 results was Ps. 3,123, net of
a reduction of Ps. 2,454 in the related deferred income tax liability.
In our opinion, the accompanying combined financial statements present fairly, in all material respects, the financial position of
the Companies comprising the Chemical Sector of DESC, S. A. DE C. V. (formerly GIRSA, S. A. DE C. V. and Subsidiaries), as of
December 31, 2003 and 2002, the results of their operations, the changes in their stockholders’ equity and the changes in their
combined financial position for the years ended December 31, 2003, 2002 and 2001 in conformity with accounting principles
generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain important respects from accounting principles generally
accepted in the United States of America (US GAAP). The application of the Accounting Principles Generally Accepted in the United
States of America would have affected the determination of combined net loss expressed in Mexican pesos of December 31, 2003
purchasing power for the years ended December 31, 2003, 2002 and 2001, and the determination of combined stockholders’ equity
and combined financial position, also expressed in Mexican pesos of December 31, 2003 purchasing power, at December 31, 2003
and 2002, to the extent summarized in Note 23 to the combined financial statements.
PricewaterhouseCoopers
/s/ José Ángel Vargas Hernández
Audit Partner
Mexico City
February 16, 2004
(February 17, 2004 with respect to Note 21).
1
The Affiliates that combine their financial statements for the Chemical Sector are listed below:
• Bioquimex Natural, S. A. de C. V.
F-54
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
CID Centro de Investigación y Desarrollo Tecnológico, S. A. de C. V.
Dirección IRSA, S. A. de C. V.
Fenoquimia, S. A. de C. V.
Forestaciones Operativas de México, S. A. de C. V.
GIRSA Corporativo, S. A. de C. V.
GIRSA Concentradora, S. A. de C. V.
H2Orizontes, S. A. de C. V.
Industrias Negromex, S. A. de C. V.
Industrias Resistol, S. A. de C. V. (Until September 29, 2003)
Inmobiliaria Thiers, S. A. de C. V
Paratec, S. A. de C. V. (Until September 30, 2003)
Paratec Elastomers, L.L.C.
Quimir, S. A. de C. V.
Resirene, S. A. de C. V.
Rexcel, S. A. de C. V.
Servicios Forestaciones de México, S. A. de C. V. (Until December 31, 2002)
Tecno-Industria, R. F., S. A. de C. V.
Plastiglás de México, S. A. de C. V.
Nhumo, S. A. de C. V.
Dynasol Elastómeros, S. A. de C. V.
Dynasol, L.L.C.
Dynasol Elastómeros, S. A.
Dynasol Gestión, S. A.
F-55
Report of Independent Registered Public Accounting Firm
To the Stockholders of
Corfuerte, S.A. de C.V. and Subsidiaries
We have audited the consolidated balance sheets of Corfuerte, S.A. de C.V. and subsidiaries as of December 31, 2002 and 2003,
and the related consolidated statements of operations, stockholders’ equity and changes in financial position for each of the three
years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in Mexico and in accordance with the
standards of the Public Company Accounting Oversight Board (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 the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Corfuerte, S.A. de C.V. and Subsidiaries at December 31, 2002 and 2003, and the consolidated results of their operations,
changes in their stockholders’ equity and changes in their financial position for each of the three years in the period ended December
31 2003, in conformity with accounting principles generally accepted in Mexico, which differ in certain respects from accounting
principles generally accepted in the United States (see Notes 17 and 18).
Mancera, S.C.
A Member Practice of Ernst & Young Global
/s/ C.P.C. Agustín Aguilar Laurents
Mexico City, Mexico
January 26, 2004
F-56
Report of Independent Auditors
To the Stockholders of
Agroken, S.A. de C.V.
We have audited the consolidated balance sheets of Agrokén, S.A. de C.V. and subsidiaries as of December 31, 2002 and 2003,
and the related consolidated statements of operations, changes in stockholders’ equity and changes in financial position for each of the
three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Mexico and in accordance with the
standards of the Public Company Accounting Oversight Board (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 the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Agrokén, S.A. de C.V. and subsidiaries at December 31, 2002 and 2003, and the consolidated results of their operations,
changes in their stockholders’ equity and changes in their financial position for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in Mexico, which differ in certain respects from accounting
principles generally accepted in the United States of America (see Notes 18 and 19).
Mancera, S.C.
A Member Practice of Ernst & Young Global
/s/ C.P.C. Agustin Aguilar Laurents
Mexico City, Mexico
February 16, 2004,
F-57
Independent Auditors’ Report
To the Stockholders of
Desc, S.A. de C.V.:
We have audited the accompanying consolidated balance sheet of DESC, S.A. DE C.V. AND SUBSIDIARIES (collectively
referred to as the “Company”) as of December 31, 2001, and the related consolidated statements of income, changes in stockholders’
equity and changes in financial position for the years ended December 31, 2000 and 2001, all expressed in thousands of Mexican
pesos of purchasing power as of December 31, 2002. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements
of the chemical segment (formerly GIRSA, S.A. de C.V. and Subsidiaries), Agrokén, S.A. de C.V. and Subsidiaries, Corfuerte, S.A.
de C.V. and Subsidiaries (formerly Grupo Corfuerte, S.A. de C.V. and Subsidiaries), and Authentic Acquisition Corporation, Inc.,
which statements reflect total assets of 45% at December 31, 2001, and total revenues of 49% and 50% for the years ended December
31, 2000 and 2001, respectively, of the related consolidated totals. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on
the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in Mexico and in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Desc, S.A. de C.V. and Subsidiaries as of December 31, 2001, and the
results of their operations and the changes in their financial position for the years ended December 31, 2000 and 2001, in conformity
with accounting principles generally accepted in Mexico.
Also, in our opinion, the amounts in U.S. dollars included in the accompanying financial statements have been translated on the
basis set forth in Note 2 for the convenience of the reader.
As mentioned in Note 4, beginning in January 2000, the Company adopted the provisions of Bulletin D-4, “Accounting for
Income and Asset Taxes and Employee Profit Sharing”. The effect of the adoption was to recognize, an initial long-term liability for
deferred income taxes in the amount of Ps.1,717,353 (thousands of Mexican pesos) affecting shareholders’ equity under “Cumulative
effect of initial recognition of deferred income taxes” and Ps.712,329 (thousands of Mexican pesos) affecting minority interest. The
provision for income taxes for the year 2000 increased by Ps.104,046 (thousands of Mexican pesos).
Beginning in 2000, the Company changed its method for recording the effect from tax consolidation. Until 1999, it was recorded
in the year in which the corresponding annual consolidated tax return was filed. Starting in 2000, this effect is recorded in the results
of the year in which the benefit is generated. The effect from this change increased the benefit from tax consolidation by Ps.130,290
(thousands of Mexican pesos), which was recorded as a “Change in accounting policy”.
Accounting practices used by the Company in preparing the accompanying consolidated financial statements conform with
accounting principles generally accepted in Mexico but do not conform with accounting principles generally accepted in the United
States of America (U.S. GAAP). A description of
F-58
these differences and a reconciliation of consolidated majority net income and majority shareholders’ equity to U.S. GAAP, as
permitted by Form 20-F of the Securities and Exchange Commission (SEC), which allows omission of the requirement to quantify, in
the U.S. GAAP reconciliation, the differences attributable to the effects of comprehensive inflation adjustments recorded locally, are
set forth in Notes 22 and 23.
Ruiz, Urquiza y Cía., S.C.
(A member firm of Andersen Worldwide until April 9,
2002.)
/s/ CPC Ernesto González Dávila
CPC Ernesto González Dávila
Mexico City, Mexico
June 14, 2002 (except with respect to the restatement into constant
Mexican pesos and the reclassification for discontinued operations
as described in Note 17 to the financial statements, as to which the
date is March 25, 2003)
THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED INDEPENDENT AUDITORS’ REPORT. SUCH REPORT
HAS NOT BEEN REISSUED BY THE PRIOR AUDITORS.
F-59
Exhibit 2.2
EXECUTION COPY
DESC, S.A. de C.V.
as Borrower
$445,749,991.78
CREDIT AGREEMENT
Dated as of December 19, 2003
CITIBANK, N.A.
as Administrative Agent
CITIGROUP GLOBAL MARKETS INC.
as Sole Global Coordinator and Sole Bookrunner
CITIGROUP GLOBAL MARKETS INC.
BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO
BBVA BANCOMER
as Joint Lead Arrangers
BANCO INBURSA, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO
INBURSA
as Lead Arranger
SECTION 1.
1.01.
1.02.
SECTION 2.
2.01.
2.02.
2.03.
2.04.
2.05.
2.06.
2.07.
SECTION 3.
3.01.
3.02.
3.03.
SECTION 4.
4.01.
4.02.
4.03.
4.04.
4.05.
4.06.
4.07.
SECTION 5.
5.01.
5.02.
5.03.
5.04.
5.05.
SECTION 6.
6.01.
6.02.
SECTION 7.
7.01.
7.02.
7.03.
DEFINITIONS
Certain Defined Terms
Accounting Terms and Determinations
1
24
COMMITMENTS, ETC
Loans
The Borrowing
Fees
Default by Bank; Certain Remedies Independent
Notes
Optional Prepayments
Mandatory Prepayments
24
24
25
25
25
26
26
PAYMENTS OF PRINCIPAL AND INTEREST
Repayment of Loans
Interest
Interest Rate Determinations; Changes in Rating Systems
28
28
29
PAYMENTS, ETC
Payments
Pro Rata Treatment
Computations
Minimum Amounts
Certain Notices
Non-Receipt of Funds by the Administrative Agent
Set-Off; Sharing of Payments
29
30
30
30
30
31
31
YIELD PROTECTION, ETC
Additional Costs
Substitute Basis
Illegality
Break-Funding Compensation
Taxes
32
33
34
35
35
CONDITIONS PRECEDENT
Conditions Precedent to the Borrowing
Additional Conditions to the Borrowing
38
41
REPRESENTATIONS AND WARRANTIES
Corporate Status
Due Authorization, Legality, Etc
No Additional Authorization Required
42
42
42
ii
7.04.
7.05.
7.06.
7.07.
7.08.
7.09.
7.10.
7.11.
7.12.
7.13.
7.14.
7.15.
7.16.
7.17.
7.18.
7.19.
7.20.
7.21.
7.22.
7.23.
7.24.
7.25.
7.26.
7.27.
SECTION 8.
8.01.
8.02.
8.03.
8.04.
8.05.
8.06.
8.07.
8.08.
8.09.
8.10.
8.11.
8.12.
8.13.
8.14.
8.15.
8.16.
8.17.
8.18.
8.19.
Legal Effect
Financial Statements.
Ranking
No Actions or Proceedings
Commercial Activity; Absence of Immunity
Taxes
Full Disclosure
Environmental Matters
Investment Company Act
Legal Form
Restrictive Agreements
Debt
Solvency
Ownership of the Desc Entities
Compliance with Law
Use of Proceeds; Compliance with Regulations U and X
Voluntary Prepayments
Employee Benefit Plans
Collateral
Insurance
Properties
Principal Subsidiaries
Sale-Leaseback Transactions
Foreign Exchange Regulations
42
43
43
44
44
44
44
45
45
45
45
45
46
46
46
46
47
47
47
47
48
48
48
48
AFFIRMATIVE COVENANTS OF THE BORROWER
Corporate Existence
Inspection of Property, Books and Records
Compliance with Law
Payment of Obligations
Maintenance of Property; Insurance
Governmental Authorizations
Reporting Requirements
Ranking
Intercompany Indebtedness
Taxes
Further Assurances
Use of Proceeds
Ownership of Principal Subsidiaries
Additional Guarantors
Additional Encumbered Entities
Upstreaming
Powers of Attorney
Business Strategy
Filings
48
48
49
49
49
50
50
53
53
53
53
54
54
54
54
56
56
56
56
iii
SECTION 9.
9.01.
9.02.
9.03.
9.04.
9.05.
9.06.
9.07.
9.08.
9.09.
9.10.
9.11.
9.12.
9.13.
9.14.
9.15.
9.16.
9.17.
SECTION 10.
10.01.
10.02.
10.03.
10.04.
10.05.
10.06.
10.07.
10.08.
10.09.
10.10.
10.11.
10.12.
10.13.
10.14.
SECTION 11.
11.01.
11.02.
11.03.
11.04.
11.05.
11.06.
11.07.
11.08.
NEGATIVE COVENANTS
Fundamental Changes
Asset Dispositions
Negative Pledge
Transactions With Affiliates
Line of Business
Accounting Changes
Dividends, Etc
Limitations on Prepayments of Indebtedness
Investments
Capital Expenditures
Interest Coverage
Leverage Test
Leverage EBITDA Test
Leverage Capitalization
Calculations
Use of Proceeds
No Subsidiary Guarantees
57
58
61
63
63
64
64
64
65
67
67
68
68
68
69
69
69
EVENTS OF DEFAULT
Payments
Covenants under this Agreement
Performance Obligations
Cross Default
Representations, Etc
Bankruptcy, Etc
Judgments
Currency Restrictions
Change in Control
Revocation of Licenses, Etc
Unenforceability of Obligations
Security Documents
Material Adverse Effect
Prepayments
70
70
70
70
70
71
71
71
72
72
72
72
72
72
THE ADMINISTRATIVE AGENT
Appointment, Powers and Immunities
Reliance by Agent
Defaults
Rights and Obligations as a Bank
Indemnification
Non-Reliance on Agents and Other Banks
Failure to Act
Resignation or Removal of Administrative Agent
iv
73
74
74
74
74
75
75
75
11.09.
11.10.
SECTION 12.
12.01.
12.02.
12.03.
12.04.
12.05.
12.06.
12.07.
12.08.
12.09.
12.10.
12.11.
12.12.
12.13.
12.14.
12.15.
12.16.
12.17.
12.18.
12.19.
Sole Global Coordinator, Sole Bookrunner, Joint Lead Arrangers and Lead Arranger
Collateral Release
76
76
MISCELLANEOUS
Waiver
Notices
Expenses, Etc
Amendments, Etc
Successors and Assigns
Assignments and Participations
Survival
Captions
Counterparts
Governing Law
Jurisdiction, Service of Process and Venue
Waiver of Jury Trial
Waiver of Immunity
Judgment Currency
Use of English Language
No Fiduciary Relationship
Confidentiality
Severability
Regulation D
76
77
78
79
80
80
82
82
82
82
82
83
83
84
84
84
84
85
85
SCHEDULE I
SCHEDULE II
SCHEDULE III
SCHEDULE IV
SCHEDULE V
SCHEDULE VI
SCHEDULE VII
SCHEDULE VIII
SCHEDULE IX
SCHEDULE X
SCHEDULE XI
SCHEDULE XII
SCHEDULE XIII
SCHEDULE XIV
SCHEDULE XV
SCHEDULE XVI
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Commitments
Form of Notice of Borrowing
Restrictive Agreements
Material Indebtedness
Intercompany Indebtedness
Existing Investments and Commitments
Guarantors
Indebtedness to be Refinanced
Potential Material Adverse Effect
Asset Pledgors
Encumbered Entities
Principal Subsidiaries
Existing Liens
Indebtedness Subject to Mandatory Prepayment
Ownership of Desc Entities
Existing Sale-Leaseback Transactions
EXHIBIT A
EXHIBIT B
–
–
Form of Note
Form of Guaranty Agreement
v
EXHIBIT C
EXHIBIT D
EXHIBIT E
EXHIBIT F
EXHIBIT G
EXHIBIT H
EXHIBIT I
–
–
–
–
–
–
–
Form of Opinion of Special Mexican Counsel to the Borrower and Desc Entities
Form of Opinion of Special New York Counsel to the Borrower and Desc Entities
Form of Opinion of Special Mexican Counsel to the Administrative Agent and the Collateral Agent
Form of Opinion of Special New York Counsel to the Administrative Agent and the Collateral Agent
Form of Collateral Agency Agreement
Form of Auditor’s Letter
Form of Assignment and Assumption Agreement
vi
CREDIT AGREEMENT, dated as of December 19, 2003, among DESC, S.A. DE C.V. (the “Borrower”); each of the
lenders that is a signatory hereto under the caption “BANKS” on the signature pages hereof and each bank or financial institution that
becomes a “Bank” after the date hereof pursuant to Section 12.06(b) (individually, a “Bank” and, collectively, the “Banks”); and
CITIBANK, N.A., as administrative agent for the Banks (in such capacity, together with its successors in such capacity, the
“Administrative Agent”).
WITNESSETH:
WHEREAS, the parties hereto make the following recitals (see Section 1 for definitions):
(A) Each Bank has previously extended one or more credits to the Borrower or its Subsidiaries, the principal amount
outstanding of which is set forth for each Bank in Schedule VIII hereto, which collectively constitute the Refinanced Debt.
(B) The Borrower acknowledges that it or its Subsidiaries has received from, and owes to, each of the Banks, the
Refinanced Debt.
(C) The Borrower has requested each Bank to Refinance, on the terms and conditions of this Agreement, any such
outstanding credit previously extended to it or its Subsidiaries by such Bank and identified opposite such Bank’s name on Schedule
VIII hereto.
(D) Each Bank is willing to Refinance, on the terms and conditions of this Agreement, each credit identified opposite such
Bank’s name on Schedule VIII hereto.
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto agree
as follows:
SECTION 1. DEFINITIONS
1.01. Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in
this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice
versa):
“Administrative Agent” shall have the meaning assigned to such term in the introduction hereto.
“Advance Date” shall have the meaning assigned to such term in Section 4.06.
“Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under
common control with such Person. For purposes of this definition, the term “control” (including the terms “controlling”, “controlled
by” and “under common control with”) of a Person shall mean the possession, direct or indirect, of the
Credit Agreement
1
power to vote 10% or more of the Voting Stock of such Person or to direct or cause the direction of the management and policies of
such Person, whether through the ownership of such Voting Stock, by contract or otherwise.
“Agent’s Account” shall mean the account of the Administrative Agent maintained by the Administrative Agent at
Citibank, N.A. at Two Penns Way, Suite 100, New Castle, Delaware 19720, ABA# 021000089, Account No. 36852248, Account
Name: Medium Term Finance, Reference: DESC, Attention: Cristian Garcia, or such other account as may be designated by the
Administrative Agent to the Borrower in writing.
“Agreement Year” shall mean each year beginning on the date of this Agreement or the anniversary thereof, as the case
may be, and ending on the day prior to the first anniversary of this Agreement or the anniversary thereof, as the case may be.
“Applicable Lending Office” shall mean, for each Bank, the “Lending Office” of such Bank (or of an Affiliate of such
Bank) designated on the signature pages hereof or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may
from time to time specify to the Administrative Agent and the Borrower as the office by which its Loans are to be made and
maintained, or in the case of any Bank that is not an original party to this Agreement, the “Lending Office” of such Bank as
designated in the notice of assignment delivered by the assignor and the assignee to the Borrower and the Administrative Agent
pursuant to Section 12.06(b), or in any case such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from
time to time specify to the Administrative Agent and the Borrower as the office by which its Loans are to be made and maintained.
“Applicable Margin” shall mean the rate per annum set forth below in the relevant chart based upon the Consolidated Net
Indebtedness to Consolidated EBITDA Ratio as of the last day of the most recently concluded period of four consecutive fiscal
quarters of the Borrower as set forth in the then most recent certificate delivered pursuant to Section 8.07(e); provided that, if the
Borrower shall fail to deliver such certificate on the date required pursuant to said Section 8.07(e), the Applicable Margin shall be
determined as if said ratio were greater than 4.00 to 1 until such certificate is delivered, whereupon the Applicable Margin shall be
determined on the basis of such certificate:
(i) the chart in this clause (i) shall apply at all times unless the Trigger Event has not occurred by the date that is 24 months after the
Closing Date, in which case the chart in clause (ii) below shall apply from and after such date:
Rate
Consolidated Net Indebtedness to Consolidated EBITDA Ratio
Greater than 4.00 to 1.00
At any time prior to the Relevant Margin Date
At any time on and after the Relevant Margin Date
Greater than 3.50 to 1.00 but less than or equal to 4.00 to 1.00
Greater than 3.00 to 1.00 but less than or equal to 3.50 to 1.00
Greater than 2.50 to 1.00 but less than or equal to 3.00 to 1.00
Less than or equal to 2.50 to 1.00
Credit Agreement
2
3.500%
4.000%
3.250%
3.000%
2.000%
1.625%;
or
(ii) the chart in this clause (ii) shall apply on and after the date that is 24 months after the Closing Date if the Trigger Event has not
occurred by the date that is 24 months after the Closing Date:
Rate
Consolidated Net Indebtedness to Consolidated EBITDA Ratio
Greater than 4.00 to 1.00
At any time prior to the Relevant Margin Date
At any time on and after the Relevant Margin Date
Greater than 3.50 to 1.00 but less than or equal to 4.00 to 1.00
Greater than 3.00 to 1.00 but less than or equal to 3.50 to 1.00
Greater than 2.50 to 1.00 but less than or equal to 3.00 to 1.00
Less than or equal to 2.50 to 1.00
4.000%
4.500%
3.750%
3.500%
2.500%
2.125%
“Asset Collateral” shall mean the Property referred to in the Security Documents which is or is intended to be subject to
any Lien in favor of the Collateral Agent, including any additional Property required to be pledged pursuant to Sections 9.02(c), 9.02
(d) and 9.09(xvi).
“Asset Pledgors” shall mean those Persons listed on Schedule X hereto which are pledging Asset Collateral, and any other
Persons required to pledge Asset Collateral pursuant to Sections 9.02(c), 9.02(d) and 9.09(xvi).
“Asset Sale” shall mean any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or
dispositions) by the Borrower or any of its Subsidiaries, including any disposition by means of a merger, consolidation or similar
transaction or any
Credit Agreement
3
issuance of securities of (each referred to for the purposes of this definition as a “disposition”), (i) all or substantially all the Property
of any division or line of business of the Borrower or any of its Subsidiaries, (ii) accounts receivable (whether or not in the ordinary
course of business of the Borrower or such Subsidiary) or (iii) any other Property of the Borrower or any of its Subsidiaries (other
than Property specified in clauses (i) or (ii) above and other than an Equity Issuance) outside the ordinary course of business of the
Borrower or such Subsidiary; provided that a merger or consolidation expressly permitted pursuant to Section 9.01 will not be an
Asset Sale; and provided further that (except for purposes of Section 9.02(c)) the following dispositions will not be Asset Sales: (x) a
disposition by the Borrower to a Guarantor or by a Subsidiary of the Borrower to the Borrower or another Subsidiary of the Borrower
(other than a Non-strategic Subsidiary) so long as the consideration received therefor at the time of such disposition is at least equal to
the fair market value of the Property so disposed, (y) solely for purposes of Section 9.02, a disposition of any Property that constitutes
a payment permitted under Section 9.07(b) and (z) a disposition of any Property (whether in one or a series of related transactions)
having an aggregate fair market value not in excess of $1,000,000 if the aggregate fair market value of all dispositions that are made
during any fiscal year and are not Asset Sales by reason of this clause (z) does not exceed $10,000,000. Each Sale-Leaseback
Transaction will be deemed to be an Asset Sale unless excluded from the definition of such term by clauses (x), (y) or (z) in the
preceding sentence.
“Assignee” shall have the meaning assigned to such term in Section 12.06.
“Assignment and Assumption Agreement” shall mean an agreement in substantially the form of Exhibit I hereto.
“Attributable Debt” shall mean, with respect to a Sale-Leaseback Transaction, as of the date of determination, the greater
of (a) the fair market value of the Property being sold or transferred and (b) the present value (discounted at the interest rate implicit
in the terms of the lease, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of
the lease included in such transaction (including any period for which such lease has been extended).
“Average Life” shall mean, with respect to any Indebtedness or Redeemable Capital Stock as of the date of determination,
the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the successive
dates of each remaining scheduled principal payment with respect to such Indebtedness or redemption or similar payment with respect
to such stock, multiplied by the respective amounts of such payments, by (ii) the sum of all such payments.
“Bank” shall have the meaning assigned to such term in the introduction hereto.
“Borrowing” shall mean the borrowing of the Loans hereunder.
“Business Day” shall mean any day (a) on which commercial banks are not authorized or required to close in New York,
New York or Mexico City, Mexico and (b) that is also a day on which dealings in Dollar deposits are carried out in the London
interbank market.
Credit Agreement
4
“Capital Expenditures” shall mean, for any period, expenditures (including, without limitation, the aggregate amount of
Capital Lease Obligations required to be paid during such period) Incurred by any Person to acquire or construct fixed assets, plant
and equipment (including, without limitation, renewals, improvements, replacements, repairs and maintenance) during such period,
that are or would be required to be capitalized on the balance sheet of such Person in accordance with GAAP.
“Capital Lease Obligations” shall mean, at any time, for any Person, all obligations of such Person to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be
accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of
such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.
“Cash Equivalents” shall mean any of the following, to the extent owned free and clear of all Liens (other than ordinary
set-off rights): (a) readily marketable direct obligations of the United States or Mexico, or of any agency or instrumentality thereof, or
obligations guaranteed as to principal and interest by the United States or Mexico, or of any agency thereof, in each case maturing not
more than 90 days from the date of acquisition thereof; (b) certificates of deposit issued by any bank or trust company organized
under the laws of the United States or any state thereof and having capital, surplus and undivided profits of at least $500,000,000 and
a rating with respect to its public, long-term, unsecured, unsubordinated debt securities of not less than “A” by S&P or “A2” by
Moody’s, maturing not more than 90 days from the date of acquisition thereof; (c) certificates of deposit issued by any of Nacional
Financiera, S.N.C., Banco Nacional de Comercio Exterior, S.N.C., Banco Nacional de Sevicios Públicos, S.N.C. or any other
development bank controlled by Mexico; and (d) banker’s acceptances, certificates of deposit or commercial paper issued by a
Mexican bank whose local or foreign currency rating is in the highest rating category of a credit rating agency of international
recognition or commercial paper rated “A-1” or better or “P-1” by S&P or Moody’s, respectively, in each case maturing not more
than 90 days from the date of acquisition thereof.
“Change in Control” shall mean (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any
Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange
Commission thereunder as in effect on the date hereof), of a Controlling Share of the Voting Stock of the Borrower; or (b) the
acquisition of direct or indirect Control of the Borrower by any Person or group, except in the case of (a) and (b), one or more of the
members of management (including directors and alternate directors) of the Borrower on the Closing Date and their respective family
members (by blood or marriage) from time to time.
“Closing Date” shall mean the date on which the Administrative Agent notifies the Borrower that the conditions specified
in Sections 6.01 and 6.02 have been satisfied or have been deemed satisfied.
Credit Agreement
5
“Collateral” shall mean the Equity Collateral, the Asset Collateral and all other Property referred to in any of the Security
Documents from time to time which is or is intended to be subject to any Lien in favor of the Collateral Agent.
“Collateral Agency Agreement” shall mean the Collateral Agency Agreement, to be dated on or prior to the Closing Date,
among the Borrower, the Administrative Agent, the Collateral Agent, Citibank, N.A., as administrative agent under the Revolving
Facility, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as administrative agent under
the Peso Facility, the Asset Pledgors from time to time and the Equity Pledgors from time to time, in substantially the form attached
hereto as Exhibit G.
“Collateral Agent” shall mean Banco Nacional de México, S.A., Institución de Banca Múltiple, Integrante del Grupo
Financiero Banamex, División Fiduciaria, as collateral agent for the Secured Parties, together with its successors under the Collateral
Agency Agreement.
“Commitment” shall mean, with respect to each Bank, the commitment of such Bank to make the Loans hereunder. The
amount of each Bank’s Commitment is set forth on Schedule I hereto. The aggregate amount of the Banks’ Commitments is
$445,749,991.78.
“Commitment Termination Date” shall mean the date two weeks after the date of this Agreement, provided, that if such
day is not a Business Day, the Commitment Termination Date shall be the immediately following Business Day.
“Communications” shall have the meaning assigned to such term in Section 12.02(b).
“Confidential Information” shall mean information that the Borrower or any of its Subsidiaries furnishes to the
Administrative Agent or any Bank on a confidential basis by informing the recipient that such information is confidential or marking
such information as such, but does not include any such information that (i) is or at the time of disclosure by such Person has become
generally available to the public (other than as a result of any action by the Administrative Agent or a Bank in violation of Section
12.17) or (ii) is or at the time of disclosure by such Person has become available to such Person from a source other than the Borrower
or any of its Subsidiaries, unless such Person has actual knowledge that (a) such source is bound by a confidentiality agreement or (b)
such information has been previously furnished to such Person on a confidential basis.
“Consolidated EBITDA” shall mean, for any period, the sum (without duplication), determined on a consolidated basis for
the Borrower and its Consolidated Subsidiaries, of operating income for such period before depreciation and amortization for such
period determined in accordance with GAAP.
“Consolidated Indebtedness” shall mean, at any time, the aggregate outstanding principal amount of Indebtedness at such
time of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis (without duplication) in accordance with
GAAP.
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“Consolidated Interest Expense” shall mean, for any period, interest expense of the Borrower and its Consolidated
Subsidiaries for such period, as determined in accordance with GAAP, including without limitation the interest portion of payments
under Capital Lease Obligations and any capitalized interest.
“Consolidated Net Indebtedness” shall mean, at any time, (i) Consolidated Indebtedness at such time, minus (ii) the Net
Cash Position at such time.
“Consolidated Net Indebtedness to Consolidated EBITDA Ratio” shall mean, at any time, the ratio of (i) Consolidated Net
Indebtedness at such time to (ii) Consolidated EBITDA for the then most recently concluded period of four consecutive fiscal
quarters of the Borrower.
“Consolidated Net Indebtedness to Total Capitalization Ratio” shall mean, at any time, the ratio of (i) Consolidated Net
Indebtedness at such time to (ii) Total Capitalization at such time.
“Consolidated Net Worth” shall mean, as of any date, the consolidated stockholders’ equity at such date of the Borrower
and its Consolidated Subsidiaries, determined as of such date in accordance with GAAP.
“Consolidated Subsidiary” shall mean, as to any Person, any Subsidiary of such Person whose accounts are, or are required
to be, consolidated with those of such Person (without duplication) in accordance with GAAP.
“Consolidated Total Assets” shall mean, at any time, the total assets at such time of the Borrower and its Consolidated
Subsidiaries, as determined on a consolidated basis in accordance with GAAP.
“Control” shall mean the possession, directly or indirectly, of the power to direct or cause to the direction of the
management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.
“Controlling Share” shall mean such portion of the Voting Stock of the Borrower as would enable the beneficial owner to
elect a majority of the members of the board of directors of the Borrower at a meeting called to elect directors, unless at any time in
the future the estatutos sociales or other constituent documents of the Borrower, or applicable laws, would require that a majority of
such board of directors be elected by a plurality of the votes cast at a meeting of the stockholders called to elect directors, in which
case “Controlling Share” shall mean capital stock representing at least 35% of all votes entitled to be cast at such meeting for such
election.
“Corfuerte” shall mean Corfuerte, S.A. de C.V., a Mexican corporation.
“Covered Taxes” shall mean all present and future taxes, duties, levies, imposts, deductions, charges or withholdings
whatsoever with respect to any amount payable on or in
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respect of this Agreement, the Loans, the Notes or any other Loan Documents, and all interest, penalties and similar amounts with
respect thereto, now or hereafter imposed, assessed, levied or collected by Mexico or any other jurisdiction from which any amount
payable hereunder is made, or any political subdivision or taxing authority thereof or therein, or any organization or federation of
which any of the foregoing may be a member or associated, excluding, however, income, real property, franchise or similar taxes
imposed on the Administrative Agent or a Bank by a jurisdiction as a result of the Administrative Agent or such Bank being
organized under the laws of such jurisdiction or being a resident of such jurisdiction for tax purposes, or by virtue of its having a
permanent establishment in such jurisdiction to which income under this Agreement is attributable or its Applicable Lending Office
being located in such jurisdiction.
“Debt Service” shall mean, for any period, the sum, without duplication, of (i) interest expense to third parties of the
Borrower and its Subsidiaries on an individual basis paid during such period and (ii) all principal paid during such period in respect of
Indebtedness to third parties of the Borrower and its Subsidiaries on an individual basis (excluding any such principal amount (A)
paid with the proceeds of any new Indebtedness or (B) paid pursuant to any mandatory or voluntary prepayment under this
Agreement or the Other Facilities (other than mandatory prepayments under this Agreement and the Other Facilities made pursuant to
Section 2.07(c)).
“Default” shall mean an Event of Default specified in Section 10 or an event that with the giving of notice or lapse of time
or both would become an Event of Default.
“Derivatives Liabilities” shall mean, with respect to any Person, all obligations of such Person in respect of any Hedging
Agreement.
“Desc Entities” shall mean the Guarantors, the Asset Pledgors, the Equity Pledgors and the Encumbered Entities (that are
also Subsidiaries of the Borrower) from time to time.
“Dividend” shall mean any dividend or other distribution (whether in cash, securities or other Property) on or in respect of
capital stock or other interests, if any, representing ownership rights of the Borrower or any of its Subsidiaries (other than a dividend
payable solely in such stock or interests other than Redeemable Capital Stock), and any purchase, redemption, repurchase or sinking
fund payment on or with respect to such stock or interests (including with respect to options and warrants in connection with such
stock or interests).
“Dollars” and “$” shall mean lawful currency of the United States.
“Domestic Business Day” shall mean any day except a Saturday, Sunday or other day on which commercial banks in New
York, New York are authorized or required by law to close.
“EDC” shall mean Export Development Canada, a Crown corporation established by an Act of the Parliament of Canada.
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“Encumbered Entities” shall mean those Persons listed in Schedule XI hereto and any additional Persons the capital stock
or other interests, if any, evidencing ownership rights owned by the Borrower and/or its Subsidiaries are required to be pledged
pursuant to Sections 8.15, 9.02(c), 9.02(d) and 9.09(xvi).
“Environmental Laws” shall mean any law, rule, regulation, order, statute, ordinance, code, writ, judgment, injunction,
decree or agreement of the Borrower or any of its Subsidiaries issued, promulgated or entered into by or with any Governmental
Authority relating to pollution or protection of the environment or the treatment, storage, disposal, release, threatened release or
handling of hazardous materials, including, without limitation, the Mexican General Law of Ecological Balance and Environmental
Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente), technical rules (normas técnicas) thereunder, and any
other Mexican local laws, rules and regulations related to environmental matters and any specific agreements of the Borrower or any
of its Subsidiaries entered into with any competent authorities which include commitments related to environmental matters.
“Equity Collateral” shall mean all capital stock and other interests, if any, evidencing ownership rights owned by the
Borrower and/or its Subsidiaries in the Encumbered Entities that are referred to in the Security Documents and are or are intended to
be subject to any Lien in favor of the Collateral Agent; provided, that the Equity Collateral with respect to the Encumbered Entities
listed in 8 through 14 of Schedule XI hereto shall be subject to the limitation in the IFC Support Agreements that pledges not be
granted on at least 50% of the interest of the Borrower’s direct or indirect interest in such Person plus one share.
“Equity Issuance” shall mean, with respect to any Person, any sale, lease, transfer or other disposition (or series of related
sales, leases, transfers or dispositions) by such Person, including any disposition by means of a merger, consolidation or similar
transaction or any issuance of securities of, or grant of any warrant, option or other right to purchase, lease or otherwise acquire (each
referred to for the purposes of this definition as a “disposition”), of any capital stock or other interests evidencing ownership rights of
such Person.
“Equity Pledgors” shall mean the Borrower and those Subsidiaries of the Borrower which are pledging Equity Collateral
from time to time.
“Eurocurrency Liabilities” shall have the meaning assigned to that term in Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
“Eurodollar Rate Reserve Percentage” shall mean, with respect to any Bank for any Interest Period with respect to a Loan
made by such Bank, the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so
applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor)
for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal
reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a
term equal to such Interest Period.
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9
“Event of Default” shall have the meaning assigned to such term in Section 10.
“Excess Cash” shall mean, for any period, (i) the sum, without duplication, of (A) Consolidated EBITDA for such period,
(B) the change (positive or negative), if any, in Working Capital, from the opening of business on the first day, to the close of
business on the last day, of such period, (C) interest income from third parties received by the Borrower and its Subsidiaries on a
consolidated basis during such period, (D) any ordinary course operating income received in cash during such period determined on a
consolidated basis for the Borrower and its Consolidated Subsidiaries that is not otherwise reflected in Consolidated EBITDA, but is
otherwise treated as income during such period in accordance with GAAP, (E) any extraordinary income relating to lines of business
of the Company and its Consolidated Subsidiaries received in cash during such period determined on a consolidated basis for the
Borrower and its Consolidated Subsidiaries that is not otherwise reflected in Consolidated EBITDA, but is otherwise treated as
income during such period in accordance with GAAP, and (F) the excess, if any, of the aggregate unrestricted cash balances
(including Cash Equivalents) of the Borrower and its Subsidiaries over the Minimum Cash Balance, at close of business on the last
day prior to the beginning of such period (except to the extent such cash was considered as Excess Cash in the prior year and used to
repay the Loans and the loans outstanding under the Peso Facility), minus (ii) the sum, without duplication, of (A) Capital
Expenditures made by the Borrower and its Subsidiaries and permitted pursuant to Section 9.10 (excluding any Capital Expenditures
referenced in the second proviso of Section 9.10) and Investments of the Borrower and its Subsidiaries permitted pursuant to Section
9.09 made during such period (but only to the extent not paid from Net Available Cash from Asset Sales or from the issuance of
Indebtedness or otherwise financed), (B) taxes and mandatory profit sharing paid by the Borrower and its Subsidiaries on a
consolidated basis during such period, (C) any ordinary course operating expenses paid in cash during such period determined on a
consolidated basis for the Borrower and its Consolidated Subsidiaries that are not otherwise reflected in Consolidated EBITDA, but
are otherwise treated as expenses during such period in accordance with GAAP, (D) any extraordinary expenses relating to lines of
business of the Company and its Consolidated Subsidiaries paid in cash during such period determined on a consolidated basis for the
Borrower and its Consolidated Subsidiaries that are not otherwise reflected in Consolidated EBITDA, but are otherwise treated as
expenses during such period in accordance with GAAP, (E) Dividends paid by the Borrower and it Subsidiaries to third parties during
such period (other than those made by a disposition excluded from the definition of Asset Sale by clause (y) of the second proviso
thereof) and (F) Debt Service for such period. For purposes of this definition, calculations of Excess Cash shall be made in current
Pesos (not constant Pesos).
“Excluded Debt” shall mean (i) any Refinancing Indebtedness Incurred by the Borrower or any of its Subsidiaries to
Refinance third-party financial Indebtedness of the Borrower or such Subsidiary outstanding on the Closing Date (other than under
the UDI Bonds, the Guaranteed Notes or the Facilities) (provided that the Refinancing Indebtedness of the Indebtedness set forth in
Schedule XIV hereto may be Incurred by any Subsidiary of Spicer, S.A.
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10
de C.V., all or substantially all of the capital stock of which is owned by Spicer, S.A. de C.V.), (ii) any Indebtedness Incurred by the
Borrower (including, without limitation, in connection with an exchange offer) that refinances any of the existing Indebtedness of the
Borrower under (A) the UDI Bonds or (B) the Guaranteed Notes, but only to the extent the aggregate principal amount of such
Indebtedness (or if Incurred with original issue discount, the aggregate accreted value) does not exceed the principal amount of the
UDI Bonds or the Guaranteed Notes, as the case may be, that is being so refinanced, no payments in respect of such Indebtedness are
due and payable prior to 66 months after the Closing Date, the refinancing (other than in the case of an exchange offer) takes place no
earlier than six months prior to the stated maturity date of the UDI Bonds or the Guaranteed Notes, as the case may be, no Default or
Event of Default would result from such refinancing, such Indebtedness shall rank pari passu with, or, by its terms or the terms of any
agreement or instrument pursuant to which it is outstanding, shall expressly be made subordinate in right of payment to, the remaining
Loans and, to the extent the proceeds from such refinancing are not promptly applied to refinance the UDI Bonds or the Guaranteed
Notes, as the case may be, such proceeds are deposited into an escrow account or a similar arrangement solely to be used for the
refinancing of the UDI Bonds or the Guaranteed Notes, as the case may be, (iii) any Indebtedness Incurred under the Revolving
Facility, (iv) short-term Indebtedness of the Borrower and its Subsidiaries issued under a Permitted Working Capital Facility to any
third party (including under the Revolving Facility) in an amount not to exceed $142,000,000 in the aggregate from time to time
outstanding, (v) Indebtedness Incurred by the Borrower or a Subsidiary of the Borrower that is an Investment therein by a Subsidiary
of the Borrower or the Borrower permitted by Section 9.09 (other than Section 9.09(xii)) and (vi) Permitted Debt.
“Facilities” shall mean this Agreement and the Other Facilities.
“Federal Funds Rate” shall mean, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of
1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business
Day next succeeding such day, provided, that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding
Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds
Rate for such day shall be the average (rounded upward, if necessary, to the nearest 1/100th of 1%) of the quotations for such day for
such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.
“GAAP” shall mean generally accepted accounting principles in Mexico.
“Governmental Authority” shall mean any nation or government, any state or municipality or other political subdivision
thereof, any entity exercising executive, legislative, judicial, monetary, regulatory or administrative functions of or pertaining to
government and any branch of power of any state.
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“Guarantee” by any Person shall mean any obligation, contingent or otherwise, of such Person directly or indirectly
guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any aval and any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part), provided, that the term “Guarantee” shall not include endorsements for collection or
deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.
“Guaranteed Notes” shall mean the $150,000,000 8 3/4% Guaranteed Notes due 2007, issued by the Borrower (as successor
by merger to Dine, S.A. de C.V.) pursuant to that certain indenture dated October 17, 1997 with Deutsche Bank Trust Company
Americas (formerly Bankers Trust Company) as trustee.
“Guarantors” shall mean each of the Subsidiaries of the Borrower listed on Schedule VII hereto and each Subsidiary of the
Borrower that may from time to time become party to the Guaranty Agreement as and to the extent required by Section 8.14 or
otherwise in accordance with Section 9.17.
“Guaranty Agreement” shall mean the agreement executed and delivered by each Guarantor in substantially the form of
Exhibit B hereto, as modified, supplemented or amended from time to time pursuant to the terms hereof or thereof.
“Hedging Agreement” shall mean any agreement effecting any rate swap transaction, basis swap, forward rate transaction,
commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross currency rate
swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing
transactions) or any combination of the foregoing transactions.
“IFC Investment Agreement” shall mean the Amended and Restated Investment Agreement (Investment Number 7251),
dated as of December 14, 2001, among various Subsidiaries of the Borrower, as borrowers, and the International Finance
Corporation, as amended by the 1996 Omnibus Amendment, Release and Assumption Agreement (Investment Number 7251) dated
as of January 28, 2003.
“IFC Loan Agreement” shall mean the Amended and Restated Loan Agreement (Investment Number 9531), dated as of
December 14, 2001, among various Subsidiaries of the Borrower, as borrowers, and the International Finance Corporation, as
amended by the 2000 Omnibus Amendment, Release and Assumption Agreement (Investment Number 9531) dated as of January 28,
2003.
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“IFC Support Agreements” shall mean (i) the Amended and Restated Project Funds, Financial Support and Share Retention
Agreement (Investment Number 9531), dated as of December 14, 2001, among the Borrower, various Subsidiaries of the Borrower
and the International Finance Corporation, as amended by the 2000 Omnibus Amendment, Release and Assumption Agreement
(Investment Number 9531) dated as of January 28, 2003 and (ii) the Amended and Restated Project Funds, Financial Support and
Share Retention Agreement (Investment Number 7251), dated as of December 14, 2001, among the Borrower, various Subsidiaries of
the Borrower and the International Finance Corporation, as amended by the 1996 Omnibus Amendment, Release and Assumption
Agreement (Investment Number 7251) dated as of January 28, 2003.
“IMSS” shall mean Instituto Mexicano del Seguro Social.
“Incur” shall mean issue, assume, guarantee, incur or otherwise become liable for. The terms “Incurs”, “Incurred” and
“Incurrence” have correlative meanings. The accretion of principal of a non-interest bearing or other discount security shall be
deemed the Incurrence of Indebtedness.
“Indebtedness” shall mean, with respect to any Person (without duplication): (a) all indebtedness of such Person for
borrowed money or for the deferred purchase price of Property or services (other than trade payables to the extent that they are not
accruing interest according to the terms of such obligations and which are incurred in the ordinary course of such Person’s business
and either are not overdue by more than 90 days or are being contested in good faith); (b) all obligations of such Person evidenced by
notes, bonds, debentures or other similar instruments (other than factoring transactions without recourse to such Person); (c) all
obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to Property
acquired by such Person (other than trade payables and other accrued current liabilities to the extent that they are not accruing interest
at any time according to the terms thereof and which are incurred in the ordinary course of such Person’s business and either are not
overdue by more than 90 days or are being contested in good faith); (d) all Capital Lease Obligations of such Person; (e) all
obligations, contingent or otherwise, of such Person in respect of acceptances, draft discounts (with recourse to such Person),
refinanced letters of credit or similar extensions of credit (excluding trade payables to the extent excluded from clause (a) above); (f)
all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any mandatorily
redeemable stock (including Redeemable Capital Stock) (except withdrawal rights of holders of stock representing the variable
portion of such Person’s capital stock), valued at the greater of (i) its voluntary or involuntary liquidation preference and (ii) the
aggregate amount payable therefor upon purchase, redemption, defeasance or payment therefor; (g) where such Person is the
Borrower or a Subsidiary of the Borrower who has entered into a factoring transaction, the aggregate amount of accounts receivable
owed to such Person by a Subsidiary or by the Borrower, as applicable, in respect of such factoring transaction immediately prior to
such Person entering into such factoring transaction; (h) all Indebtedness of other Persons referred to in clauses (a) through (g) above
or clauses (i) or (j) below Guaranteed by such Person; (i) all Indebtedness referred to in clauses (a) through (h) above or clause (j)
below secured by (or for which the holder of such Indebtedness
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13
has an existing right, contingent or otherwise, to be secured by) any Lien on Property or revenues of such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness; and (j) the credit exposure of such Person in respect
of Derivatives Liabilities (other than, for all purposes hereunder except Section 10.04, Derivatives Liabilities that are (i) entered into
in the ordinary course of business to hedge or mitigate risks to which such Person is exposed in the conduct of its business or the
management of its liabilities and (ii) not for speculative purposes). In determining the Indebtedness of the Borrower or any Subsidiary
of the Borrower in respect of Derivatives Liabilities for purposes of Section 10.04, the “principal amount” of any Derivatives
Liability at any time shall be the aggregate amount (giving effect to any netting provisions) that the Borrower or such Subsidiary
would be required to pay under the agreement governing such Derivatives Liability if such agreement were terminated at such time.
“INFONAVIT” shall mean Instituto del Fondo Nacional de la Vivienda para los Trabajadores.
“Interest Coverage Ratio” shall mean, for any period, the ratio of (i) Consolidated EBITDA for such period to (ii)
Consolidated Interest Expense for such period.
“Interest Period” shall mean, with respect to the Loans, the period commencing on the Closing Date or the last day of the
preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. Except
as provided in the preceding sentence, the duration of each such Interest Period shall be one or three months as the Borrower may, by
notice received by the Administrative Agent not later than 11:00 a.m. (New York time) on the third Business Day prior to the first day
of such Interest Period, select; provided, however, that:
(i) any Interest Period that would otherwise extend beyond any Principal Payment Date shall end on such Principal
Payment Date;
(ii) each Interest Period that begins on the last Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate
subsequent calendar month; and
(iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of
such Interest Period shall be extended to occur on the next succeeding Business Day; provided that, if such extension would cause the
last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the
next preceding Business Day;
provided, that the term “Interest Period” shall include any period selected by the Administrative Agent from time to time in
accordance with the definition of “Post-Default Rate”.
“Investment” shall mean, for any Person: (a) the acquisition (whether for cash, Property, services, securities or otherwise)
of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any
agreement to make any
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14
such acquisition (including, without limitation, any “short sale” or any sale of any securities at a time when such securities are not
owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or other extension of credit
to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or
otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not
exceeding 90 days representing the purchase price of goods or services sold by such Person in the ordinary course of business); (c) the
entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person
and (without duplication) any amount committed to be advanced, loaned or extended to such Person; (d) the entering into of any
Hedging Agreement; or (e) the making of any contributions of capital to any other Person.
“Joint Lead Arrangers” shall mean Citigroup Global Markets Inc. and BBVA Bancomer, S.A., Institución de Banca
Múltiple, Grupo Financiero BBVA Bancomer.
“Joint Venture Entity” shall mean any Subsidiary of the Borrower, the capital stock or other ownership interests, if any, of
which are not all or substantially all owned directly or indirectly by the Borrower.
“Lead Arranger” shall mean Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa.
“LIBO Rate” shall mean, for any Interest Period, the offered rate for deposits in Dollars for a period equal to or nearest the
number of days in such Interest Period which appears on the Telerate Page 3750 as of approximately 11:00 a.m., London time, on the
date two Business Days prior to the first day of such Interest Period, provided, that (i) if such rates do not appear on such Telerate
Page 3750, the “LIBO Rate” shall mean, for any Interest Period, the offered rate for deposits in Dollars for a period equal to or
nearest the number of days in such Interest Period which appears on the Reuters Screen LIBO Page, and (ii) if such rate or rates do
not appear on either the Telerate Page 3750 or Reuters Screen LIBO Page, the “LIBO Rate” shall mean, with respect to each day
during such Interest Period, the rate per annum equal to the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the
respective rates notified to the Administrative Agent by each Reference Bank as the rate at which Dollar deposits are offered to such
Reference Bank by prime banks at or about 11:00 a.m., London time, two Business Days prior to the beginning of such Interest
Period in the London interbank market for delivery on the first day of such Interest Period for a period approximately equal to the
number of days in such Interest Period and in an amount comparable to the principal amount of the Loans.
“Lien” shall mean any mortgage, lien, pledge, assignment, charge, encumbrance, preference, priority or other security
interest of any kind or nature whatsoever, or any preferential arrangement that has the practical effect of creating a security interest
(including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed
under any recording or notice statute, and any lease having substantially the same effect as any of the foregoing.
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15
“Loan” shall mean the loan by a Bank pursuant to Section 2.01.
“Loan Documents” shall mean this Agreement, the Notes, the Guaranty Agreement, the Security Documents and the other
documentation required hereby or thereby to be executed and delivered by the Borrower or any Desc Entity from time to time
pursuant to the terms hereof or thereof, in each case as modified, supplemented or amended from time to time pursuant to the terms
hereof or thereof.
“Majority Banks” shall mean (i) at any time prior to the Closing Date, Banks having Commitments representing more than
66 2/3% of the aggregate Commitments and (ii) at any time on or after the Closing Date, Banks having Loans representing more than
66 2/3% of the aggregate outstanding principal amount of the Loans at such time.
“Material Adverse Effect” shall mean a material adverse effect on (a) the business, condition (financial or otherwise),
operations, performance, Properties or prospects of the Borrower or of the Borrower and its Consolidated Subsidiaries taken as a
whole, (b) the ability of the Borrower or any Desc Entity to perform its respective obligations under the Loan Documents to which it
is a party, or (c) the ability of the Administrative Agent, the Collateral Agent, or any Bank to enforce, or the validity or enforceability
of, the obligations of the Borrower or any Desc Entity under each Loan Document to which it is a party.
“Material Debt” shall have the meaning assigned to such term in Section 10.04.
“Maximum Reinvestment Amount” shall mean (i) for each of the first three Agreement Years, $20,000,000 per Agreement
Year and (ii) thereafter, $25,000,000 per Agreement Year; provided that the cumulative Maximum Reinvestment Amounts for the
first three Agreement Years shall in no event exceed $50,000,000; and provided further that, on and following the date on which the
Borrower delivers the second consecutive certificate pursuant to Section 8.07(e) (other than in respect of the last quarter of 2005) that
shows the Consolidated Net Indebtedness to Consolidated EBITDA Ratio, in each case as of the last day of the most recently
concluded period of four consecutive fiscal quarters of the Borrower, to be equal to or less than 3.75 to 1.00, the Maximum
Reinvesment Amount shall be $25,000,000 per Agreement Year (and the first proviso of this definition shall not apply).
“Mexican Bank” shall mean a bank incorporated under the laws of Mexico and authorized to carry out the business of
banking in Mexico by the Ministry of Finance under the Mexican Law of Credit Institutions (Ley de Instituciones de Crédito).
“Mexico” shall mean the United Mexican States.
“Minimum Cash Balance” shall mean cash and Cash Equivalents of the Borrower and its Subsidiaries in an aggregate
amount of $50,000,000.
“Ministry of Finance” shall mean the Secretaría de Hacienda y Crédito Público of Mexico.
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16
“Moody’s” shall mean Moody’s Investors Service, Inc. and its successors.
“Net Asset Sale Proceeds” shall mean (A) Net Available Cash from any Asset Sale by or on behalf or for the account of the
Borrower or any of its Subsidiaries other than to the extent applied (or committed to be applied pursuant to a definitive legally
binding agreement with a Person that is not an Affiliate of the Borrower or any of its Subsidiaries) to replace or repair Property of the
Borrower or its Subsidiaries (other than cash, Cash Equivalents or securities) used in one or more lines of business in which the
Borrower or any of its Subsidiaries is engaged as of the date thereof within 90 days of receipt (but only to the extent such Property is
owned by the Borrower or any of its Subsidiaries), and (B) any insurance proceeds received by or on behalf or for the account of the
Borrower or any of its Subsidiaries (including to the extent received by the Collateral Agent in respect of the Collateral) in respect of
any Property of the Borrower or such Subsidiary to the extent not applied (or committed to be applied in the manner described in
clause (A) above) to replace or repair such Property within 90 days of receipt; provided that, to the extent any Net Available Cash
referred to in clauses (A) or (B) is committed to be applied within such 90-day period, such Net Available Cash must be so applied
within 180 or 270 days of receipt, respectively. For purposes of the determination of Net Asset Sale Proceeds, the term Asset Sale
shall not include Receivables Sales.
“Net Available Cash” shall mean with respect to any transaction involving an Asset Sale, Incurrence of Indebtedness or
Equity Issuance, the proceeds thereof received in the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations with respect to
the Indebtedness are financed or sold with recourse to the Borrower or any of its Subsidiaries) net of (only and without duplication)
(a) customary brokerage commissions and other reasonable and documented fees and expenses (including fees and expenses of
counsel, accountants, lenders, investment bankers and any placement agent fee or underwriter discount relating to the sale of
securities) incurred in connection with such transaction; and (b) in the case of an Asset Sale, (i) provisions for all taxes payable as a
result of such Asset Sale after taking into account any reduction in tax liability due to available tax credits or deductions and any tax
sharing arrangements which are directly related to such Asset Sale; (ii) payments made to retire Indebtedness or any other obligation
(other than Indebtedness or any other obligation owed to the Borrower or any Subsidiary of the Borrower) outstanding at the time of
such Asset Sale to the extent (A) such Indebtedness or other obligation is secured by a Lien on Property sold or transferred in such
Asset Sale, (B) such Indebtedness or obligation is required to be repaid upon such disposition and (C) the amounts so paid are
properly attributable to such transaction or to the Property that is the subject thereof; and (iii) appropriate amounts provided by the
Borrower or any of its Subsidiaries as a reserve, in accordance with GAAP, against any liabilities associated with the Property sold
and retained by the Borrower or any of its Subsidiaries after such Asset Sale, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset
Sale. If there shall occur any reduction in the amount of taxes payable referred to in clause (b)(i) of the preceding sentence or of any
reserve referred to in clause (b)(iii) of the preceding sentence, the amount of such reduction (to the extent deducted pursuant to such
clause (b)(i) or clause (b)(iii)) shall then be deemed to be Net Available Cash.
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“Net Cash Position” shall mean, at any time, an amount equal to the lesser of:
(i) the aggregate amount of cash and Cash Equivalents owned at such time by the Borrower and its Consolidated
Subsidiaries determined on a consolidated basis (without duplication); and
(ii) $50,000,000.
“Net Debt Issuance Proceeds” shall mean the Net Available Cash from any Incurrence of Indebtedness (other than
Excluded Debt) by the Borrower or any of its Subsidiaries.
“Net Equity Issuance Proceeds” shall mean (i) the Net Available Cash from any Equity Issuance by the Borrower and (ii)
the Net Available Cash from any Equity Issuance by any Subsidiary of the Borrower (other than (a) an Equity Issuance to the
Borrower or any of its Subsidiaries in connection with an Investment by the Borrower or any of its Subsidiaries in such Subsidiary
that is otherwise permitted by Section 9.09 and (b) in connection with Permitted Joint Ventures).
“Net Proceeds” shall mean any Net Asset Sale Proceeds, Net Equity Issuance Proceeds and Net Debt Issuance Proceeds.
“Non-strategic Subsidiaries” shall mean Aquatecnología, S.A. de C.V., Bioquimex Natural, S.A. de C.V., Bujías
Mexicanas, S.A. de C.V., Comercializadora Aquanova, S.A. de C.V., Fenoquimia, S.A. de C.V., Hayes Wheels de México, S.A. de
C.V., Industria Eléctrica Automotriz, S.A. de C.V., Nutrientes Aquanova, S.A. de C.V. and Bosques de las Lomas, S.A. de C.V., each
a Mexican corporation, and each of their respective Subsidiaries, unless at any time such Person or such Subsidiary is a Principal
Subsidiary.
“Note” shall have the meaning assigned to such term in Section 2.05.
“Notice of Borrowing” shall have the meaning assigned to such term in Section 4.05.
“Other Facilities” shall mean the Peso Facility and the Revolving Facility.
“Other Applicable Taxes” shall have the meaning assigned to such term in Section 5.05(e).
“Participant” shall have the meaning assigned to such term in Section 12.06(d).
“Permitted Collateral Liens” shall mean (i) Liens created under the Security Documents and (ii) any Liens described in
Sections 9.03(d), (e), (h) and (m) to the extent not voluntary.
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“Permitted Debt” shall mean (i) the Indebtedness Incurred hereunder, under the Peso Facility and under the other Loan
Documents, (ii) customer deposits and advance payments received from customers for goods, or real property or improvements
thereon, purchased in the ordinary course of business, (iii) Indebtedness under currency, interest rate and commodity agreements,
provided that such agreements (A) are designed solely to protect the Borrower or a Subsidiary against fluctuations in foreign currency
exchange rates, interest rates or commodity prices, as the case may be, and are not for purposes of speculation and (B) shall not
increase the Indebtedness of the Borrower or any of its Subsidiaries outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates, interest rates or commodity prices, as the case may be, or by reason of fees, indemnities or
compensation payable thereunder, (iv) Indebtedness in respect of performance, surety, appeal or return-of-money bonds or other
obligations of a like nature Incurred in the ordinary course of business, and (v) Indebtedness that is permitted to be secured pursuant
to Section 9.03(o).
“Permitted Investments” shall mean: (a) Investments in cash or Cash Equivalents; and (b) Investments in commercial paper
rated A-1 or better or P-1 by S&P or Moody’s, respectively, maturing not more than 90 days from the date of acquisition thereof; in
each case so long as the same provide for the payment of both principal and interest.
“Permitted Joint Venture” shall mean an Equity Issuance by a Subsidiary of the Borrower to a Person that is not the
Borrower or an Affiliate of the Borrower, provided that (i) the Net Available Cash from such Equity Issuance is applied (or
committed to be applied pursuant to a definitive legally binding agreement with a Person that is not an Affiliate of the Borrower or
any of its Subsidiaries) by such Subsidiary to make a Capital Expenditure in one or more lines of business in which such Subsidiary is
engaged as of the date thereof within 90 days of receipt (but only to the extent such Property is owned by such Subsidiary) and (ii) the
Borrower Controls such Subsidiary after giving effect to the Equity Issuance; provided further that, to the extent any Net Available
Cash is committed to be applied within such 90-day period, such Net Available Cash must be so applied within 180 days of receipt.
“Permitted Liens” shall have the meaning assigned to such term in Section 9.03.
“Permitted Working Capital Facility” shall mean a borrowing facility or facilities, now existing or hereinafter established,
established exclusively for the purposes of funding working capital and providing for (i) the issuance of letters of credit or the
creating of bankers’ acceptances for the benefit of trade creditors in the ordinary course of business or (ii) the making of loans on a
revolving basis. For all purposes hereof, the Revolving Facility shall be deemed a Permitted Working Capital Facility.
“Person” shall mean any individual, corporation, company, voluntary association, partnership, limited liability company,
joint venture, trust, unincorporated organization or Governmental Authority or other entity of whatever nature.
“Peso Facility” shall mean the Peso 1,222,553,307.97 Credit Agreement, to be dated on or prior to the Closing Date,
among the Borrower, the Guarantors, as joint obligors (obligados solidarios), BBVA Bancomer, S.A., Institución de Banca Múltiple,
Grupo Financiero BBVA Bancomer, as administrative agent, the banks party thereto and certain other parties.
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“Pesos” shall mean the lawful currency of Mexico.
“Platform” shall have the meaning assigned to such term in Section 12.02(c).
“Post-Default Rate” shall mean (a) until the end of the Interest Period in existence as of the date of the relevant Event of
Default, a rate per annum which is equal to the Applicable Margin plus 2% per annum plus the LIBO Rate for such Interest Period,
and (b) thereafter a rate per annum which is equal to the Applicable Margin plus 2% per annum plus the LIBO Rate applicable to such
Interest Period or Interest Periods as shall be selected by the Administrative Agent (which Interest Periods shall not be of durations
exceeding one month).
“Principal Payment Date” shall mean each of June 30, 2006, December 31, 2006, June 30, 2007, December 31, 2007, June
30, 2008 and the date that is sixty months after the Closing Date; provided, that if any such date would otherwise fall on a date that is
not a Business Day, the relevant Principal Payment Date shall be the next succeeding Business Day.
“Principal Subsidiary” shall mean, at any time, any Subsidiary of the Borrower having, during any of the four immediately
preceding fiscal quarters of the Borrower, more than 5% of the Consolidated EBITDA for such fiscal quarter; provided that, for the
purposes of this Agreement, each Desc Entity shall in any event be deemed to be a Principal Subsidiary; and provided further that,
solely for purposes of Section 10.06, a Principal Subsidiary shall mean, at any time, the Desc Entities and any Subsidiary of the
Borrower (a) having, during any of the four immediately preceding fiscal quarters of the Borrower, at least 10% of the total sales of
the Borrower and its Consolidated Subsidiaries on a consolidated basis, (b) having, during any of the four immediately preceding
fiscal quarters of the Borrower, at least 10% of the Consolidated EBITDA for such fiscal quarter or (c) having, as at the last day of
any such fiscal quarter, at least 10% of the Consolidated Total Assets as at such day, all determined on the basis of GAAP.
“Process Agent” shall have the meaning assigned to such term in Section 12.11(b).
“Property” of a Person shall mean any property or assets, or interest therein, of such Person.
“Receivables Sales” shall mean sales in the ordinary course of business of accounts receivable in existence and owned by
the Borrower or any of its Subsidiaries at the time of sale; provided that such sales are without recourse to the seller and are made
pursuant to a revolving credit line or lines therefor not exceeding $70,000,000 in the aggregate at any time.
“Redeemable Capital Stock” shall mean any capital stock or other ownership interest (and any warrant, option or other
right to acquire the same) that, either by its terms, by law, by the terms of any security or other interest into which it is convertible or
exchangeable, by agreement or otherwise, is, or upon the happening of an event or passage of time or both would
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20
be, required to be redeemed, purchased or otherwise acquired, including at the option of the holder thereof or counterparty thereof, at
any time prior to the stated maturity of the Loans or to be converted into or exchanged for debt securities or other Indebtedness at any
time prior to any such stated maturity at the option of the holder thereof; provided that Redeemable Capital Stock will not include any
shares representing variable capital stock solely because such shares provide redemption rights that are not materially more onerous
for the obligor than those existing with respect to the Borrower’s variable capital on the date hereof are for the Borrower.
“Reference Banks” shall mean the principal London offices of Citibank, N.A., JPMorgan Chase Bank and Deutsche Bank
AG.
“Refinance” shall mean, in respect of any referenced Indebtedness, to use the proceeds of other Indebtedness, substantially
concurrently with the Incurrence of such other Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to issue other Indebtedness in exchange or replacement for, such referenced Indebtedness. “Refinanced” and “Refinances”
have correlative meanings.
“Refinanced Debt” shall have the meaning assigned to such term in Section 2.01(b).
“Refinancing Indebtedness” shall mean Indebtedness that Refinances any other Indebtedness, provided, however, that (i)
such Refinancing Indebtedness has a final stated maturity no earlier, and an Average Life at the time of such Refinancing no shorter,
than that of the Indebtedness being refinanced, (ii) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred
with original issue discount, an aggregate issue price) that is no greater than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) of the Indebtedness being Refinanced (plus reasonable and customary fees and
expenses, including any premium and defeasance costs, incurred in connection with such Refinancing), (iii) Indebtedness of one
Person may not be Refinanced with Indebtedness of any other Person, (iv) such Refinancing Indebtedness, to the extent it Refinances
Indebtedness that ranks pari passu with the Loans, shall rank pari passu with, or, by its terms or the terms of any agreement or
instrument pursuant to which it is outstanding, shall expressly be made subordinate in right of payment to, the remaining Loans and
(v) such Refinancing Indebtedness, to the extent it Refinances any Indebtedness that is subordinated in right of payment to the Loans,
shall by its terms or the terms of any agreement or instrument pursuant to which it is outstanding expressly be made subordinate in
right of payment to the Loans at least to the extent that the Indebtedness being Refinanced is so subordinated.
“Register” shall have the meaning assigned to such term in Section 12.06(c).
“Relevant Margin Date” shall mean the date on which the certificate required pursuant to Section 8.07(e) in respect of the
last quarter of 2005 is delivered.
“Required Payment” shall have the meaning assigned to such term in Section 4.06.
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“Requirement of Law” shall mean, as to any Person, any statute, law, treaty, rule or regulation or determination, order,
injunction or judgment of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such
Person or any of such Person’s Property or revenues.
“Reuters Screen LIBO Page” shall mean the display designated as page “LIBO” on the Reuter Monitor Money Rates
Service or such other page as may replace the “LIBO” page on that service for the purpose of displaying London interbank offered
rates of major banks.
“Revolving Facility” the $112,000,000 Revolving Loan and Letter of Credit Agreement, dated as of the date hereof, among
the Borrower, Citibank, N.A., as administrative agent, the banks party thereto and certain other parties.
“S&P” shall mean Standard & Poor’s Ratings Group and its successors.
“Sale-Leaseback Transaction” shall mean, for any Person, an arrangement with any lender or investor or to which such
lender or investor is a party providing for the leasing by such Person of any Property of such Person that has been or is being sold or
transferred by such Person to such lender or investor or to any other Person to whom funds have been or are to be advanced by such
lender or investor on the security of such property or asset. Upon entering into a Sale-Leaseback Transaction, such Person is deemed
to have incurred Indebtedness in an amount equal to the Attributable Debt with respect thereto, to have incurred a Lien on the
Property being sold or transferred and securing such Attributable Debt, and to have effected an Asset Sale (unless such transaction is
excluded from the definition of “Asset Sale”) of such Property.
“SAR” shall mean Sistema de Ahorro para el Retiro, the mandatory retirement system of Mexico.
“Secured Parties” shall have the meaning assigned to such term in the Collateral Agency Agreement.
“Security Documents” shall mean the Collateral Agency Agreement, each mortgage, pledge without transfer of possession,
pledge and any and all contracts, instruments and other documents now or hereafter executed and delivered in connection with this
Agreement (including, without limitation, Sections 8.15, 9.02(c) and 9.02(d)) and the Collateral Agency Agreement pursuant to which
any security interest in Collateral is granted to the Collateral Agent.
“Solvent” shall mean, with respect to any Person at any time, that (a) the fair value of the Property of such Person is greater
than the total amount of liabilities (including without limitation contingent liabilities) of such Person, (b) the present fair saleable
value of the Property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its
debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person’s ability to pay as such debts and liabilities mature, (d) such Person is not engaged in a business
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22
and is not about to engage in a business for which such Person’s property would constitute an unreasonably small capital and (e) such
Person is not insolvent pursuant to Article 2166 of the Mexican Federal Civil Code (Código Civil Federal) or its correlative
provisions of the Civil Codes of states that comprise Mexico (or any legal provision that succeeds them).
“Subsidiary” shall mean, as to any Person, any corporation or other Person of which more than 50% of the Voting Stock or
other voting interests is owned or Controlled, directly or indirectly, by such first Person and/or by any Subsidiary of such first Person.
“Substitute Basis” shall have the meaning assigned to such term in Section 5.02.
“Telerate Page 3750” shall mean the display designated as page “3750” on the Telerate Service of Bridge Information
Services or such other page as may replace the “3750” page on that service or such other service or services as may be nominated by
the British Bankers’ Association for the purpose of displaying London interbank offered rates for Dollar deposits.
“Total Capitalization” shall mean, as at any time, the sum of the following for the Borrower and its Consolidated
Subsidiaries determined on a consolidated basis (without duplication) in accordance with GAAP:
(i)
Consolidated Net Indebtedness at such time; plus
(ii) Consolidated Net Worth at such time.
“Total Subsidiary Indebtedness” shall mean, at any time, the aggregate outstanding principal amount of Indebtedness at
such time of the Subsidiaries of the Borrower to third parties determined on a consolidated basis (without duplication) in accordance
with GAAP.
“Trigger Event” shall mean the Borrower shall have prepaid the Loans in accordance with Section 2.06 or 2.07 in an
aggregate principal amount, when added to the aggregate principal amount of the loans outstanding under the Peso Facility prepaid,
equal to at least $75,000,000 (using for this purpose, in the case of amounts prepaid in Pesos under the Peso Facility, the relevant
exchange rate described in Section 2.07(e) as in effect on the date of any such prepayment).
“UDI Bonds” shall mean the medium-term promissory notes (denominated in unidades de inversión) of the Borrower
maturing in 2006 and 2007 issued pursuant to those certain promissory notes dated October 21, 1999 and July 13, 2000, respectively.
“United States” shall mean the United States of America.
“Voting Stock” shall mean, at any time, with respect to any Person, the outstanding securities of such Person entitled to
vote generally in the election of directors (or persons performing similar functions) of such Person, even if the right to so vote has
been suspended by the happening of any contingency.
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23
“Working Capital” shall mean, at any time, (i) the short-term assets of the Borrower and its Consolidated Subsidiaries at
such time, minus (ii) the short-term liabilities of the Borrower and its Consolidated Subsidiaries at such time, in each case as
determined in accordance with GAAP and without taking into account cash or Cash Equivalents or any financial Indebtedness.
1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder
shall be prepared, in accordance with GAAP as in effect from time to time, applied on a basis consistent with the most recent audited
financial statements of the Borrower delivered to the Banks hereunder.
SECTION 2. COMMITMENTS, ETC.
2.01. Loans.
(a) Each Bank severally agrees, on and subject to the terms and conditions of this Agreement, to make a loan to the
Borrower under this Section 2.01(a) in Dollars on the Closing Date in an aggregate principal amount equal to the Commitment of
such Bank and, as to all Banks, in an aggregate principal amount equal to $445,749,991.78. The Commitments shall terminate on the
Commitment Termination Date.
(b) The proceeds of each Loan shall be used solely to repay, to the Bank making such Loan, the outstanding Indebtedness
of the Borrower or its Subsidiaries as to such Bank listed in Schedule VIII hereto (the “Refinanced Debt”).
2.02. The Borrowing. (a) The Borrower shall give the Administrative Agent notice of the Borrowing as provided in Section
4.05. Not later than 11:00 a.m. New York time on the Closing Date, each Bank shall make available in Dollars, through such Bank’s
Applicable Lending Office, the full amount of such Bank’s Commitment, and credit the amount so made available to the Borrower to
the payment of the principal amount of the Refinanced Debt owed to such Bank. In furtherance of the foregoing, the Borrower hereby
irrevocably instructs each Bank making a Loan to it immediately to apply such amount to the payment of the principal amount of the
Refinanced Debt owed to such Bank. The transaction contemplated by this Section 2.02(a) shall be deemed to have taken effect
unless one or more Banks shall have provided to the Administrative Agent written notice no later than 9:00 a.m. (New York time) on
the date set forth in the Notice of Borrowing as the date of the “Proposed Borrowing” (as defined therein) stating that it will not make
its Loan in the full amount of its Commitment or apply such amount to the payment of the Refinanced Debt owed to such Bank. Each
Bank hereby acknowledges and agrees that, notwithstanding any terms of the Refinanced Debt to the contrary requiring notice of a
prepayment a specified number of days in advance, such Bank will receive a prepayment of the Refinanced Debt owed to it (i) on the
Closing Date, in an amount equal to its Commitment and (ii) on or prior to the Closing Date, in an amount equal to the difference
between the aggregate amount of the Refinanced Debt owed to it and its Commitment.
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(b) On the Closing Date, simultaneously with the making of the Loans and the repayment of the Refinanced Debt, the
Borrower shall pay or cause to be paid to each Bank making a Loan to it (either directly or through the administrative agent with
respect to such Refinanced Debt, in each case in accordance with the terms of the applicable Refinanced Debt), in immediately
available funds in Dollars, any and all interest accrued and unpaid in respect of the Refinanced Debt to, but excluding, the Closing
Date, together with any applicable premium, taxes, breakage costs (to the extent such breakage costs, if any, are known at such time)
and other amounts then due and owing to such Bank in respect of such Refinanced Debt in accordance with the terms thereof. On the
Closing Date, each Bank shall deliver to the Borrower each promissory note issued to it, if any, representing the Refinanced Debt
previously extended by such Bank.
2.03. Fees. (a) Not later than 11 a.m. New York time on the Closing Date, the Borrower shall pay in the aggregate
$5,507,350.00 to the Administrative Agent in Dollars in immediately available funds to be divided for the account of each Bank
based on the percentage by which such Bank’s Commitment represents to the aggregate Commitments.
(b) The Borrower shall pay to the Administrative Agent, the Collateral Agent and the Joint Lead Arrangers fees in such
amounts and at such times as previously agreed upon between the Borrower and each of the Administrative Agent, the Collateral
Agent and the Joint Lead Arrangers.
2.04. Default by Bank; Certain Remedies Independent. Neither any Bank nor the Administrative Agent shall be responsible
for the failure of any other Bank to make the Loan to be made by such other Bank, and no Bank shall have any obligation to the
Administrative Agent or any other Bank for the failure by such other Bank to make the Loan required to be made by such other Bank.
In the event that any Bank shall for any reason fail to make any Loan required hereunder on the Closing Date and to provide the
notice to the Administrative Agent in accordance with the last sentence of Section 2.02(a), and such failure shall continue past 11:00
a.m., New York time, on the Business Day immediately following the Closing Date, such defaulting Bank shall be liable for any and
all costs, losses and expenses incurred by the Administrative Agent and the Banks in connection with the failure of the Borrowings to
occur and the Refinanced Debt to be repaid; provided, that the Borrower shall pay the amount of such costs, losses and expenses to
the Banks (other than the defaulting Bank) and the Administrative Agent to the extent not promptly paid by the defaulting Bank;
provided further, that no such payment by the Borrower shall relieve the defaulting Bank of its obligations hereunder, and the
Borrower shall be subrogated to the rights of the Administrative Agent and the Banks with respect thereto. The amounts payable by
the Borrower at any time hereunder and under any Note to any Bank shall be a separate and independent debt and it shall not be
necessary for any other Bank or the Administrative Agent to consent to, or be joined as an additional party in, any proceedings to
recover the payment of any overdue amounts.
2.05. Notes. Each Loan of each Bank shall be evidenced by a separate promissory note legended as “non-negotiable” of the
Borrower, bearing the aval of each Guarantor, substantially in the form of Exhibit A hereto (each, a “Note”), dated the Closing Date,
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25
payable to such Bank in a principal amount equal to the principal amount of such Loan and otherwise duly completed. In the event
that any conflict arises between the provisions of this Agreement and the terms of any Note, the provisions of this Agreement shall be
deemed to prevail. Promptly upon the election of the Borrower, in accordance with the provisions contained in the definition of
“Interest Period” in Section 1.01, to change the duration of the Interest Period of any Loan, the Borrower and each Guarantor shall
execute and deliver to the Administrative Agent for the account of each Bank, in exchange for the Note evidencing such Loan
theretofore delivered to such Bank pursuant to this Section 2.05, a new Note in substantially the form of Exhibit A payable to such
Bank, dated the date of such Note being exchanged, in a principal amount equal to the principal amount then outstanding of such Note
and otherwise duly completed.
2.06. Optional Prepayments. Subject to Section 4.04, the Borrower shall have the right to prepay the Loans and the Notes
in whole or in part at any time or from time to time without premium or penalty, provided, that (i) simultaneously with the making of
each prepayment, the Borrower shall pay all interest accrued on the amount prepaid to the date of prepayment; (ii) the Borrower shall
give the Administrative Agent notice of each such prepayment as provided in Section 4.05 (and, upon the date specified in any such
notice, the amount to be prepaid shall become due and payable hereunder); (iii) each such prepayment shall be made only on the last
day of an Interest Period unless the Borrower pays in full, simultaneously with the making of such prepayment, any and all amounts
payable in connection therewith pursuant to Section 5.04; and (iv) prepayments of the Loans shall be applied to the installments of the
Loans in the inverse order of maturity. Amounts prepaid hereunder may not be reborrowed hereunder.
2.07. Mandatory Prepayments. (a) The Borrower will apply or cause to be applied all Net Proceeds received by or on
behalf or for the account of the Borrower or any of its Subsidiaries no later than the last day of the Interest Period during which such
Net Proceeds are received by or on behalf or for the account of the Borrower or such Subsidiary to repay, ratably, the Loans
outstanding on such day; provided that the application of this paragraph (a) to any such Net Proceeds received by or on behalf or for
the account of (A) any Subsidiary of the Borrower that is subject to the provisions of the IFC Investment Agreement or the IFC Loan
Agreement shall be subject to Sections 6.02(a) and (b) and Section 6.02(a) thereof, respectively, as in effect on the date hereof (and a
brief summary of which is set forth in Schedule III hereto), and (B) any Subsidiary of the Borrower that is not wholly-owned (directly
or indirectly) by the Borrower shall be subject to limitations (if any) on the ability of the Borrower to receive such Net Proceeds (i) in
excess of the direct or indirect ownership interest percentage of the Borrower in such Subsidiary (but only to the extent there is no
intercompany Indebtedness owing by such Subsidiary to the Borrower or any Subsidiary of the Borrower, in which case such Net
Proceeds shall be applied to repay any such intercompany Indebtedness prior to any distribution, and shall be applied in accordance
with this paragraph (a)) and (ii) resulting from the existing covenants of the Borrower and its Subsidiaries set forth in Schedule III
hereto or applicable law (but only to the extent compliance with such law is not within the direct or indirect control of the Borrower).
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(b) On the last Business Day in May of each year beginning on May 28, 2004, the Loans then outstanding shall be prepaid,
ratably, in an aggregate amount equal to 75% of Excess Cash for the immediately preceding fiscal year (as determined by reference to
the audited financial statements for such fiscal year) until 66 2/3% of the aggregate principal amount of the Loans outstanding as of the
Closing Date has been repaid.
(c) In the event that any payment of principal (whether scheduled or otherwise and whether by repayment, repurchase or
otherwise) of the Indebtedness set forth in Schedule XIV hereto is made (other than any payment thereof made with Refinancing
Indebtedness (in which case such Refinancing Indebtedness shall be deemed to be set forth in Schedule XIV hereto for purposes of
this paragraph (c)); provided that such Refinancing Indebtedness may be Incurred by any Subsidiary of Spicer, S.A. de C.V., all or
substantially all of the capital stock of which is owned by Spicer, S.A. de C.V.), any Loans then outstanding shall be prepaid in an
amount equal to the principal amount of such other Indebtedness so paid multiplied by two.
(d) In the event that any payment of principal (whether scheduled or otherwise and whether by repayment, repurchase or
otherwise) of the Indebtedness under the UDI Bonds is made (other than any payment thereof made with Excluded Debt described in
clause (ii) of the definition thereof), any Loans then outstanding shall be prepaid in an amount such that the percentage principal
amount prepaid under this Agreement is equal to the percentage principal amount of the Indebtedness under the UDI Bonds that is so
paid.
(e) In the event that any prepayment of principal is made under the Peso Facility, any Loans then outstanding shall be
prepaid in an amount such that the percentage principal amount prepaid under this Agreement is equal to the percentage principal
amount of the Peso Facility so paid; provided, however, that if any such prepayment under the Peso Facility is made as a result of the
application of Cláusula 2.11(c) or Net Proceeds (“Recursos Netos”) or Excess Cash (“Exceso de Caja”) thereunder in accordance with
the terms of the Peso Facility as of the date hereof, the payment obligations arising under paragraphs (a), (b) and (c) hereof shall be
deemed satisfied if such prepayment, Net Proceeds or Excess Cash, as the case may be, has been applied ratably as between this
Agreement and the Peso Facility; and provided further that any other such prepayment shall otherwise be done in accordance with
Section 2.06. For purposes of this paragraph (e) and calculating the aggregate outstanding principal amount of the Loans and the loans
outstanding under the Peso Facility, the Peso/Dollar exchange rate published by Banco de México in the Official Gazette of the
Federation of Mexico (“Diario Oficial de la Federación”) as the rate “para solventar obligaciones denominadas en moneda extranjera
pagaderas en la República Mexicana” on the Mexican business day immediately prior to the relevant prepayment date, to be in effect
on such prepayment date, shall be used, provided that, if Banco de México ceases to publish such exchange rate, the exchange rate
shall be calculated by taking the Peso/Dollar exchange rates published by Citibank, N.A., JPMorgan Chase Bank and Deutsche Bank
AG (or the main offices of their subsidiaries located in Mexico, if not published by those institutions) at the close of business on the
Mexican business day immediately prior to the relevant prepayment date (i.e., 24-hours forward), to be in effect on such prepayment
date, and calculating the average of such exchange rates.
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(f) All mandatory prepayments required to be made pursuant to paragraphs (a) (other than 50% of any mandatory
prepayments made from Net Proceeds that are Net Asset Sale Proceeds), (c) and (d) of this Section 2.07 (and 50% of any mandatory
prepayments required to be made pursuant to paragraph (e) of this Section 2.07 that satisfy the obligations of the Borrower under
paragraph (a) of this Section 2.07 and are made from Net Proceeds that are Net Asset Sale Proceeds and all mandatory prepayments
required to be made pursuant to paragraph (e) of this Section 2.07 that satisfy the obligations of the Borrower under paragraph (c) of
this Section 2.07) shall be applied by the Borrower to pay ratably all Loans in direct order of maturities, 50% of any mandatory
prepayments made from Net Proceeds that are Net Asset Sale Proceeds pursuant to paragraph (a) of this Section 2.07 (and 50% of any
mandatory prepayments required to be made pursuant to paragraph (e) of this Section 2.07 that satisfy the obligations of the Borrower
under paragraph (a) of this Section 2.07 and are made from Net Proceeds that are Net Asset Sale Proceeds) shall be applied by the
Borrower to pay ratably all Loans pro rata across the order of maturities, and all mandatory prepayments required to be made pursuant
to paragraph (b) of this Section 2.07 (and all mandatory prepayments required to be made pursuant to paragraph (e) of this Section
2.07 that satisfy the obligations of the Borrower under paragraph (b) of this Section 2.07) shall be applied by the Borrower to pay
ratably all Loans in inverse order of maturities. All other mandatory prepayments required to be made pursuant to paragraph (e) of
this Section 2.07 shall be applied by the Borrower to pay ratably all Loans in the inverse order of maturity. Amounts prepaid
hereunder may not be reborrowed hereunder.
SECTION 3. PAYMENTS OF PRINCIPAL AND INTEREST
3.01. Repayment of Loans.
(a) The Borrower agrees to pay to the Administrative Agent the full principal of the Loans for the pro rata account of the
Banks in six equal installments, payable on each Principal Payment Date in an aggregate principal amount (for each Loan on each
such date) equal to one-sixth of the aggregate principal amount of the Loans outstanding on the Closing Date.
3.02. Interest.
(a) The Borrower agrees to pay to the Administrative Agent for the account of each Bank interest on the unpaid principal
amount of each Loan made by such Bank for the period from and including the date of such Loan to but excluding the date such Loan
shall be paid in full, at a rate per annum for each Interest Period equal to the LIBO Rate for such Interest Period plus the Applicable
Margin. In addition, if the Consolidated Net Indebtedness to Consolidated EBITDA Ratio as of the last day of the period of four
conservative quarters of the Borrower as set forth in the certificate delivered pursuant to Section 8.07(e) in respect of the last quarter
of 2005 is greater than 4.00 to 1.00, the Borrower agrees to pay to the Administrative Agent for the account of each Bank additional
interest on the unpaid principal amount of each Loan made by such Bank for the period from and including January 1, 2006 to but
excluding the date such certificate is delivered at a rate per annum equal to 0.50%.
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(b) Notwithstanding the foregoing, the Borrower agrees to pay to the Administrative Agent for the account of each Bank
interest at the Post-Default Rate, to the fullest extent permitted by applicable law, (i) during any period when any Event of Default
shall have occurred and be continuing, on the principal of each Loan of such Bank and (ii) on any other amount whatsoever payable
by the Borrower hereunder to such Bank that shall not be paid in full when due (whether at stated maturity, by acceleration, or
otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full.
(c) Accrued interest on each Loan shall be payable on the last day of each Interest Period and upon the payment or
prepayment thereof (on the principal amount so paid or prepaid), provided, that any interest payable at the Post-Default Rate shall be
payable from time to time on demand; provided further, that any additional interest payable pursuant to the second sentence of
Section 3.02(a) shall be payable within five Business Days after delivery of the certificate pursuant to Section 8.07(e) in respect of the
last quarter of 2005.
(d) Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative
Agent shall give notice thereof to the Banks and to the Borrower. Each such determination by the Administrative Agent shall be
conclusive and binding for all purposes, absent manifest error.
(e) Each Bank agrees to promptly return to Borrower or any Guarantor, as the case may be, any interest received by such
Bank as a result of any enforcement of its Note which is in excess of the amount of interest to which it would have otherwise been
entitled pursuant to this Agreement.
3.03. Interest Rate Determinations; Changes in Rating Systems.
(a) The Administrative Agent shall give prompt notice to the Borrower and the Banks of the applicable interest rate
determined by the Administrative Agent for the purpose of Section 3.02.
(b) If the Borrower shall fail to select the duration of any Interest Period in accordance with the provisions contained in the
definition of “Interest Period” in Section 1.01, the Borrower shall irrevocably be deemed to have selected an Interest Period with a
three-month duration.
SECTION 4. PAYMENTS, ETC.
4.01. Payments.
(a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the
Borrower under this Agreement and the Notes shall be made in Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at the Agent’s Account, not later than 11:00 A.M. New York time on the date on which
such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the
next succeeding Business Day). Partial
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payments hereunder shall be applied first to unreimbursed costs and expenses of the Administrative Agent invoiced to the Borrower
which remain unpaid after their due date (which shall not be less than five Business Days after such invoice is sent to the Borrower),
then to accrued and unpaid interest, then to unpaid principal, and then to other amounts payable hereunder.
(b) The Borrower shall, at the time of making each payment under this Agreement and the Notes for the account of any
Bank, specify to the Administrative Agent the amounts payable by the Borrower hereunder to which such payment is to be applied
(and in the event that the Borrower fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative
Agent may distribute such payment to the Banks for application in such manner as it or the Majority Banks, subject to Section 4.02,
may determine to be appropriate).
(c) Each payment received by the Administrative Agent under this Agreement and the Notes for the account of any Bank
shall be paid by the Administrative Agent promptly to such Bank, in immediately available funds, for the account of such Bank’s
Applicable Lending Office.
(d) If the due date of any payment under this Agreement and the Notes would otherwise fall on a day that is not a Business
Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for
the period of such extension.
4.02. Pro Rata Treatment. Except to the extent otherwise provided herein, each payment or prepayment of principal or
interest on the Loans shall be made for the account of the Banks pro rata in accordance with the respective amounts of principal or
interest on such Loans then due and payable to them.
4.03. Computations. Interest on the Loans shall be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period for which such interest is payable.
4.04. Minimum Amounts. Each optional partial prepayment of principal of the Loans pursuant to Section 2.06 shall be in
an aggregate amount equal to at least $10,000,000 and an integral multiple of $5,000,000 (or such lesser amount as may be necessary
to prepay in full the principal amount then outstanding).
4.05. Certain Notices. The notice by the Borrower to the Administrative Agent of the Borrowing shall be substantially in
the form of Schedule II hereto (the “Notice of Borrowing”) and shall be effective only if received by the Administrative Agent not
later than 11:00 a.m. New York time on the date two Business Days prior to the Closing Date, and notices of optional prepayments
shall be effective only if received by the Administrative Agent not later than 11:00 a.m. New York time on the date five Business
Days prior to the date of each such prepayment. The Notice of Borrowing and each notice of optional prepayment shall specify the
amount (which, in the case of an optional prepayment, shall be in accordance with Section 4.04)
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to be borrowed or prepaid and the Closing Date or date of prepayment (which shall be a Business Day), as the case may be. The
Administrative Agent shall promptly notify the Banks of the contents of each such notice.
4.06. Non-Receipt of Funds by the Administrative Agent. Unless the Administrative Agent shall have been notified in
writing by the Borrower prior to the date on which the Borrower is to make payment to the Administrative Agent for the account of
one or more of the Banks hereunder (any such payment being herein called the “Required Payment”) that the Borrower will not make
the Required Payment, the Administrative Agent may assume that the Borrower is timely making the Required Payment available to
the Administrative Agent and, in reliance upon such assumption, make available to the Banks, a corresponding amount. If such
amount is not made available to the Administrative Agent by the required time on such date (the “Advance Date”), such Bank and the
Borrower severally agree to pay to the Administrative Agent, on demand, such amount owed by such Bank or the Borrower with
interest thereon at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate
applicable thereto pursuant to Section 3.02(b) for the period from the Advance Date until paid in full and (ii) in the case of such Bank,
the Federal Funds Rate for such period. If such Bank pays such amount to the Administrative Agent, then such amount (not including
any interest accrued thereon to the date of such prepayment) shall constitute such Bank’s Loan. A certificate of the Administrative
Agent submitted to the Borrower with respect to any amounts owing under this Section 4.06 shall be conclusive in the absence of
manifest error.
If a Required Payment is not made available to the Administrative Agent by the Borrower or the recipient(s) within three Business
Days of the Advance Date, the Administrative Agent shall also be entitled to recover such amount on demand from the Borrower,
together with interest thereon retroactive to the Advance Date at the Post-Default Rate.
4.07. Set-Off; Sharing of Payments.
(a) Without limiting any of the obligations of the Borrower or the rights of the Banks hereunder, if the Borrower shall fail
to pay when due (whether at stated maturity, by acceleration or otherwise) any amount payable by it hereunder or under any Note,
each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, without prior notice to the
Borrower (which notice is expressly waived by the Borrower to the fullest extent permitted by applicable law), to set off and
appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final, in any
currency, matured or unmatured) and any other obligations at any time owing by such Bank or any Subsidiary, Affiliate, branch or
agency thereof to or for the credit or account of the Borrower. Such Bank shall promptly provide notice to the Borrower of such setoff, provided, that failure by such Bank to provide such notice to the Borrower shall not give the Borrower any cause of action or
right to damages or affect the validity of such set-off and application. The rights of each Bank under this Section 4.07 are in addition
to any other rights and remedies (including, without limitation, any other rights of set-off) that such Bank may have.
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(b) If any Bank shall obtain from the Borrower or any Desc Entity payment of any principal of or interest on its Loans or
payment of any other amount under this Agreement, the Notes or any other Loan Document through the exercise of any right of setoff, banker’s lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as
a result of such payment, such Bank shall have received a percentage of the principal of or interest on its Loans or such other amounts
then due hereunder by the Borrower to such Bank in excess of its pro rata share thereof, it shall promptly purchase from such other
Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans or such other amounts,
respectively, owing to such other Banks (or in interest due thereon, as the case may be) in such amounts, and/or make such other
adjustments as shall be equitable, to the end that all the Banks shall share the benefit of such excess payment (net of any expenses that
may be incurred by such Bank in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of
and/or interest on the Loans or such other amounts, respectively, owing to each of the Banks. To such end all the Banks shall make
appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must
otherwise be restored.
(c) Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to
exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower.
SECTION 5. YIELD PROTECTION, ETC.
5.01. Additional Costs.
(a) If, on or after the date hereof, as a result of the adoption of any Requirement of Law, or any change in any Requirement
of Law, or any change in the interpretation or administration thereof by any court or other Governmental Authority charged with the
interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) of any such Governmental Authority there shall be any increase in the cost to any Bank of
agreeing to make or making, funding or maintaining its Loans (other than taxes, which shall be governed by the terms of Section
5.05), then such Bank shall, promptly after the occurrence of such event, notify the Borrower thereof, and the Borrower shall, subject
to paragraph (c) below, pay to the Administrative Agent for the account of such Bank the amount stated in such notification as
required to indemnify such Bank against such increased cost, such amount to be payable within ten days after the Borrower’s receipt
of such notification.
(b) If any Bank shall have determined that, after the date hereof, the adoption of any Requirement of Law regarding capital
adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority
charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not
having the force of law) of any such Governmental Authority, has or would have the effect of reducing the rate of return on capital of
such Bank (or its parent) as a consequence of such Bank’s obligations hereunder or its Loans to a level below that which such Bank
(or its
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parent) could have achieved but for such adoption, change, request or directive by an amount reasonably deemed by it to be material,
then from time to time, such Bank shall, promptly after the occurrence of such reduction, notify the Borrower thereof, and the
Borrower shall, subject to paragraph (c) below, pay to such Bank the amount stated in such notification as required to indemnify such
Bank (or its parent) against such reduction, such amount to be payable within ten days after the Borrower’s receipt of such
notification.
(c) Each Bank will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof,
which will entitle such Bank to compensation pursuant to this Section 5.01. Before giving any such notice pursuant to this paragraph
(c) such Bank shall designate a different Applicable Lending Office or take such other action as it deems appropriate in its reasonable
judgment if such designation or other action (x) will, in the reasonable judgment of such Bank, avoid the need for, or reduce the
amount of, such compensation and (y) will not, in the reasonable judgment of such Bank, be materially disadvantageous to such
Bank. A notification of any Bank claiming compensation under this Section 5.01 setting forth in reasonable detail the calculation of
the additional amount or amounts to be paid to it hereunder, shall be conclusive and binding on the Borrower in the absence of
manifest error. The Borrower shall not be obligated to compensate any Bank pursuant to this Section 5.01 for increased costs or
reduced return accruing prior to the date which is 90 days before such Bank requests compensation pursuant to this Section 5.01.
(d) Without duplication of paragraph (a) above, the Borrower shall pay to each Bank, so long as such Bank shall be
required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or
assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of the Loans of such
Bank, from and including the date of such Loans until such principal amount is paid in full, at an interest rate per annum equal at all
times to the remainder obtained by subtracting (i) the LIBO Rate for the relevant Interest Period from (ii) the rate obtained by
dividing such LIBO Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Bank for such
Interest Period, payable on each date on which interest is payable on such Loans. Such additional interest shall be determined by such
Bank and notified to the Borrower through the Administrative Agent.
5.02. Substitute Basis. If, on or prior to the first day of any Interest Period (an “Affected Interest Period”):
(a) the Administrative Agent determines that, by reason of circumstances affecting the London interbank market, the
“LIBO Rate” cannot be determined pursuant to the definition thereof, or
(b) the Majority Banks determine (as evidenced by a certificate from the Administrative Agent) and notify the
Administrative Agent that the relevant rates of interest referred to in the definition of “LIBO Rate” in Section 1.01 upon the basis of
which the rate of interest for Loans for such Affected Interest Period is to be determined will not adequately reflect the cost to such
Banks of making or maintaining their Loans for such Affected Interest Period in the London interbank market,
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then the Administrative Agent shall give notice (a “Rate Determination Notice”) thereof, which, if applicable, shall be accompanied
by the certificate referred to above, to the Borrower and the Banks as soon as practicable thereafter. If such notice is given, during the
thirty-day period following such Rate Determination Notice (the “Negotiation Period”) the Administrative Agent and the Borrower
shall negotiate in good faith with a view to agreeing upon a substitute interest rate basis (having the written approval of the Majority
Banks) for the Loans which shall reflect the cost to the Banks of funding their Loans from alternative sources (a “Substitute Basis”),
and if such Substitute Basis is so agreed upon during the Negotiation Period, such Substitute Basis shall apply in lieu of the LIBO
Rate to all Interest Periods commencing on or after the first day of the Affected Interest Period, until the circumstances giving rise to
such notice have ceased to apply. If a Substitute Basis is not agreed upon during the Negotiation Period, the Borrower may elect to
prepay the Loans pursuant to Section 2.06, provided, however, that if the Borrower does not elect so to prepay, each Bank shall
determine (and shall certify from time to time in a certificate delivered by such Bank to the Administrative Agent setting forth in
reasonable detail the basis of the computation of such amount) the rate basis reflecting the cost to such Bank of funding its Loans for
any Interest Period commencing on or after the first day of the Affected Interest Period, until the circumstances giving rise to such
notice have ceased to apply, and such rate basis shall be binding upon the Borrower and such Bank and shall apply in lieu of the
LIBO Rate for the relevant Interest Periods. Promptly upon the agreement of any Substitute Basis, the Borrower and each Guarantor
shall execute and deliver to the Administrative Agent for the account of each Bank, in exchange for the Note evidencing each Loan of
such Bank theretofore delivered to such Bank pursuant to Section 2.05, a new Note in substantially the form of Exhibit A payable to
such Bank reflecting such Substitute Basis (or, if a Substitute Basis is not agreed upon during the Negotiation Period, promptly upon
the delivery by any Bank to the Administrative Agent of a certificate setting forth a rate basis pursuant to this Section 5.02, a new
Note in substantially the form of Exhibit A payable to such Bank reflecting such rate basis), dated the date of such Note being
exchanged, in a principal amount equal to the principal amount then outstanding of such Note and otherwise duly completed.
5.03. Illegality. Notwithstanding any other provision of this Agreement, in the event that on or after the date hereof the
adoption of or any change in any Requirement of Law or in the interpretation or application thereof by any competent Governmental
Authority shall make it unlawful for any Bank or its Applicable Lending Office to make or maintain its Loans hereunder (and, in the
opinion of such Bank, the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be
materially disadvantageous to such Bank), then such Bank shall promptly notify the Borrower thereof (with a copy to the
Administrative Agent) following which (a) such Bank’s Commitment shall be suspended until such time as such Bank may again
make and maintain its Loans hereunder and/or (b) if such Requirement of Law shall so mandate, such Bank’s Loans shall be prepaid
in full by the Borrower, together with accrued and unpaid interest thereon and all other amounts payable by the Borrower under this
Agreement, on or before such date as shall be mandated by such Requirement of Law, provided, that if it is lawful for such Bank to
maintain its Loans through the last day of the current Interest Period, such payment shall be made on such date.
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5.04. Break-Funding Compensation. The Borrower shall pay to the Administrative Agent for the account of each Bank,
upon the request of such Bank through the Administrative Agent, such amount or amounts as shall be sufficient to compensate it for
any loss (other than loss of anticipated profits), cost or expense that such Bank determines is attributable to:
(a) any prepayment of a Loan made by such Bank, or the replacement of a Bank pursuant to Section 5.05(h)(i), for any
reason on a date other than the last day of an Interest Period; or
(b) any failure by the Borrower for any reason (including, without limitation, the failure of any of the conditions precedent
specified in Section 6 to be satisfied but not including breach by any Bank of its obligations under Section 2.01(a)) to borrow the
Loans on the date for the Borrowing specified in the Notice of Borrowing given pursuant to Section 2.02, or to prepay the Loans in
accordance with a notice of prepayment under Section 2.06 or 2.07, as applicable.
Such amount or amounts shall be determined by such Bank to be equal to the excess, if any, of (i) the amount of interest calculated at
the LIBO Rate for the balance of such Interest Period (or for the Interest Period that would have commenced on the date of such
prepayment or Borrowing), over (ii) the amount of interest that such Bank would earn on such principal amount for the balance of
such Interest Period (or for such Interest Period) if such Bank were to invest such principal amount for such period at the interest rate
that would be bid by such Bank (or an Affiliate of such Bank) for Dollar deposits from other banks in the London interbank market at
the commencement of such period. Each Bank will furnish to the Borrower a certificate setting forth the basis and amount of each
request by such Bank for compensation under this Section 5.04, which certificate shall be conclusive and binding on the Borrower in
the absence of manifest error.
5.05. Taxes.
(a) All payments on account of the principal of and interest on the Loans and the Notes, fees and all other amounts payable
hereunder by the Borrower to or for the account of the Administrative Agent or any Bank, including, without limitation, amounts
payable under paragraph (b) of this Section 5.05, shall be made free and clear of and without reduction or liability for Covered Taxes,
unless so required by applicable law, decree or regulation.
(b) The Borrower shall indemnify the Administrative Agent and each Bank against, and reimburse them upon demand for,
any Covered Taxes paid at any time by the Administrative Agent or such Bank (as the case may be) and any loss, liability, claim or
expense, including interest, penalties, surcharges and reasonable and documented, when possible, legal fees, that the Administrative
Agent or such Bank may incur at any time arising out of or in connection with any failure of the Borrower to make any payment of
Covered Taxes when due.
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(c) In the event that the Borrower, any Person making a payment hereunder on behalf of the Borrower or the
Administrative Agent shall be required by applicable law, decree or regulation to deduct or withhold Covered Taxes from any
amounts payable on, under or in respect of this Agreement, the Loans, the Notes or the other Loan Documents, the sum payable shall
be increased as necessary so that after making all required deductions and withholdings the recipient of such payment receives an
amount equal to the sum it would have received had no such deduction or withholding been made.
(d) Upon the request of any Bank, the Borrower shall furnish to such Bank copies, certified by the chief financial officer or
the chief accounting officer of the Borrower, of official tax receipts in respect of each payment of Covered Taxes required under this
Section 5.05 with respect to such Bank, as soon as practicable after the date such payment or, if appropriate, request is made (and in
any event no later than the later of 45 days after such payment and 15 days after such request), and the Borrower shall promptly
furnish to such Bank any other information, documents and receipts that such Bank may reasonably require to establish that full and
timely payment has been made of all Covered Taxes required to be paid under this Section 5.05 with respect to such Bank.
(e) The Borrower agrees to pay all present and future stamp, court or documentary taxes and any other excise taxes,
charges or similar levies and any related interest or penalties incidental thereto imposed by Mexico, or any jurisdiction from which
any amount payable hereunder is made, or any municipality or other political subdivision or taxing authority thereof or therein which
arises from any payment made by the Borrower hereunder or from the execution, delivery, enforcement or registration of this
Agreement, the Notes or the other Loan Documents (hereinafter referred to as “Other Applicable Taxes”).
(f) Each Bank (other than EDC and a Mexican Bank) party to this Agreement on the date hereof represents and warrants to
the Borrower that, as of the date hereof, such Bank (i) is registered with the Ministry of Finance as a foreign financial institution for
purposes of Article 195(I) of the Mexican Income Tax Law (Ley del Impuesto sobre la Renta), the regulations thereunder and any
administrative rules issued thereunder and intends to be the effective beneficiary of the interest payable under this Agreement and the
Note delivered to such Bank, (ii) is a resident for tax purposes of a country (or the main office of which, if lending through a branch
or agency, is resident of a country) with which Mexico has entered into a treaty for the avoidance of double taxation, and complies
with the requirements provided in such treaty to apply a reduced withholding tax rate on interest, and (iii) will use reasonable
commercial efforts that are within its control to (x) comply with the requirements of such treaty for so long as it provides a reduced
withholding tax rate under the Mexican Income Tax Law or such double taxation treaty, (y) file all documentation necessary to
maintain its registration with the Ministry of Finance pursuant to Article 195(I) of the Mexican Income Tax Law, so long as such
requirement remains applicable, and (z) maintain its status (directly or through its main office, if lending through a branch or agency)
as a resident for tax purposes of the country of which it is currently a resident.
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(g) Each Bank and the Administrative Agent (other than EDC and a Mexican Bank) will use all reasonable commercial
efforts to provide to the Borrower (or as appropriate, complete and file with the appropriate governmental authority), within 60 days
of a written request made by the Borrower, such duly completed form, certification or similar documentation, if any, as is then
required under applicable law, regulation or published administrative rule or double taxation treaty to which Mexico is a party, which
is in effect, in order to obtain an exemption from (if applicable), or reduced rate of, deduction, payment or withholding in respect of
Covered Taxes to which such Bank or the Administrative Agent would be entitled on interest payments made to such Bank or the
Administrative Agent pursuant to a tax treaty that is in effect or the law or regulations of the relevant jurisdiction, provided, that
neither any Bank nor the Administrative Agent shall have any obligation to provide such form, certification or similar document if, in
the reasonable judgment of such Bank or the Administrative Agent, as the case may be, the provision of such form, certification or
similar document would be materially disadvantageous to such Bank or the Administrative Agent.
(h) Any Bank (other than EDC and any Mexican Bank) claiming any additional amounts payable pursuant to this Section
5.05, which are in excess of the tax imposed at the lowest rate of withholding that would be otherwise applicable to such Bank and
which exceed additional amounts payable on the date hereof for reasons other than a change in applicable law (provided, that such
Bank is in compliance with the requirements set forth in paragraph (g) and (i) of this Section 5.05), agrees to use reasonable
commercial efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable
Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that
may thereafter accrue and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such
Bank, provided, that if any Bank is unable to designate a different Applicable Lending Office, then the Borrower may, at its option
(without prejudice to Section 5.05(i)), (i) designate an Assignee (which shall be an entity reasonably satisfactory to the Administrative
Agent) to replace such Bank in accordance with Section 12.06, which Assignee shall pay or cause to be paid to such Bank the
outstanding principal amount of such Bank’s Loans (without a discount) plus accrued interest plus other amounts payable to such
Bank hereunder or (ii) subject to giving five Business Days’ notice to the Administrative Agent, without penalty or premium but
subject to Sections 2.06 and 5.04 and without giving effect to the sharing provisions of Section 4.07, prepay the principal amount of
such Loans, together with accrued interest thereon and all other amounts payable to such Bank hereunder; and in the case of
designation of an Assignee, such Bank and Assignee shall deliver to the Administrative Agent and the Borrower a notice of
assignment in form and substance satisfactory to the Administrative Agent and the Borrower whereby such Assignee shall agree to be
bound by the terms hereof, provided, however, that the failure of any such Bank to execute or deliver such notice of assignment shall
not render such assignment invalid and such assignment shall be deemed effective as of the date on which such Assignee pays or
causes to be paid to such Bank the amounts specified in clause (i) above.
(i) The Borrower shall not be required to indemnify any Bank or the Administrative Agent or increase the amount payable
to any Bank or to the Administrative Agent under paragraphs (a), (b) or (c) of this Section 5.05 for any additional amounts in respect
of
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Covered Taxes to the extent that such Covered Taxes or portion thereof would not have been withheld but for the fact that the
representation and warranty in paragraph (f) above (or, with respect to EDC, paragraph (j) below) is incorrect with respect to such
Bank on the date it was made or the failure of such Bank or the Administrative Agent, as the case may be, to comply with the
provisions of paragraphs (f), (g) and (h) (unless such Bank is a Mexican Bank or EDC) of this Section 5.05 (and the obligations of the
Borrower under this Section 5.05 are subject to the second sentence of Section 12.06(d)).
(j) EDC represents and warrants to the Borrower that, as of the date hereof, (i) it is registered with the Ministry of Finance
as a foreign financial institution for purposes of Article 195(I) of the Mexican Income Tax Law (Ley del Impuesto sobre la Renta),
the regulations thereunder and any administrative rules issued thereunder and intends to be the effective beneficiary of the interest
payable under this Agreement and the Note delivered to it, and (ii) its head office is in Ottawa, Canada. If EDC claims any additional
amounts payable pursuant to this Section 5.05 which are in excess of the tax imposed at the lowest rate of withholding that would be
otherwise applicable to the Banks (other than EDC and any Mexican Bank), then the Borrower may, at its option (without prejudice
to Section 5.05(i)), (i) designate an Assignee (which shall be an entity reasonably satisfactory to the Administrative Agent) to replace
EDC in accordance with Section 12.06, which Assignee shall pay or cause to be paid to EDC the outstanding principal amount of
EDC’s Loans (without a discount) plus accrued interest plus other amounts payable to EDC hereunder or (ii) subject to giving five
Business Days’ notice to the Administrative Agent, without penalty or premium but subject to Sections 2.06 and 5.04 and without
giving effect to the sharing provisions of Section 4.07, prepay the principal amount of EDC’s Loans, together with accrued interest
thereon and all other amounts payable to EDC hereunder; and in the case of designation of an Assignee, EDC and such Assignee shall
deliver to the Administrative Agent and the Borrower a notice of assignment in form and substance satisfactory to the Administrative
Agent and the Borrower whereby such Assignee shall agree to be bound by the terms hereof, provided, however, that the failure of
EDC to execute or deliver such notice of assignment shall not render such assignment invalid and such assignment shall be deemed
effective as of the date on which such Assignee pays or causes to be paid to EDC the amounts specified in clause (i) above.
SECTION 6. CONDITIONS PRECEDENT
6.01. Conditions Precedent to the Borrowing. The obligation of each Bank to make its Loan hereunder is subject to the
conditions precedent that (i) the Closing Date shall have occurred on or before the Commitment Termination Date, (ii) the Banks
shall be reasonably satisfied with the corporate and legal structure and capitalization of the Borrower and its Principal Subsidiaries
(and the Administrative Agent shall be entitled to assume that this condition is deemed satisfied upon the satisfaction of all of the
conditions precedent set forth below in this Section 6.01 unless otherwise expressly advised by any Bank prior to such satisfaction),
and (iii) the Administrative Agent shall have received the following documents, each of which shall be in form and substance
reasonably satisfactory to the Administrative Agent:
(a) Executed Loan Documents. Each of this Agreement, the Guaranty Agreement and the Security Documents, duly
executed and delivered by the Borrower and each of the other parties thereto.
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(b) Notes. The Notes in accordance with Section 2.05.
(c) Governmental Approvals. Certified copies of all licenses, consents and approvals (including without limitation
exchange control approvals) of, and filings and registrations with, any Mexican Governmental Authority, and of all third-party
consents and approvals, necessary in connection with the making and performance by each Desc Entity of the Loan Documents to
which it is a party (including, in the case of the Guarantors, the making and performance by each Guarantor of its aval on the Notes).
(d) Corporate Documents. Certified copies of (i) the estatutos sociales, as amended to date, of the Borrower and each Desc
Entity and (ii) powers of attorney of the Borrower and each Desc Entity party to a Loan Document, notarized by a Mexican notary
public (including authority for actos de administración, suscripción de títulos de crédito and actos de dominio for each Desc Entity
pledging or mortgaging Collateral), authorizing the making and performance by it of the Loan Documents to which it is a party
(including, in the case of the Guarantors, the aval on the Notes).
(e) Officer’s Certificate. A certificate, dated the Closing Date, of the Chief Executive Officer or Chief Financial Officer of
the Borrower and each Desc Entity party to a Loan Document (and attested to by the Secretary or other senior executive officer of
such Person) certifying (i) as to the satisfaction of the conditions set forth in Section 6.02(c) and (ii) as to the authority, incumbency
and specimen signatures of the persons who have executed the Loan Documents on behalf of the Borrower or such Desc Entity.
(f) Opinions of Counsel.
(1) An opinion, dated the Closing Date, of De Ovando y Martínez del Campo, S.C., special Mexican counsel to the
Borrower and the Desc Entities, in substantially the form of Exhibit C hereto.
(2) An opinion, dated the Closing Date, of Weil, Gotshal & Manges LLP, special New York counsel to the Borrower
and the Desc Entities, in substantially the form of Exhibit D hereto.
(3) An opinion, dated the Closing Date, of Ritch, Heather y Mueller, S.C., special Mexican counsel to the
Administrative Agent and the Collateral Agent, in substantially the form of Exhibit E hereto.
(4) An opinion, dated the Closing Date, of Cleary, Gottlieb, Steen & Hamilton, special New York counsel to the
Administrative Agent and the Collateral Agent, in substantially the form of Exhibit F hereto.
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(g) Process Agent Acceptance. (i) An instrument duly executed and delivered by the Process Agent dated on or prior to the
date hereof pursuant to which it accepts its appointment as Process Agent for the Borrower hereunder and for the Borrower and/or
applicable Desc Entity under each other Loan Document that requires such an appointment and (ii) a notarized power of attorney of
the Borrower and each Desc Entity party to a Loan Document appointing such Process Agent, granted pursuant to Mexican law;
provided that the condition set forth in clause (ii) shall be deemed to have been satisfied if the Administrative Agent shall have
received a letter addressed to the Process Agent from each of the Borrower and each Desc Entity party to a Loan Document
appointing such Process Agent to act as such on behalf of the Borrower and such Desc Entity, as the case may be, under the relevant
Loan Documents.
(h) External Advisor. Evidence of the engagement by the Borrower of the independent consulting firm of internationallyrecognized standing required to be engaged pursuant to Section 8.18.
(i) Fees. Evidence of payment by the Borrower of the fees and other amounts then due and payable by the Borrower under
Sections 2.03, 5.05(e) and 12.03, provided, that in the case of Section 12.03 the evidence of such payment shall only be required to
the extent a statement shall have been submitted to the Borrower at least two Business Days prior to the Closing Date.
(j) Notice of Borrowing. A Notice of Borrowing, complying with the terms of Section 4.05. The Notice of Borrowing by
the Borrower hereunder shall constitute a certification by the Borrower to the effect that the conditions set forth in subparagraphs (1)
and (2) of paragraph (c) of Section 6.02 have been fulfilled (both as of the date of such notice and, unless the Borrower otherwise
notifies the Administrative Agent prior to the Closing Date, as of the Closing Date).
(k) Refinanced Debt. A certificate of the Chief Executive Officer or Chief Financial Officer of the Borrower certifying
that, on the Closing Date and contemporaneously with the satisfaction of all other conditions specified in Section 6.01, the principal
of and interest on, and all other amounts owing in respect of, the Indebtedness (if any) outstanding under the Refinanced Debt shall be
paid in full and all commitments thereunder shall be terminated, which notice shall be in form and substance reasonably satisfactory
to the Administrative Agent; provided that, in the case of any payments in respect of the Refinanced Debt, such payments shall be
deemed paid for purposes of this paragraph (k) to the extent received by the administrative agent, if applicable, with respect to such
Refinanced Debt.
(l) Perfection of Security Interest in the Collateral. Evidence that (i) in respect of each mortgage and pledge without
transfer of possession covering the Collateral, it shall have been executed and notarized, (ii) in respect of each mortgage, it shall have
received a no Lien certificate in connection with the relevant real Property constituting the Collateral and a precautionary notice
(aviso preventivo) shall have been filed with the relevant Public Registry of Property and (iii) in respect of each pledge covering
stock, it shall have been executed, the
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applicable stock certificates shall have been endorsed and delivered to the Collateral Agent, a notation shall have been made in the
applicable stock registry and the Collateral Agent shall have received a certificate issued by the secretary of the relevant Encumbered
Entity attaching such notation and setting forth its authority and the correctness of the entry into the stock registry.
(m) Auditor’s Letter. A letter from Deloitte & Touche LLP, in substantially the form of Exhibit H hereto.
(n) Other Documents. An intercreditor agreement duly executed and delivered by the Administrative Agent, each Bank and
each Agent and lender under the Other Facilities in form and substance satisfactory to the Administrative Agent and each Bank, and
such other documents as the Administrative Agent may reasonably request in connection with this Agreement and the other Loan
Documents and the transactions contemplated hereby and thereby.
6.02. Additional Conditions to the Borrowing. The obligation of any Bank to make its Loan hereunder is subject to the
further conditions precedent that:
(a) except and to the extent set forth in Schedule IX hereto, since December 31, 2002, no event or circumstance shall have
occurred which has had a Material Adverse Effect;
(b) there shall not have occurred a material adverse change in Mexico or the United States and no material disruption of or
material adverse change in loan syndication or financial banking or capital market conditions in Mexico, the United States or
internationally;
(c) both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof
the following statements shall be true:
(1) no Default shall have occurred and be continuing or would result from such Borrowing; and
(2) the representations and warranties made by the Borrower and by each Desc Entity in each Loan Document to
which it is a party shall be in all material respects true on and as of the date of the making of such Loan with the same force and
effect as if made on and as of such date, or, if any such representation or warranty is expressly stated to have been made as of a
specific date, as of such date;
(d) no law, regulation or decree shall be applicable which, in the reasonable opinion of the Majority Banks, restrains, prevents or
imposes materially adverse conditions upon the transactions contemplated hereby; and
(e) the disbursement of the loans under the Other Facilities shall occur simultaneously with the disbursement of the Loans
hereunder.
The Administrative Agent will promptly notify the Borrower and each Bank of the occurrence of the Closing Date.
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SECTION 7. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Administrative Agent and the Banks that:
7.01. Corporate Status. Each of the Borrower and the Principal Subsidiaries (i) is a corporation duly organized and validly
existing under the laws of the jurisdiction of its incorporation, (ii) has all requisite corporate or other power, and has all material
governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as
proposed to be conducted, (iii) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure so to qualify could reasonably be expected to (either individually or in the aggregate)
have a Material Adverse Effect, (iv) is in material compliance with all applicable laws and regulations and (v) has good title to all its
assets, free and clear of any Liens except for Liens expressly permitted pursuant to Section 9.03.
7.02. Due Authorization, Legality, Etc. Each of the Borrower and the Desc Entities has full power, authority and legal right
to make and perform each of the Loan Documents to which it is a party. The execution, delivery and performance by each of the
Borrower and the Desc Entities of each of the Loan Documents to which it is a party and all other documents and instruments to be
executed and delivered hereunder by the Borrower or such Desc Entity have been duly authorized by all necessary corporate action,
and do not and will not contravene (a) the estatutos sociales of the Borrower or such Desc Entity, as the case may be, (b) any
applicable law, decree, regulation, judgment, award, injunction or similar legal restriction, as now in effect, or (c) any material
agreement, instrument or contractual restriction binding on or affecting the Borrower or such Desc Entity or any of its Property, as the
case may be, and do not and will not result in the imposition of any Lien on any Property of the Borrower or any of the Principal
Subsidiaries, except for the Liens created pursuant to the Security Documents.
7.03. No Additional Authorization Required. No license, consent, authorization or approval or other action by, or notice to
or registration or filing with, any Governmental Authority (other than as set forth in Sections 6.01(l) and 8.19), and no other thirdparty consent or approval, is necessary for the due execution, delivery and performance by each of the Borrower and the Desc Entities
of each of Loan Documents to which it is a party or for the legality, validity or enforceability of such Loan Documents (other than as
indicated in Section 7.22(b)).
7.04. Legal Effect. This Agreement has been duly executed and delivered by the Borrower and is, and each Note and other
Loan Document when duly executed and delivered by the Borrower or the Desc Entities party thereto will be, the legal, valid and
binding obligation of the Borrower and such Desc Entities, as the case may be, enforceable against the Borrower or such Desc
Entities, as the case may be, in accordance with its terms, except (i) as may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors’ rights generally and (ii) as may be limited by equitable principles of general applicability.
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7.05. Financial Statements.
(a) The audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2002, and
the related consolidated statements of income, stockholders’ equity and changes in financial position for the fiscal year ended on that
date, with the opinion thereon of Deloitte & Touche LLP, heretofore furnished to the Banks, are complete and correct in all material
respects and fairly present the consolidated financial condition of the Borrower and its Consolidated Subsidiaries as at said date and
the results of their respective operations for the fiscal year ending on said date, all in accordance with GAAP.
(b) The unaudited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of September 30, 2003,
and the related consolidated statements of income, stockholders’ equity and changes in financial position for the portion of the fiscal
year ended on that date, heretofore furnished to the Banks, are complete and correct in all material respects and fairly present the
consolidated financial condition of the Borrower and its Consolidated Subsidiaries as at said date and the results of their respective
operations for the period ending on said date, all in accordance with GAAP, and the Borrower and its Subsidiaries have no material
contingent liabilities or material unusual forward or long-term commitments not disclosed therein.
(c) The unaudited consolidated balance sheets of each Desc Entity and its Consolidated Subsidiaries as of September 30,
2003, and the related consolidated statements of income, stockholders’ equity and changes in financial position for the portion of the
fiscal year ended on that date, heretofore furnished to the Banks, are complete and correct in all material respects and fairly present
the consolidated financial condition of such Desc Entity and its Consolidated Subsidiaries as at said date and the results of their
respective operations for the period ending on said date, all in accordance with GAAP, and such Desc Entity and its Subsidiaries have
no material contingent liabilities or material unusual forward or long-term commitments not disclosed therein.
(d) Except and to the extent set forth in Schedule IX hereto, since December 31, 2002, no event or circumstance has
occurred that has had or that the Borrower reasonably expects to have a Material Adverse Effect.
7.06. Ranking. The payment obligations of the Borrower hereunder are unconditional, secured (but only to the extent of the
Collateral, and otherwise unsecured) and unsubordinated general obligations of the Borrower, and rank and will at all times rank at
least pari passu in priority of payment with all other present and future unsecured and unsubordinated Indebtedness of the Borrower,
other than statutorily preferred obligations, and will have priority with respect to such unsecured and unsubordinated Indebtedness,
other than statutorily preferred obligations, to the extent of the Collateral, except that (i) certain limited labor claims for salaries and
indemnities provided for in the Mexican Constitution, and bankruptcy-related expenses, and (ii) in respect of amounts due in excess
of the Collateral, other labor claims, claims of tax authorities for unpaid taxes, social security quotas, workers’ housing fund quotas,
retirement fund quotas and other secured obligations (to the extent of the value of the relevant collateral)
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will have priority over the claims of the Administrative Agent and the Banks in any bankruptcy proceeding initiated in Mexico
pursuant to the laws of Mexico (x) in the case of (i), with respect to both the secured and unsecured obligations of the Borrower, and
(y) in the case of (ii), with respect to unsecured obligations of the Borrower.
7.07. No Actions or Proceedings. There are no legal or arbitral proceedings, or proceedings by or before any Governmental
Authority, now pending or (to the knowledge of the Borrower) threatened against the Borrower or any of its Principal Subsidiaries
that (either individually or in the aggregate) (a) could reasonably be expected to have a Material Adverse Effect or (b) purport to
affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document.
7.08. Commercial Activity; Absence of Immunity. Each of the Borrower and the Desc Entities is subject to civil and
commercial law with respect to its obligations under this Agreement, the Notes and the other Loan Documents to which it is a party
and the making and performance of this Agreement, the Notes and such other Loan Documents by each of the Borrower and the Desc
Entities constitute private and commercial acts rather than public or governmental acts. None of the Borrower or any Desc Entity is
entitled to any immunity on the ground of sovereignty or the like from the jurisdiction of any court or from any action, suit or
proceeding, or the service of process in connection therewith, arising under this Agreement, the Notes or the other Loan Documents.
7.09. Taxes. There is no income, stamp or other tax, levy, assessment, impost, deduction, charge or withholding of any
kind imposed by Mexico (or any municipality or other political subdivision or taxing authority thereof or therein that exercises de
facto or de jure power to impose such tax, levy, assessment, impost, deduction, charge or withholding) either (a) on or by virtue of the
execution or delivery of this Agreement, the Notes or the other Loan Documents (other than registration fees payable by the Borrower
or a Desc Entity relating to the registrations with the relevant Public Registries of Property or Public Registries of Commerce
mentioned in Section 6.01(1) above) or (b) on any payment to be made by the Borrower or any Desc Entity, as appropriate, pursuant
to this Agreement, the Notes or the other Loan Documents, other than any such tax, levy, assessment, impost, deduction, charge or
withholding imposed on any Person as a result of such Person being organized under the laws of Mexico or by virtue of its having a
permanent establishment in Mexico to which income under this Agreement and the Notes is attributable or its Applicable Lending
Office being located in Mexico, except for withholding tax on payments by the Borrower or any Desc Entity of interest and fees
deemed to be interest to Banks other than Mexican Banks (acting directly and not acting through non-Mexican agencies or branches)
and EDC. The Borrower has filed all tax returns required to be filed and paid all taxes shown to be due thereon except such as are
being contested in good faith by appropriate proceedings and for which adequate reserves have been made if required in accordance
with GAAP.
7.10. Full Disclosure. There is no fact (other than matters of a general economic or political nature which do not affect the
Borrower or any of its Subsidiaries uniquely) known to the Borrower that has or that could reasonably be expected to have a
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Material Adverse Effect that has not been disclosed herein or in a report, financial statement, exhibit, schedule, disclosure letter or
other writing furnished to the Banks for use in connection with the transactions contemplated hereby.
7.11. Environmental Matters. The operations and Property of the Borrower and each of its Subsidiaries comply with all
applicable Environmental Laws, except to the extent the failure to so comply, either individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
7.12. Investment Company Act. None of the Borrower or any Desc Entity is an “investment company” or a company
“controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
7.13. Legal Form. This Agreement is, and each Note and other Loan Document when duly executed and delivered by the
Borrower or a Desc Entity will be, in proper legal form under the laws of Mexico for the enforcement thereof against the Borrower or
the relevant Desc Entity under such law, and if this Agreement and each Note and other Loan Document (if not stated to be governed
by Mexican law) were stated to be governed by such law, it would constitute a legal, valid and binding obligation of the Borrower or
such Desc Entity under such law, enforceable in accordance with its terms, except (i) as it would be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors’ rights generally and (ii) as it would be limited by equitable principles of
general applicability. All formalities required in Mexico for the validity and enforceability of this Agreement have been
accomplished, and by the Closing Date all formalities required in Mexico for the validity and enforceability of the Notes and the other
Loan Documents will have been accomplished, and (except for the registration fees mentioned in Section 7.09 above) no Covered
Taxes are required to be paid and, except as set forth in Section 6.01(l), no notarization is required, for the validity and enforceability
hereof or thereof, provided that in the event any legal proceedings are brought in the courts of Mexico, a Spanish translation of any
non-Spanish documents required in such proceedings needs to be prepared by a court-approved translator and would have to be
approved by such court, after the defendant had been given an opportunity to be heard with respect to the accuracy of the translation,
and proceedings would thereafter be based upon the translated documents.
7.14. Restrictive Agreements. Schedule III hereto contains a complete and correct list of each indenture, credit agreement,
loan agreement, shareholders agreement or other agreement to which the Borrower or any of its Subsidiaries is a party that, directly or
indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposing any condition upon, the declaration or
payment of dividends or other distributions on any class of stock of any Subsidiary of the Borrower, or loans or advances by or
transfers of Property of any Subsidiary of the Borrower to the Borrower, and a brief description of the relevant provisions in such
agreement.
7.15. Debt. (a) Schedule IV hereto sets forth a complete and correct list of all Indebtedness of the Borrower and its
Consolidated Subsidiaries (other than intercompany Indebtedness among the Borrower and any of its Subsidiaries) having an
outstanding principal
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amount in excess of $5,000,000 as of the date hereof, and in the case of secured Indebtedness, such Schedule IV sets forth a
description of the security interest granted by the Borrower and/or its Consolidated Subsidiaries, as applicable.
(b) Schedule V hereto sets forth a true and complete list of all intercompany Indebtedness among the Borrower and any of
its Subsidiaries outstanding as of October 31, 2003 (including the amounts thereof).
7.16. Solvency. Each of the Borrower and each Desc Entity is, and after giving effect to the making of the Loans and the
use of proceeds thereof (but, in the case of each of the Guarantors, without taking into account any liabilities arising from the
Guaranty Agreement or the Guarantee provided by such Guarantor in respect of the Other Facilities) will be, Solvent.
7.17. Ownership of the Desc Entities. The Borrower owns, free and clear of Liens, and has the unencumbered right to vote,
all of the outstanding shares of Voting Stock of each Desc Entity, except for the shares owned by other Persons in a Desc Entity as
indicated in Schedule XV hereto. All of the issued and outstanding capital stock of each Desc Entity is validly issued, fully paid and
non-assessable and there are no outstanding Equity Rights with respect to any Desc Entity held by any Person other than the
Borrower or its Subsidiaries, except as indicated in Schedule XV hereto. For purposes of this Section 7.17, “Equity Rights” shall
mean, with respect to a Desc Entity, any outstanding preemptive rights, subscriptions, options, warrants, commitments or agreements
of any kind (including, without limitation, any stockholders’ or voting trust agreements) for the issuance, sale, registration or voting
of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership
interests of any type in, such Desc Entity.
7.18. Compliance with Law. The Borrower and its Subsidiaries are in compliance with all Applicable Law, including rules,
regulations and orders of Governmental Authorities (including without limitation IMSS, INFONAVIT and SAR) except where the
failure to be in compliance would not individually or in the aggregate have a Material Adverse Effect.
7.19. Use of Proceeds; Compliance with Regulations U and X. The Borrower intends to use the proceeds of the Loans
solely for the purposes set forth in Section 2.01(b) (in each case in compliance with all applicable legal and regulatory requirements),
provided, that neither the Administrative Agent nor any Bank shall have responsibility as to the use of any such proceeds. Neither the
Borrower nor any of the Principal Subsidiaries is engaged principally or as one of its important activities in the business of extending
credit for the purpose of purchasing or carrying, and no Borrower nor any Principal Subsidiary owns or presently intends to acquire,
any “margin stock” as defined in Regulations U and X (12 C.F.R. Parts 221 and 224) (the “Regulations”) of the Board of Governors
of the Federal Reserve System (“margin stock”). None of the proceeds of the Loans will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase or carry margin stock of for any other purpose which might constitute this transaction a “purpose credit” within
the meaning of the Regulations.
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7.20. Voluntary Prepayments. The Borrower has not made any voluntary prepayment of any Indebtedness (other than
Indebtedness outstanding under a Permitted Working Capital Facility) since December 31, 2002, except as otherwise required in
respect of the Refinanced Debt.
7.21. Employee Benefit Plans. The Borrower has no employees or employee benefit plans, and the Principal Subsidiaries
with employees are in compliance with their respective obligations relating to all employee benefit plans established, maintained or
contributed to by their employees, and none of such Principal Subsidiaries has any outstanding liabilities with respect to any such
employee benefit plan, except such noncompliance as would not, individually or in the aggregate, have a Material Adverse Effect.
7.22. Collateral. (a) The Security Documents create valid, enforceable and, when the requirements set forth in Sections
6.01(l) and 8.19 have been satisfied, perfected security interests in the Collateral purported to be covered thereby for the benefit of the
Collateral Agent, which security interests secure the Loans. The Liens created by the Security Documents are enforceable as security
for the obligations secured thereunder in accordance with their terms with respect to the Collateral, which enforceability is subject
only to statutorily preferred obligations and as may be limited by bankruptcy, insolvency or similar laws affecting secured creditors’
rights generally.
(b) No Governmental Approvals or other approvals are required for the sale, lease, transfer or disposition by the Collateral
Agent or the Banks of the Collateral, except as have been obtained and are in effect, except that (i) the approval of the National
Foreign Commission (Comisión Nacional de Inversión Extranjera) may be needed for foreign investors to acquire assets or shares of
a Desc Entity whose total asset value at the time of acquisition exceeds the amount established by such Commission and provided
such acquisition results in the direct or indirect participation of foreign investors in the capital of the relevant company in excess of
49%, (ii) such sale may need to be notified to the Federal Competition Commission (Comisión Federal de Competencia) under the
Federal Law of Economic Competition (Ley Federal de Competencia Económica) if concentration occurs and/or a minimum
threshold amount is exceeded and (iii) a judicial resolution shall be required if judicial foreclosure of the Collateral is sought.
(c) There are no Liens on the Collateral (other than Permitted Collateral Liens), no Person has the right to acquire the
Collateral and the Collateral is freely transferable (subject in each case to the provisions of the Security Documents).
7.23. Insurance. Each of the Borrower and the Principal Subsidiaries maintains insurance including, but not limited to,
business interruption coverage and public liability coverage insurance from responsible companies in such amounts and against such
risks to the Borrower and each Principal Subsidiaries as is consistent and in accordance with industry practice for companies similarly
situated owning similar properties in the same general areas in which the Borrower or such Principal Subsidiary operates.
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7.24. Properties. Each of the Borrower and the Principal Subsidiaries has valid and marketable title to all Property owned
by it and necessary to its business. Each of the Borrower and the Principal Subsidiaries holds all material licenses, certificates and
clearances of municipal and other authorities necessary to own and operate its Properties in the manner and for the purposes currently
operated by it. There are no actual or, to the best knowledge of the Borrower, threatened or alleged defaults which, individually or in
the aggregate, could have a Material Adverse Effect with respect to any leases of real Property under which the Borrower or any of its
Subsidiaries is lessor or lessee.
7.25. Principal Subsidiaries.
(a) The Principal Subsidiaries and the direct and indirect ownership thereof by the Borrower as of the date hereof are as set
forth on Schedule XII hereto.
(b) To the extent any Principal Subsidiary is a corporation, the issued and outstanding shares of such Principal Subsidiary
have been duly authorized and issued and are fully paid and non-assessable. The ownership interest in each of the Principal
Subsidiaries represents a direct or indirect Controlling interest by the Borrower for purposes of directing or causing the direction of
the management and policies of each Principal Subsidiary.
7.26. Sale-Leaseback Transactions. There are no individual Sale-Leaseback Transactions of the Borrower and the Principal
Subsidiaries having outstanding payment obligations of $5,000,000 or more as of the date hereof, except as described in Schedule
XVI hereto.
7.27. Foreign Exchange Regulations. There are no foreign exchange controls or other similar legal restrictions in effect in
Mexico that would affect the ability of the Borrower or any Desc Entity, as the case may be, to make interest, principal or other
payments under the Loan Documents to which it is a party, or that would restrict the ability of the Borrower or any Desc Entity, as the
case may be, to convert Pesos into Dollars (or other foreign currencies) for subsequent payment thereunder.
SECTION 8. AFFIRMATIVE COVENANTS OF THE BORROWER. The Borrower covenants and agrees with the Banks
and the Administrative Agent that, so long as any Commitment or Loan is outstanding and until payment in full of all amounts
payable by the Borrower hereunder:
8.01. Corporate Existence. The Borrower will, and will cause each of its Principal Subsidiaries to, (i) preserve and maintain
its legal existence and (ii) preserve and maintain all of its material rights, privileges, licenses and franchises (provided, that nothing in
this Section 8.01 shall prohibit any transaction expressly permitted under Section 9.01, except in either case in the case of a Principal
Subsidiary (other than a Desc Entity) where the failure to preserve and maintain the same would not have a Material Adverse Effect.
8.02. Inspection of Property, Books and Records. The Borrower will, and will cause each of its Subsidiaries to, maintain
appropriate books and records in which full, true and
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correct entries shall be made of all dealings and transactions in relation to its business and activities. The Borrower will, and will
cause each of its Principal Subsidiaries to, permit representatives of any Bank, the Administrative Agent or the Collateral Agent,
during normal business hours and as often as may reasonably be desired at their own cost and expense (unless a Default or Event of
Default has occurred and is continuing, in which case such costs and expenses shall be borne by the Borrower) and following
reasonable notice (unless a Default or Event of Default has occurred and is continuing, in which case notice shall not be required) and
subject to Section 12.17, to examine, copy and make extracts from its books and records, to inspect its Property, and to discuss its
business and affairs with its officers, all to the extent reasonably requested by such Bank, the Administrative Agent or the Collateral
Agent (as the case may be), provided, that such examinations, inspections and discussions are conducted in a manner that does not
interfere with or otherwise interrupt in any material respect the operations of the Borrower or the relevant Principal Subsidiary.
8.03. Compliance with Law. The Borrower will, and will cause each of its Subsidiaries to, comply in all material respects
with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including without limitation
IMSS, INFONAVIT and SAR and all Environmental Laws and laws relating to social security) except where the necessity of
compliance therewith is being contested in good faith by appropriate proceedings.
8.04. Payment of Obligations. The Borrower will, and will cause each of its Subsidiaries to, pay and discharge at or before
maturity all of their respective material obligations and liabilities (including, without limitation, claims of materialmen,
warehousemen and the like which if unpaid might by law give rise to a Lien) and pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties
attach thereto, except for any such obligation, liability, tax, assessment, charge or levy the payment of which is being contested in
good faith and by proper proceedings and against which adequate reserves are being maintained in accordance with GAAP and where
the failure to pay or discharge such tax, obligation, liability, assessment, charge or levy would not result in a Material Adverse Effect.
8.05. Maintenance of Property; Insurance. The Borrower will, and will cause each of its Principal Subsidiaries to:
(a) maintain all of its Property useful and necessary in the business conducted by the Borrower and its Subsidiaries in good
working order and condition, ordinary wear and tear excepted; provided, however, that neither the Borrower nor any Subsidiary shall
be prevented by this Section 8.05 from discontinuing such operations or disposing of or suspending the maintenance of those
Properties which, in the reasonable judgment of the Borrower, are no longer necessary or useful in the conduct of the business of the
Borrower or such Subsidiary, as the case may be, and if such discontinuation, disposition or suspension would not result in a Material
Adverse Effect; and
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(b) maintain insurance with creditworthy insurance companies against such risks and in such amounts as are usually
maintained or insured against in Mexico (and other relevant jurisdictions in which the Borrower or such Subsidiary (as applicable)
conducts its operations) by other companies of established repute engaged in the same or a similar business; and will furnish to the
Banks, upon reasonable request from the Administrative Agent, information presented in reasonable detail as to the insurance so
carried.
8.06. Governmental Authorizations. The Borrower will, and will cause the Desc Entities to, promptly from time to time
obtain or make and maintain in full force and effect all licenses, consents, authorizations and approvals of, and filings and
registrations with, any Governmental Authority from time to time necessary under the laws of Mexico for the making and
performance by the Borrower and the Desc Entities of this Agreement, the Notes or the other Loan Documents, as the case may be.
8.07. Reporting Requirements. The Borrower will furnish or cause to be furnished to the Administrative Agent for
distribution to each Bank (and in sufficient copies for each Bank):
(a) Annual Financial Statements of the Borrower. As soon as available, and in any event within 120 calendar days after the
close of each fiscal year of the Borrower, a balance sheet of the Borrower (i) on a stand-alone basis and (ii) on a consolidated basis
with its Consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, stockholders’
equity and changes in financial position of the Borrower and its Consolidated Subsidiaries for such fiscal year, setting forth in each
case in comparative form the figures for the previous fiscal year, with figures expressed in constant Pesos for such fiscal year, all
prepared and reported on in conformity with GAAP with an unqualified opinion thereon of independent certified public accountants
of recognized international standing, provided, that such opinion may rely on the opinions of other independent public accountants of
recognized international standing to the extent that such other accountants shall have conducted the audits of Consolidated
Subsidiaries included in the Borrower’s consolidated financial statements;
(b) Annual Financial Statements of the Desc Entities. As soon as available, and in any event within 120 calendar days after
the close of each fiscal year of the relevant Desc Entity, a consolidated balance sheet of such Desc Entities and its Consolidated
Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, stockholders’ equity and changes in
financial position of such Desc Entity and its Consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative
form the figures for the previous fiscal year, with figures expressed in constant Pesos for such fiscal year, all reported on in
conformity with GAAP consistently applied and with an unqualified opinion thereon of independent public accountants of recognized
international standing, provided, that such opinion may rely on the opinions of other independent public accountants of recognized
international standing to the extent that such other accountants shall have conducted the audits of Consolidated Subsidiaries included
in such Desc Entity’s consolidated financial statements;
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(c) Quarterly Financial Statements of the Borrower. As soon as available, and in any event within 45 calendar days after
the close of each of the first three quarters of each fiscal year of the Borrower and after the close of the last quarter of 2005 of the
Borrower, an unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of each such fiscal
quarter and the related consolidated statements of income, stockholders’ equity and changes in financial position of the Borrower and
its Consolidated Subsidiaries for such quarter and for the portion of the fiscal year ended at the end of such quarter, setting forth in
each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, and
the consolidated statements of changes in financial position, with figures expressed in constant Pesos for such fiscal quarter, all
certified as to fairness of presentation and conformity with GAAP by a senior financial officer of the Borrower;
(d) Quarterly Financial Statements of the Desc Entities. As soon as available, and in any event within 45 calendar days
after the close of each of the first three quarters of each fiscal quarter of the relevant Desc Entity an unaudited consolidated balance
sheet of such Desc Entity and its Consolidated Subsidiaries as at the end of each such fiscal quarter and the related consolidated
statements of income, stockholders’ equity and changes in financial position of such Desc Entity and its Consolidated Subsidiaries for
such quarter and for the portion of the fiscal year ended at the end of such quarter, setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding portion of the previous fiscal year, and the consolidated statements of
changes in financial position, with figures expressed in constant Pesos for such fiscal quarter, all certified as to fairness of
presentation and conformity with GAAP by a senior financial officer of the Borrower or the relevant Desc Entity;
(e) Officer’s Certificate. Simultaneously with the delivery of each set of financial statements referred to in paragraphs (a)
through (d) above, a certificate of the Chief Financial Officer or the Chief Accounting Officer of the Borrower (w) setting forth in
reasonable detail the calculations required to establish whether the Borrower, as of the last day of the most recently ended fiscal
quarter of the Borrower, was in compliance with the requirements of Sections 9.11 through 9.14, inclusive, on the date of such
financial statements, (x) listing each Principal Subsidiary as of the date of such financial statements, (y) stating whether any Default
exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower
is taking or proposes to take with respect thereto and (z) with the delivery of the financial statements referred to in paragraph (a)
above only, setting forth in reasonable detail the calculations required to determine Excess Cash for purposes of determining
compliance with the requirements of Section 2.07(b);
(f) Accountants’ Certificate. Simultaneously with the delivery of the financial statements referred to in paragraph (a)
above, a statement of the firm of independent public accountants which reported on such statements (x) whether anything has come to
their attention to cause them to believe that any Default existed on the date of such statements and (y) confirming the calculations set
forth in the officer’s certificate delivered simultaneously therewith pursuant to paragraph (e) above;
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(g) Budget. Within 60 calendar days after the close of each fiscal year of the Borrower, an annual budget for the Borrower
and its Consolidated Subsidiaries for the next fiscal year (including a balance sheet and consolidated statements of income and
changes in financial position on a monthly basis for such fiscal year). In addition, simultaneously with the delivery of each set of
financial statements referred to in paragraphs (b) and (c) above, a comparison of the results of the relevant fiscal year or fiscal quarter,
as applicable, to the budget for such year or quarter, as applicable, and a brief analysis of any deviations between them.
(h) Notice of Default or Litigation. Promptly, and in any event within three Business Days after an officer of the Borrower
obtains knowledge thereof, (i) notice of the occurrence of any event which constitutes a Default or Event of Default and (ii) notice of
any litigation or governmental proceeding pending with respect to any Loan Document;
(i) Other Reports and Filings. For so long as securities of the Borrower are held by the public, promptly upon the delivery
or filing thereof, copies of all material reports that pursuant to applicable law the Borrower is required to deliver to any of its security
holders, and copies of all reports and registration statements that the Borrower or the Desc Entities file with the Securities and
Exchange Commission of the United States or any national securities exchange;
(j) Notice of Change in Composition of Subsidiaries. Promptly upon the Borrower’s creating or acquiring any Principal
Subsidiary or upon any of its Subsidiaries becoming a Principal Subsidiary after the date hereof, notice thereof and a brief description
of the circumstances under which such Principal Subsidiary was created or acquired or otherwise became a Principal Subsidiary;
(k) Notice of Change in Control. Promptly, and in any event within three Business Days after an officer of the Borrower
obtains knowledge thereof, notice of a (i) Change in Control or (ii) any action taken or the occurrence of an event that could
reasonably be expected to result in a Change of Control;
(l) Material Adverse Effect. Promptly upon the commencement of, or any material adverse development in, any litigation
or proceeding against the Borrower or any of its Subsidiaries which is reasonably likely to have a Material Adverse Effect, notice
thereof with a description thereof in reasonable detail;
(m) Asset Sales. Within 30 days after the occurrence of each Asset Sale by the Borrower or any of its Subsidiaries
(including its Non-strategic Subsidiaries) during each fiscal year of the Borrower, a statement, certified by a senior financial officer of
the Borrower, in form and detail reasonably satisfactory to the Administrative Agent, of the aggregate amount of consideration and
Net Available Cash received or to be received by the Borrower or any of its Subsidiaries (whether during the then current fiscal year
or any subsequent fiscal year, but without duplication) in respect of such Asset Sale and the amounts of Net Available Cash that the
Borrower intends to apply (or has applied) in accordance with Section 2.07; and
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(n) Other Information. From time to time, such other information or documents (financial or otherwise) relating to the
business, affairs and financial condition of the Borrower and its Subsidiaries (including the disposition of any Property) as any Bank
may reasonably request.
8.08. Ranking. The Borrower will ensure that the payment obligations of the Borrower under this Agreement and the Notes
will at all times constitute unconditional, secured (but only to the extent of the Collateral, and otherwise unsecured) and
unsubordinated general obligations of the Borrower ranking at least pari passu in priority of payment with all other present and future
unsecured and unsubordinated Indebtedness of the Borrower (other than Indebtedness or obligations having priority by operation of
law).
8.09. Intercompany Indebtedness. The Borrower will cause all intercompany Indebtedness between the Borrower and any
of its Subsidiaries to be evidenced at all times by a note or agreement duly executed and delivered by the borrower under such
Indebtedness, which instrument shall be a legal, valid and binding obligation of the borrower thereunder, enforceable against such
borrower in accordance with its terms, as such enforceability may be limited by bankruptcy, insolvency or similar laws affecting
secured creditors’ rights generally.
8.10. Taxes. The Borrower will, and will cause each of the Principal Subsidiaries to, pay and discharge or cause to be paid
and discharged all applicable taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or
upon any of its Property or upon any part thereof, when due, as well as all lawful claims for labor, materials and supplies which, if
unpaid, might by a Requirement of Law become a Lien upon such Property, provided, however, that none of the Borrower or any of
the Principal Subsidiaries will be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or
validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves have been established in
accordance with GAAP, but only so long as such tax, assessment, charge, levy or claim does not become a Lien or charge other than a
Permitted Lien. The Borrower will, and will cause each Principal Subsidiary to, timely file all information returns required by federal,
state or local tax authorities.
8.11. Further Assurances. The Borrower will, promptly after receiving notice (or otherwise becoming aware) thereof, cure,
or cause to be cured, any defects in the creation and issuance of any of the Notes, defects in the creation and perfection of a firstpriority security interest in the Collateral and the execution and delivery of the Loan Documents (including, without limitation, this
Agreement), resulting from any acts or failure to act by the Borrower or any of the Principal Subsidiaries or any employee or officer
thereof. The Borrower at its expense will promptly execute and deliver to the Administrative Agent, the Collateral Agent and the
Banks, or cause to be executed and delivered to the Administrative Agent, the Collateral Agent and the Banks, all such other and
further documents, agreements and instruments in compliance with or to achieve compliance with the covenants and agreements in
the Loan Documents (including, without limitation, this Agreement) or to correct any omissions in the Loan Documents, or to obtain
any consents, all as may be necessary in connection therewith or as may be reasonably requested by the Administrative Agent, the
Collateral Agent or any Bank in connection therewith.
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8.12. Use of Proceeds. The Borrower will use the proceeds from the Loans solely to Refinance the Refinanced Debt.
Neither the Administrative Agent nor any Bank shall have responsibility as to the use of any of the proceeds of any Loan.
8.13. Ownership of Principal Subsidiaries. The Borrower will at all times own (beneficially and of record), directly or
indirectly, a majority of the Voting Stock of each Principal Subsidiary, provided, that this Section 8.13 shall not be construed to
restrict any transaction expressly permitted by Section 9.01 or 9.02 (including, without limitation, by reference therein to Section
9.03).
8.14. Additional Guarantors. (a) In the event and to the extent that the existing contractual limitations relating to the
Guarantee by any Joint Venture Entity no longer apply and all or substantially all of the capital stock or other interests, if any,
evidencing ownership rights in such Joint Venture Entity are owned directly or indirectly by the Borrower, the Borrower promptly
will (i) cause such Joint Venture Entity and its Subsidiaries that are not separately Joint Venture Entities to Guarantee the
Indebtedness hereunder by duly executing and delivering an Assumption Agreement substantially in the form attached as Annex I to
the Guaranty Agreement and (ii) deliver or cause to be delivered to the Administrative Agent an opinion of counsel or counsels to
such Guarantor or Guarantors, addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and
from such counsels and in such jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the
Collateral Agent.
(b) In the event that a new Subsidiary of the Borrower (other than a new Joint Venture Entity created pursuant to a
Permitted Joint Venture) is formed, then the Borrower promptly will (i) cause such Subsidiary to Guarantee the Indebtedness
hereunder by duly executing and delivering an Assumption Agreement substantially in the form attached as Annex I to the Guaranty
Agreement and (ii) deliver or cause to be delivered to the Administrative Agent in connection therewith an opinion of counsel or
counsels to such Guarantor, addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and in
such jurisdictions reasonably acceptable to legal counsel or counsels to the Administrative Agent and the Collateral Agent; provided
that this paragraph (b) shall only apply at such time as the Borrower or any Subsidiary of the Borrower has made Investments in such
Subsidiary (in the aggregate) in excess of $5,000,000.
8.15. Additional Encumbered Entities. (a) In the event that any partner in a Joint Venture Entity grants a Lien on its capital
stock or other ownership interests, if any, in such Joint Venture Entity, the Borrower will use its reasonable best efforts to obtain the
consent of such partner to the pledge by the Borrower to the Collateral Agent of all capital stock or other interests, if any, evidencing
ownership rights owned by the Borrower or its Subsidiaries in such Joint Venture Entity.
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(b) (i) In the event that the consent of a partner in a Joint Venture Entity is obtained pursuant to paragraph (a) above, or (ii)
in the event and to the extent the existing contractual limitations relating to the pledge by the Borrower and/or its Subsidiaries of all
the capital stock and other interests, if any, evidencing ownership rights owned by them in any Joint Venture Entity cease to apply, or
(iii) in the event the Borrower and/or its Subsidiaries acquire all or substantially all of the capital stock or other interests, if any,
evidencing ownership rights in any such Joint Venture Entity, or (iv) in the event a Subsidiary becomes a Guarantor pursuant to
Section 8.14(b), the Borrower promptly will (A) grant and/or cause its relevant Subsidiaries to grant the Collateral Agent, for its
benefit and for the benefit of the Secured Parties, a perfected first-priority security interest in all capital stock or other interests, if any,
evidencing ownership rights owned by the Borrower or its Subsidiaries in such Joint Venture Entity and its Subsidiaries that are not
separately limited by existing contractual restrictions (unless the capital stock or other interests, if any, evidencing ownership rights in
such Joint Venture Entity (in the aggregate) have a book value of less than $5,000,000 at such time) by duly executing and delivering
a security agreement in form and substance reasonably satisfactory to the Administrative Agent and the Collateral Agent, (B) cause
any of its Subsidiaries that are granting a security interest pursuant to clause (A) above to accede to the terms of the Collateral
Agency Agreement (to the extent not already a party thereto) by duly executing and delivering an Assumption Agreement
substantially in the form attached as Annex I to the Collateral Agency Agreement, (C) deliver or cause to be delivered to the
Administrative Agent in connection therewith an opinion of counsel or counsels to the pledgor and the Encumbered Entity addressed
to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and from such counsels and in such
jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the Collateral Agent and (D) take
and/or cause its relevant Subsidiaries to take all actions necessary or reasonably requested by the Collateral Agent (including
executing and delivering all documents and instruments necessary or appropriate for the filing and/or recording thereof in all
applicable jurisdictions) to perfect the first priority Lien in such capital stock and other ownership interests and shall pay all taxes,
fees and other charges (including registration fees) then payable in connection with such perfection.
(c) In the event that the Borrower directly or indirectly acquires all or substantially all of the capital stock and other
ownership interests, if any, in Corfuerte, the Borrower will use its reasonable efforts to obtain the consent of Grupo Gavaldón (or any
other Person a shareholder therein at such time) to the pledge by Corfuerte of its capital stock and other ownership interests, if any, in
each of Nair Industrias, S.A. de C.V. (or its successor) and Pesquera Nair, S.A. de C.V. (or its successor) (the “Corfuerte
Subsidiaries”), and, to the extent such consent is obtained, the Borrower promptly will (i) cause Corfuerte to grant the Collateral
Agent, for its benefit and for the benefit of the Secured Parties, a perfected first-priority security interest in all capital stock or other
interests, if any, evidencing ownership rights owned by Corfuerte in each of the Corfuerte Subsidiaries by duly executing and
delivering a security agreement in form and substance reasonably satisfactory to the Administrative Agent and the Collateral Agent,
(ii) cause Corfuerte to accede to the terms of the Collateral Agency Agreement by duly executing and delivering an Assumption
Agreement substantially in the form attached as Annex I to the Collateral Agency Agreement, (iii) deliver or cause to be delivered to
the Administrative Agent in connection therewith an opinion of counsel or counsels to Corfuerte and
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the Corfuerte Subsidiaries addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and
from such counsels and in such jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the
Collateral Agent and (iv) take and/or cause Corfuerte to take all actions necessary or reasonably requested by the Collateral Agent
(including executing and delivering all documents and instruments necessary or appropriate for the filing and/or recording thereof in
all applicable jurisdictions) to perfect the first priority Lien in such capital stock and other ownership interests and shall pay all taxes,
fees and other charges (including registration fees) then payable in connection with such perfection.
8.16. Upstreaming. If and to the extent necessary in order for the Borrower to comply with Section 2.07(a), the Borrower
will cause its Subsidiaries to make available to it as soon as is possible, but in any event within 15 days after received by or on behalf
or on account of such Subsidiary (first by the repayment of intercompany Indebtedness and second by dividend or otherwise), to the
maximum extent permitted by applicable law and by the contractual provisions in effect on the date hereof and described in Schedule
III hereto, an amount equal to any Proceeds received that, but for the proviso in Section 2.07(a) (other than the limitation in clause (B)
(i) thereof relating to the ownership interest of the Borrower in such Subsidiary), would be required to be used by the Borrower to
make a mandatory prepayment of Loans.
8.17. Powers of Attorney. To the extent the Borrower or a Desc Entity does not deliver its notarized power of attorney
described in Section 6.01(g)(ii) on or prior to the Closing Date, the Borrower will, or will cause the relevant Desc Entity to, so deliver
it to the Administrative Agent no later than 30 days following the Closing Date.
8.18. Business Strategy.
(a) The Borrower will engage an independent consulting firm of internationally-recognized standing on or prior to the
Closing Date and will work with such firm in order to (i) analyze and evaluate the business of the Borrower and its Subsidiaries (and
to explore potential sources of non-operating cash and cost and expense savings) to enable the Borrower to develop a new strategic
plan for it and its Subsidiaries, (ii) enable the Borrower to revise the existing financial projections to take into account such new
strategic plan, and (iii) furnish to the Administrative Agent for distribution to each Bank (and in sufficient copies for each Bank), no
later than May 31, 2004, a copy of the revised financial projections developed by the Borrower in accordance with clause (ii) above
and a report of such consulting firm describing in reasonable detail the results of the work required by clause (i) above and containing
an analysis of, and the views expressed by, such firm of the revised financial projections developed by the Borrower.
(b) The Borrower will use its commercially reasonable efforts to implement the new strategic plan upon which the report
delivered pursuant to clause (iii) of paragraph (a) above was based.
8.19. Filings. As promptly as possible, but in any event (A) on the first day immediately following the Closing Date on
which the relevant Public Registry of Property or Public Registry of Commerce, as the case may be, is open for business, the
Borrower will (i) file
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with the relevant registry the precautionary notice (aviso preventivo) relating to the execution and formalization of each mortgage and
pledge without transfer of possession covering the Collateral in accordance with applicable law and (ii) deliver to the Administrative
Agent a letter issued by the relevant Notary Public confirming that such filing has been made and (B) by January 12, 2004, the
Borrower will (i) file each mortgage and pledge without transfer of possesion covering the Collateral with the relevant Public
Registry of Property or Public Registry of Commerce, as the case may be, and (ii) deliver evidence of such filings to the
Administrative Agent. In addition, the Borrower will deliver to the Collateral Agent and the Administrative Agent, the deed (primer
testimonio) of each such mortgage and pledge without transfer of possesion duly recorded with the relevant Public Registry of
Property or Public Regitsry of Commerce promptly following receipt thereof.
SECTION 9. NEGATIVE COVENANTS
9.01. Fundamental Changes. The Borrower will not, and will not permit any of its Principal Subsidiaries to, (a) wind-up,
liquidate or dissolve its affairs or merge, consolidate or otherwise combine with any other Person or (b) sell, lease or convey or
otherwise dispose of (or agree to do any of the foregoing at any future time) all or substantially all of its Property (other than, in the
case of any Desc Entity that is a Principal Subsidiary solely by virtue of the first proviso in the definition of Principal Subsidiary, any
sale, lease conveyance or disposition expressly permitted in Section 9.02), unless (i) (A) the Borrower will be the continuing
corporation or (B) in the case of a merger, consolidation or other combination among a Principal Subsidiary and any other Person,
each of the following conditions shall be met: (1) a Principal Subsidiary or the Borrower will be the successor corporation, (2) except
where the Borrower is the surviving corporation, the Borrower’s direct or indirect ownership interest in the surviving Principal
Subsidiary immediately after giving effect to such transaction shall be at least equal to the Borrower’s direct and indirect ownership
interest in the Principal Subsidiary merging into the surviving Principal Subsidiary immediately prior to giving effect to such
transaction and (3) to the extent such merger, consolidation or other combination involves a Desc Entity that is not the surviving
corporation, the surviving corporation is a Mexican corporation or a corporation organized under the laws of one of the states of the
United States and shall have expressly assumed the obligations of such Desc Entity under Loan Documents to which such Desc Entity
is a party, (ii) immediately after giving effect to such merger, consolidation, combination, sale, lease or conveyance (including any
Incurrence of Indebtedness in connection therewith) (A) no Default or Event of Default shall have occurred and be continuing and (B)
the Borrower would have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Borrower
immediately prior to such transaction, and (iii) the Borrower has delivered to the Administrative Agent and Collateral Agent an
opinion from special New York counsel to the Borrower to the effect that the conditions set forth in clauses (i) and (ii) of this Section
9.01 have been satisfied and (if applicable) the surviving Principal Subsidiary has validly assumed all of the obligations of the
relevant Desc Entity under the Loan Documents to which it is a party. Each agreement or instrument (including each legal opinion)
required by this Section 9.01 shall be executed and delivered by the obligor in a form reasonably satisfactory to the Administrative
Agent and Collateral Agent.
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9.02. Asset Dispositions.
(a) Limitations on Asset Sales. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly,
effect any Equity Issuance of its Subsidiaries or any Asset Sale unless:
(i) no Default or Event of Default exists and is continuing or would result therefrom; provided that this clause (i) shall not
apply to Receivables Sales;
(ii) the Borrower or such Subsidiary receives consideration at the time of such Asset Sale or Equity Issuance, as the case
may be, at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by
the Borrower, of the Property sold or transferred, such Asset Sale or Equity Issuance, as the case may be, is on arm’s-length terms, at
least 70% of the consideration therefor received by the Borrower or such Subsidiary is in the form of cash or Cash Equivalents and is
paid at the time of such Asset Sale or Equity Issuance, as the case may be, or within 30 days thereafter and any consideration therefor
that is not received in the form of cash or Cash Equivalents is paid in cash or Cash Equivalents by no later than one year after such
Asset Sale or Equity Issuance, as the case may be; provided that this clause (ii) shall not apply to any Asset Sale of or by a NonStrategic Subsidiary so long as such Asset Sale is on arm’s-length terms and conducted in a commercially reasonable manner, as
determined in good faith by the Borrower;
(iii) any Net Asset Sale Proceeds or Net Equity Issuance Proceeds in respect of such Asset Sale or Equity Issuance, as the
case may be, are applied in accordance with Section 2.07;
(iv) any Net Available Cash in respect of such Asset Sale or Equity Issuance, as the case may be, that would otherwise be
required to be applied in accordance with Section 2.07 is applied in the manner specified or referenced in the definition of Net Asset
Sale Proceeds or Net Equity Issuance Proceeds, respectively;
(v) the Borrower is in compliance with the provisions of Sections 9.11, 9.12, 9.13 and 9.14 upon giving pro forma effect to
such Asset Sale or Equity Issuance, as the case may be, (assuming that (A) for purposes of such calculation with respect to Section
9.11, such Asset Sale or Equity Issuance, as the case may be, was consummated on the first day of the current fiscal quarter and (B)
for purposes of such calculation with respect to Section 9.13, such Asset Sale or Equity Issuance, as the case may be, was
consummated on the first day of the prior fiscal quarter); and
(vi) the prior written consent of the Majority Banks has been obtained with respect to any Asset Sale (other than
Receivables Sales) if the aggregate consideration received in respect of all Asset Sales (other than Receivables Sales, and taking into
account the consideration to be received in respect of such Asset Sale) in the current Agreement Year (after the deduction of any Net
Available Cash in respect of Asset Sales that is treated as Net Proceeds (without any reinvestment of such proceeds in accordance
with the definition of Net Asset Sale Proceeds) and applied in accordance with Section 2.07 in such Agreement Year) exceeds the
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58
Maximum Reinvestment Amount unless all Net Available Cash in respect of such Asset Sale is treated as Net Proceeds (without any
reinvestment of such proceeds in accordance with the definition of Net Asset Sale Proceeds) and applied in accordance with Section
2.07.
(b) Limitation on Sale-Leaseback Transactions. The Borrower will not, and will not permit any of its Subsidiaries to, enter
into any Sale-Leaseback Transaction unless the Borrower or such Subsidiary could incur a Lien on the Property the subject of such
Sale-Leaseback Transaction (A) to secure Indebtedness in an amount equal to the Attributable Debt relating to such Sale-Leaseback
Transaction under Section 9.03(o) or (B) pursuant to Section 9.03(c).
(c) Limitations on the Disposition of Collateral. Notwithstanding anything to the contrary herein, the Borrower will not,
and will not permit any of its Subsidiaries to, directly or indirectly, (A) effect any Asset Sale (whether or not it is in the ordinary
course of business) of any Property of the Borrower or any of its Subsidiaries that is Collateral or (B) effect any Asset Sale (other than
in the ordinary course of business, but, and for the avoidance of doubt, any contribution of Property to another Person as a capital
contribution or otherwise shall not be considered in the ordinary course of business) of any Property underlying any accounts
receivable that constitute Collateral unless:
(i) no Default or Event of Default exists and is continuing or would result therefrom;
(ii) the Borrower or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the fair market
value, as determined in good faith by the Borrower, of the Property sold or transferred, such Asset Sale is on arm’s-length terms and
at least 70% of the consideration therefor received by the Borrower or such Subsidiary is in the form of cash or Cash Equivalents and
is paid at the time of such Asset Sale or within 30 days thereafter and any consideration therefor that is not received in the form of
cash or Cash Equivalents is pledged to the Collateral Agent in accordance with clause (iv)(1)(z) below as if it were repaired or
replaced Property;
(iii) the Borrower is in compliance with the provisions of Sections 9.11, 9.12, 9.13 and 9.14 upon giving pro forma effect
to such Asset Sale (assuming that (1) for purposes of such calculation with respect to Section 9.11, such Asset Sale was consummated
on the first day of the current fiscal quarter and (2) for purposes of such calculation with respect to Section 9.13, such Asset Sale was
consummated on the first day of the prior fiscal quarter); and
(iv) either (1)(v) the proceeds of all such Asset Sales that are made during any Agreement Year (including any
consideration in respect of such Asset Sale that has not been received in the form of cash or Cash Equivalent which, for purposes
hereof, shall be deemed received in the Agreement Year in which such Asset Sale is made) and not applied in accordance with clause
(2) of this clause (iv) does not exceed $20,000,000, (w) the proceeds of all such Asset Sales (other than those from an Asset Sale of
any Equity Collateral) that are made during any Agreement Year (including any consideration in respect of such Asset Sale that has
not been received in the form of cash or Cash Equivalent which, for purposes hereof, shall be deemed
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59
received in the Agreement Year in which such Asset Sale is made) and not applied in accordance with clause (2) of this clause (iv)
does not exceed $10,000,000, (x) the Borrower is in compliance with paragraph (a)(vi) of this Section 9.02 (taking into account the
consideration received in respect of such Asset Sale), (y) all the proceeds of such Asset Sale not applied in accordance with clause (2)
of this clause (iv) (including any consideration in respect thereof that has not been received in the form of cash or Cash Equivalents)
are applied in the manner specified in the definition of Net Asset Sale Proceeds (and the time period set forth therein for such
application shall apply to any such consideration that has not been received in the form of Cash Equivalents as if cash had been
received on the date such Asset Sale is made) and (z) once applied in accordance with clause (y), if applicable, the Borrower promptly
(a) grants and/or causes its relevant Subsidiaries to grant the Collateral Agent, for its benefit and for the benefit of the Secured Parties,
a perfected first-priority security interest in such repaired or replaced Property by duly executing and delivering a security agreement
in form and substance reasonably satisfactory to the Administrative Agent and the Collateral Agent, (b) causes any of its Subsidiaries
that are granting a security interest pursuant to clause (a) above to accede to the terms of the Collateral Agency Agreement (to the
extent not already a party thereto) by duly executing and delivering an Assumption Agreement substantially in the form attached as
Annex I to the Collateral Agency Agreement, (c) delivers or causes to be delivered to the Administrative Agent an opinion of counsel
or counsels to the pledgor of such Property addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and
substance and from such counsels and in such jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative
Agent and the Collateral Agent and (d) takes and/or causes its relevant Subsidiaries to take all actions necessary or reasonably
requested by the Collateral Agent (including executing and delivering all documents and instruments necessary or appropriate for the
filing and/or recording thereof in all applicable jurisdictions) to perfect the first priority Lien in such Property and shall pay all taxes,
fees and other charges (including registration fees) then payable in connection with such perfection or (2) all the proceeds of such
Asset Sale (without any reinvestment of such proceeds in accordance with the definition of Net Asset Sale Proceeds) shall be treated
as Net Proceeds and shall be applied in accordance with Section 2.07.
(d) Insurance Proceeds. Notwithstanding anything to the contrary herein, all insurance proceeds received by or on behalf or
for the account of the Borrower or any of its Subsidiaries (including to the extent received by the Collateral Agent) in respect of any
Property of the Borrower or such Subsidiary that is Collateral (without any reinvestment of such proceeds in accordance with the
definition of Net Asset Sale Proceeds) shall, so long as no Event of Default exists and is continuing, be treated as Net Proceeds and
shall be applied in accordance with Section 2.07 unless:
(i) the aggregate insurance proceeds received by or on behalf or for the account of the Borrower or any of its Subsidiaries
(including to the extent received by the Collateral Agent) in respect of any Property of the Borrower or any of its Subsidiaries that is
Collateral during any Agreement Year (excluding any insurance proceeds in respect of Property of Pistones Moresa, S.A. de C.V. and
Pintura Estampado y Montaje, S.A. de C.V.) and that are not so applied in accordance with Section 2.07 do not exceed $10,000,000;
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60
(ii) such insurance proceeds (including any insurance proceeds in respect of Property of Pistones Moresa, S.A. de C.V. and
Pintura Estampado y Montaje, S.A. de C.V.) are applied in the manner specified in the definition of Net Asset Sale Proceeds; and
(iii) once applied in accordance with clause (iii), if applicable, the Borrower promptly will (A) grant and/or cause its
relevant Subsidiaries to grant the Collateral Agent, for its benefit and for the benefit of the Secured Parties, a perfected first-priority
security interest in such repaired or replaced Property by duly executing and delivering a security agreement in form and substance
reasonably satisfactory to the Administrative Agent and the Collateral Agent, (B) cause any of its Subsidiaries that are granting a
security interest pursuant to clause (A) above to accede to the terms of the Collateral Agency Agreement (to the extent not already a
party thereto) by duly executing and delivering an Assumption Agreement substantially in the form attached as Annex I to the
Collateral Agency Agreement, (C) deliver or cause to be delivered to the Administrative Agent an opinion of counsel or counsels to
the pledgor of such Property addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and
from such counsels and in such jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the
Collateral Agent and (D) take and/or cause its relevant Subsidiaries to take all actions necessary or reasonably requested by the
Collateral Agent (including executing and delivering all documents and instruments necessary or appropriate for the filing and/or
recording thereof in all applicable jurisdictions) to perfect the first priority Lien in such Property and shall pay all taxes, fees and
other charges (including registration fees) then payable in connection with such perfection.
9.03. Negative Pledge. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create,
assume, incur or suffer to exist any Lien on any of its Property whether now owned or hereafter acquired, other than, subject to the
proviso below, Liens created under one or more of the following circumstances (“Permitted Liens”):
(a) Liens existing on the date hereof that, to the extent they secure Indebtedness or exist in respect of any individual
Property with a book value in excess of $1,000,000, are listed on Schedule XIII hereto (each, an “Existing Lien”);
(b) any Lien on any Property (including shares of capital stock) existing at the time of acquisition thereof (including by
means of a merger or consolidation), provided that such Lien shall not be created as a result of, in connection with or in anticipation
of such acquisition and shall not attach to any Property (including shares of capital stock) other than those so acquired (a “PreExisting Lien”);
(c) any Lien that replaces, renews or extends one or more Existing Liens or Pre-Existing Liens, provided that such
replacement Lien (A) shall be created within 180 days after the earliest expiration of the Lien or Liens being replaced, (B) shall not
secure Indebtedness in an amount exceeding the amount of Indebtedness secured by the Lien or Liens being replaced (adjusted, if
Peso-denominated, to reflect constant Pesos as of the incurrence date of the replacement Lien and, if such replacement Lien secures
Dollar-denominated Indebtedness, calculated in Dollars after such adjustment) and (C) shall not attach to Property other than those to
which the Lien or Liens being replaced is attached;
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61
(d) any Lien securing taxes, assessments and other governmental charges, the payment of which is not yet due or is being
contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which such reserves or other
appropriate provision, if any, as is required by GAAP, shall have been made;
(e) any Lien incurred or deposit made in the ordinary course of business in connection with workers’ compensation,
unemployment insurance and other types of social security;
(f) any statutory Lien of a landlord or Lien of a carrier, warehouseman, mechanic, materialman or employee incurred in the
ordinary course of business for a sum not yet due or the payment of which is being contested in good faith by appropriate proceedings
promptly initiated and diligently conducted and for which such reserves or other appropriate provision, if any, as is required by
GAAP, shall have been made;
(g) Liens incurred on deposits made to secure the performance of bids, tenders, trade contracts, leases, statutory or
regulatory obligations, surety and appeal bonds, performance and return-of-money bonds, government contracts, account agreements
with financial institutions, banker’s acceptances and other obligations of a like nature incurred in the ordinary course of business;
(h) any judgment Lien securing an amount not exceeding $10,000,000 if (i) the judgment secured thereby is discharged, or
execution thereof is stayed pending appeal, within 180 days after the entry thereof and (ii) if stayed pending appeal, such judgment is
discharged within 180 days after the expiration of any such stay;
(i) any Lien existing under any agreement of the kind described in clause (iii) of the definition of Permitted Debt, provided
that such Lien secures only Indebtedness existing under such agreement and covers only (1) the Property represented by such
agreement or (2) cash or Cash Equivalents not to exceed $5,000,000;
(j) any Lien on Property of a Non-strategic Subsidiary securing obligations of such Non-strategic Subsidiary;
(k) any Lien on Property of a Subsidiary of the Borrower securing obligations owed by such Subsidiary solely to the
Borrower or a Guarantor, and any Lien on Property of a Subsidiary of the Borrower that is not a Desc Entity securing the obligations
owed by such Subsidiary solely to the Borrower or a Desc Entity;
(l) any Lien incurred or deposits made (including escrow or similar arrangements) to secure indemnity obligations in
respect of the disposition of any business or Property of the Borrower or any of its Subsidiaries, provided that the Property subject to
such Lien shall not have a fair market value in excess of 10% of the consideration received by the Borrower and its Subsidiaries in
connection with such disposition and such Lien is released by no later than one year after such disposition;
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(m) any easement, right-of-way, municipal or zoning ordinance or similar charge, or any title defect or similar irregularity,
that does not materially impair the marketability or usefulness of the Property subject thereto;
(n) Liens created under the Security Documents; and
(o) any Lien securing Indebtedness of the Borrower or any of its Subsidiaries in an amount that shall not, when added to
the amount of (A) all other Indebtedness of the Borrower and its Subsidiaries then secured by Liens otherwise prohibited by this
Section 9.03 but for this paragraph (o) plus (B) all Attributable Debt of the Borrower and its Subsidiaries then outstanding and
prohibited by Section 9.02(b) but for the exception described in clause (A) thereof, exceed, at the time such Lien is incurred, an
amount equal to 5% of Consolidated Total Assets; provided, that the aggregate amount of Indebtedness (including any Attributable
Debt) of the Borrower and its Subsidiaries secured by Liens permitted by this paragraph (o) shall not at any time exceed $15,000,000.
Notwithstanding anything to the contrary in this Section 9.03, the Borrower will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create, assume, incur or suffer to exist any Lien on any of the Collateral other than Permitted Collateral
Liens.
9.04. Transactions With Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, directly or
indirectly, enter into any transaction with an Affiliate of the Borrower (other than the Borrower or any of its Subsidiaries or any
employee stock ownership plan for the benefit of employees of the Borrower or any of its Subsidiaries), except upon commercially
reasonable terms that are no less favorable to the Borrower or such Subsidiary, as the case may be, than those which might be
obtained in a comparable arm’s length transaction at the time from a Person which is not such an Affiliate.
9.05. Line of Business. The Borrower will not, and will not permit any of its Principal Subsidiaries to, make any material
change in the nature of its business as conducted on the date hereof; provided, that the Borrower or any Principal Subsidiary may
discontinue a business activity or business operation pursuant to a resolution of the Board of Directors of the Borrower or such
Principal Subsidiary, as the case may be, to so discontinue such business activity or business operation (which resolution shall have
been made in good faith), if in the reasonable judgment of such Board such discontinuance of such business activity or business
operation is desirable in the conduct of the business of the Borrower or Principal Subsidiary (as applicable), and not disadvantageous
in any material respect to any Bank; provided further that, a Desc Entity that is a Principal Subsidiary solely by virtue of the first
proviso in the definition of Principal Subsidiary also may make a material change in the nature of its business pursuant to a resolution
of the Board of Directors of such Desc Entity to so change the nature of its business (which resolution shall have been made in good
faith), if in the reasonable judgment of such Board such business is desirable in the conduct of the business of such Desc Entity, and
not disadvantageous in any material respect to any Bank; provided, however, that this Section 9.05
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shall not be construed to restrict any transaction expressly permitted by Section 9.02 (including, without limitation, by reference
therein to Section 9.03). Subsidiaries of the Borrower that are not Principal Subsidiaries may discontinue or otherwise make material
changes in their lines of business.
9.06. Accounting Changes. The Borrower will not make or allow, or permit any of its Subsidiaries to make or allow, any
material change in accounting policies or reporting practices, except as required to comply with GAAP or applicable law or
regulation, or as permitted by GAAP.
9.07. Dividends, Etc.
(a) No Restrictions. The Borrower will not permit any of its Subsidiaries to enter into, create, assume or suffer to exist any
indenture, agreement or other contractual arrangement (except as disclosed on Schedule III hereto) that, directly or indirectly,
prohibits or restrains, or has the effect of prohibiting or restraining, or imposes any condition upon, (i) the declaration or payment of
Dividends by, or the making of loans or advances by, or the transfer of Property of, any Subsidiary of the Borrower to the Borrower
or the Guarantors or (ii) the ability of the Borrower to make a mandatory prepayment as and when required pursuant to Section 2.07.
(b) Dividends. (i) The Borrower may not declare any Dividends unless no more than $239,450,000 and Pesos 650,000,000
is outstanding under this Agreement and the Peso Facility, respectively, and the Consolidated Net Indebtedness to Consolidated
EBITDA Ratio has not exceeded 3.0 to 1.0 for the previous four consecutive quarters; and
(ii) The Borrower will not permit any of its Subsidiaries to declare any Dividends (A) while intercompany Indebtedness to
such Subsidiary shall then be outstanding (except to the extent required to comply with existing covenants of the Borrower and its
Subsidiaries as disclosed in Schedule III hereto) other than in the case of Subsidiaries wholly-owned by the Borrower and (B) unless
the capital stock or other ownership interests held by the Borrower or a Subsidiary of the Borrower in a non-wholly owned Subsidiary
are not treated in a manner less favorable than that held by another person or entity in such non-wholly owned Subsidiary except
solely to reflect differences in ownership percentages.
Notwithstanding the foregoing, the Borrower will not, in any event, pay Dividends if, on the date of such payment and after giving
effect thereto, (i) a Default or Event of Default has occurred and is continuing or (ii) the Borrower is not in pro forma compliance
with Sections 9.11 through 9.14.
9.08. Limitations on Prepayments of Indebtedness. The Borrower will not, and will not permit any of its Subsidiaries to,
make any voluntary or optional payment or prepayment on or redemption or acquisition for value of any Indebtedness prior to the
date such Indebtedness is scheduled to mature in accordance with its original terms (including, without limitation, by way of
depositing with the trustee or Person fulfilling a similar function with respect to such Indebtedness money or securities prior to the
date such Indebtedness is scheduled to mature in
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accordance with its original terms for the purpose of paying it when due) or make any payment in violation of any subordination
terms of any Indebtedness, other than in respect of (w) the Loans (and, to the extent done in accordance Section 2.07, the Peso
Facility), (x) any Indebtedness under a Permitted Working Capital Facility that would constitute Excluded Debt, (y) any
intercompany Indebtedness and (z) the UDI Bonds or the Guaranteed Notes in connection with a refinancing thereof that would
constitute Excluded Debt.
9.09. Investments. The Borrower will not, and will not permit any of its Subsidiaries to, make or permit to remain
outstanding any Investments, other than:
(i) Investments outstanding on the date hereof that, to the extent not in a Subsidiary of the Borrower, are identified in
Schedule VI hereto (and any renewals or extensions thereof that do not increase the amount outstanding thereunder), and Investments
made pursuant to commitments in existence as of the date hereof and described on Schedule VI hereto;
(ii) operating deposit, checking and other customary accounts with banks;
(iii) Permitted Investments;
(iv) Investments by the Borrower and its Subsidiaries in the Borrower and wholly-owned Subsidiaries of the Borrower
(other than Non-strategic Subsidiaries), including an Investment in a Subsidiary of the Borrower that directly results in such
Subsidiary becoming wholly-owned by the Borrower;
(v) Investments by the Borrower and its Subsidiaries in non-wholly owned Subsidiaries of the Borrower (other than Nonstrategic Subsidiaries) but only to the extent such Investments are made in proportion to the direct or indirect ownership percentage of
the Borrower and its Subsidiaries in such Subsidiary and (except in the case of Dynasol Elastómeros, S.A. de C.V. to the extent
required to comply with covenants applicable thereto as of the date hereof) only in the case that any third party owner of such
Subsidiary invests proportionately in such Subsidiaries and, to the extent such Subsidiary is subject to mandatory dividend
requirements, such Investment will only be in the form of an equity Investment;
(vi) Hedging Agreements entered into in the ordinary course of the Borrower’s financial planning and not for speculative
purposes;
(vii) Investments consisting of security deposits with utilities and other like Persons made in the ordinary course of
business;
(viii) pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security
legislation;
(ix) Investments received in connection with any Asset Sale to the extent permitted pursuant to Sections 9.02(a) and 9.02
(c);
(x) loans or advances to employees in the ordinary course of business;
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(xi) Investments received in settlement of amounts due to the Borrower or any Subsidiary of the Borrower and effected in
the ordinary course of business;
(xii) Investments constituting Indebtedness, but solely to the extent the terms and conditions of this Agreement have
otherwise been complied with relating to the Incurrence of such Indebtedness (including, without limitation, Section 2.07);
(xiii) Investments constituting Liens and permitted under Section 9.03 of this Agreement;
(xiv) Investments in accounts receivable, payment intangibles, chattel paper, notes receivables and similar items arising or
acquired in the ordinary course of business consistent with past practice;
(xv) Investments in an outstanding amount not exceeding $5,000,000 at any time after the Closing Date; and
(xvi) Investments by any Subsidiary of the Borrower that is a Guarantor and an Encumbered Entity in the capital stock,
rights or other interests, if any, evidencing ownership or first priority rights in a Person (including a trust) in connection with a sale or
disposition by a Subsidiary of the Borrower to such Person of real Property in the ordinary course of business; provided that (A) such
Subsidiary (or, in the case of any accounts receivable described in clause (i), the Subsidiary of the Borrower that has sold or disposed
of the real Property) has (i) granted the Collateral Agent, for its benefit and for the benefit of the Secured Parties, a perfected firstpriority security interest in all capital stock, rights or other interests, if any, evidencing ownership or first priority rights owned by
such Subsidiary in such Person and, to the extent not already pledged as Collateral, all accounts receivable of a Subsidiary of the
Borrower that arise in respect of the sale or disposition of real Property to which such Investment relates, by duly executing and
delivering a security agreement in form and substance reasonably satisfactory to the Administrative Agent and the Collateral Agent,
(ii) delivered to the Administrative Agent in connection therewith an opinion of counsel or counsels to the pledgor addressed to the
Administrative Agent, the Collateral Agent and the Banks, in form and substance and from such counsels and in such jurisdictions
reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the Collateral Agent and (iii) taken all actions
necessary or reasonably requested by the Collateral Agent (including executing and delivering all documents and instruments
necessary or appropriate for the filing and/or recording thereof in all applicable jurisdictions) to perfect the first priority Lien in such
capital stock, rights and other ownership interests or rights in any such accounts receivable and shall pay all taxes, fees and other
charges (including registration fees) then payable in connection with such perfection, (B) there are no Liens on the Collateral pledged
in accordance with clause (A) above, no Person has the right to acquire such Collateral and such Collateral is freely transferable
(subject in each case to the provisions of the Security Documents and subject to a right of first offer granted to the third party that
owns the remaining capital stock or other interests, if any, evidencing ownership or first priority rights in the Person whose interests
are pledged), (C) the outstanding amount of such Investment (whether in the form of capital stock or rights) does not exceed 20% of
the
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consideration received by the Borrower and/or its Subsidiaries in connection with such sale or disposition, (D) such Investment is
made at fair market value as determined in good faith by the Borrower and on arm’s-length terms and in a Person (including a trust)
that is Controlled or the majority of the rights of which are owned, as the case may be, by an unrelated bona fide third party, and (E)
the sale or disposition of real Property to which such Investment relates was made pursuant to an agreement that provides for transfer
of the Property with retention of title (reserva de dominio) or another arrangement having a similar effect in respect of title to such
Property.
9.10. Capital Expenditures. The Borrower will not, and will not permit any of its Subsidiaries to, make Capital
Expenditures (in the aggregate) that exceed $60,000,000 in fiscal year 2003, $75,000,000 in fiscal year 2004, $90,000,000 in fiscal
year 2005 and $50,000,000 in each of fiscal years 2006, 2007 and 2008; provided, that the limit for any of fiscal years 2006, 2007 and
2008 shall be subject to increase to $90,000,000 for such fiscal year if the ratio of Consolidated Net Indebtedness at the end of the
prior fiscal year to Consolidated EBITDA for the then most recently concluded period of four consecutive fiscal quarters of the
Borrower is less than 3.0 to 1.0; and provided further that (i) any amounts received and invested in accordance with the definition of
Permitted Joint Venture in connection with an Equity Issuance by a Subsidiary of the Borrower to a Person that is not the Borrower or
an Affiliate of the Borrower and (ii) any cash contributed as capital to a Subsidiary of the Borrower by a Person that is not the
Borrower or an Affiliate of the Borrower and applied in accordance with the definition of Permitted Joint Venture in the same manner
as if it had been an Equity Issuance by such Subsidiary shall not be included in the computation of Capital Expenditures pursuant to
this Section.
9.11. Interest Coverage. The Borrower will not permit the Interest Coverage Ratio to be less than the following respective
ratios for each period of four consecutive fiscal quarters of the Borrower ending during the following respective periods:
Period
From January 1 through March 31
From April 1 through June 30
From July 1 through September 30
From October 1 through December
31
2003
—
—
—
2.25 to 1.00
2004
2005
2006
2007
2008
2.25 to 1.00
2.25 to 1.00
2.25 to 1.00
2.25 to 1.00
2.25 to 1.00
2.25 to 1.00
2.50 to 1.00
2.50 to 1.00
2.50 to 1.00
2.75 to 1.00
2.75 to 1.00
2.75 to 1.00
3.25 to 1.00
3.25 to 1.00
3.25 to 1.00
2.25 to 1.00
2.50 to 1.00
2.75 to 1.00
3.25 to 1.00
3.25 to 1.00
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9.12. Leverage Test. The Borrower will not permit the ratio of Total Subsidiary Indebtedness at any time to Consolidated
Indebtedness at such time to be higher than the following respective ratios at any time during the following respective periods:
Period
From January 1 through March 31
From April 1 through June 30
From July 1 through September 30
From October 1 through December
31
2003
—
—
—
0.20 to 1.00
2004
2005
2006
2007
2008
0.20 to 1.00
0.20 to 1.00
0.20 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
0.15 to 1.00
9.13. Leverage EBITDA Test. The Borrower will not permit the Consolidated Net Indebtedness to Consolidated EBITDA
Ratio to be higher than the following respective ratios at any time during the following respective periods:
Period
From January 1 through March 31
From April 1 through June 30
From July 1 through September 30
From October 1 through December
31
2003
—
—
—
5.35 to 1.00
2004
2005
2006
2007
2008
5.35 to 1.00
5.35 to 1.00
5.35 to 1.00
5.15 to 1.00
5.15 to 1.00
5.15 to 1.00
4.50 to 1.00
4.50 to 1.00
4.50 to 1.00
3.75 to 1.00
3.75 to 1.00
3.75 to 1.00
3.25 to 1.00
3.25 to 1.00
3.25 to 1.00
5.15 to 1.00
4.50 to 1.00
3.75 to 1.00
3.25 to 1.00
3.25 to 1.00
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9.14. Leverage Capitalization. The Borrower will not permit the Consolidated Net Indebtedness to Total Capitalization
Ratio to be higher than the following respective ratios at any time during the following respective periods:
Period
From January 1 through March 31
From April 1 through June 30
From July 1 through September 30
From October 1 through December
31
2003
—
—
—
0.55 to 1.00
2004
2005
2006
2007
2008
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.50 to 1.00
0.50 to 1.00
0.50 to 1.00
0.55 to 1.00
0.55 to 1.00
0.55 to 1.00
0.50 to 1.00
0.50 to 1.00
9.15. Calculations. The financial covenants set forth in Sections 9.11 through 9.14 shall be calculated in Dollars and, to the
extent any amounts necessary for the calculation thereof are denominated in a currency other than Dollars, such amounts shall be
converted into Dollars based on (i) the exchange rate as of the close of business on the relevant date (if a Mexican business day or, if
not, the most recent Mexican business day), for balance sheet items, and (ii) the average of the exchange rates of each Mexican
business day during the relevant period, for income statement items. The exchange rate to be used for the purposes of this Section
9.15 shall be, for any date, the Peso/Dollar exchange rate published by Banco de México in the Official Gazette of the Federation of
Mexico (“Diario Oficial de la Federación”) as the rate “para solventar obligaciones denominadas en moneda extranjera pagaderas
en la República Mexicana” on such date, provided that, if Banco de México ceases to publish such exchange rate, the exchange rate
shall be calculated by taking the Peso/Dollar exchange rates published by Citibank, N.A., JPMorgan Chase Bank and Deutsche Bank
AG as of the close of business on such date, and calculating the average of such exchange rates (or the main offices of their
subsidiaries located in Mexico, if not published by those institutions).
9.16. Use of Proceeds. The Borrower will not, and will not permit any of its Subsidiaries to, take any action that would
require any Bank, potential Participant or Assignee to register under Regulation U of the Board of Governors of the Federal Reserve
System.
9.17. No Subsidiary Guarantees. The Borrower will not permit any of its Subsidiaries, directly or indirectly, to Guarantee
or otherwise become liable or responsible for in any manner, any Indebtedness of the Borrower unless such Subsidiary is a Guarantor
hereunder or, if such Subsidiary is not a Guarantor hereunder, becomes a Guarantor by (i) duly executing
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and delivering an Assumption Agreement substantially in the form attached as Annex I to the Guaranty Agreement and (ii) delivering
or causing to be delivered to the Administrative Agent an opinion of counsel or counsels to such Guarantor, addressed to the
Administrative Agent, the Collateral Agent and the Banks, in form and substance and from such counsels and in such jurisdictions
reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the Collateral Agent.
SECTION 10. EVENTS OF DEFAULT
If one or more of the following events (herein called “Events of Default”) shall occur and be continuing:
10.01. Payments. The Borrower shall fail to pay (i) when due any principal of any Loan, or (ii) within three Business Days
of the due date thereof, any interest on any Loan or any other amount whatsoever payable hereunder or under the Notes.
10.02. Covenants under this Agreement. The Borrower shall (i) default in the observance or performance of any of its
obligations contained in Sections 8.01, 8.07(h), 8.08, 8.12, 8.13, 8.16, 8.17, 8.18, 8.19, 9.01, 9.02, 9.03, 9.05, 9.07, 9.08, 9.09, 9.11,
9.12, 9.13, 9.14 or 9.17, or (ii) default in the observance or performance of any other provision of Section 8 or 9 and such default in
respect of such other provision shall remain unremedied for a period of 30 days or more after notice thereof from the Administrative
Agent is received by the Borrower.
10.03. Performance Obligations. The Borrower shall default in the observance or performance of its obligations hereunder
or under any other Loan Document (other than as provided in Sections 10.01 and 10.02) to which it is a party or any Desc Entity shall
default in the observance or performance of any of its obligations under any Loan Document to which it is a party, and such default, if
being capable of being remedied, shall continue unremedied for a period of 30 or more days after written notice thereof shall have
been given to the Borrower by the Administrative Agent at the request of any Bank.
10.04. Cross Default. The Borrower, any Desc Entity or any of their respective Subsidiaries shall default in the payment of
any principal of or interest on any other Indebtedness (whether at stated maturity or by reason of prepayment or otherwise, after the
expiration of the applicable grace periods) (i) outstanding under the Other Facilities or (ii) having an aggregate outstanding principal
amount of $20,000,000 or more (the Indebtedness described in clauses (i) and (ii), “Material Debt”), or any default, event of default
or equivalent event (however described) shall occur under any agreement or instrument evidencing or relating to such Material Debt
which results in the acceleration of the maturity thereof or enables the holder or holders of such Material Debt, or an agent or trustee
on its or their behalf, to accelerate the maturity thereof or to require the mandatory prepayment or redemption thereof, provided, that
this Section 10.04 will not apply to any default or event of default with respect to any Indebtedness of Non-strategic Subsidiaries
owed to the Borrower or any of its Subsidiaries.
10.05. Representations, Etc. Any representation or warranty made herein or in any Loan Document by the Borrower or any
Desc Entity party thereto or in any certificate,
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financial statement or other document furnished to any Bank, the Administrative Agent or the Collateral Agent pursuant to the
provisions hereof or of the other Loan Documents shall prove to have been incorrect or misleading in any material respect when made
or deemed to be made.
10.06. Bankruptcy, Etc. The Borrower or any of its Principal Subsidiaries shall admit in writing its inability to pay its debts
generally as such debts become due or otherwise becomes insolvent or the Borrower or any of its Principal Subsidiaries shall (i) apply
for or consent to the appointment of, or the taking of possession by, a receiver, custodian, síndico, conciliador, trustee, examiner or
liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) file a
petition seeking to take advantage of any other law relating to bankruptcy, insolvency, concurso mercantil, quiebra, reorganization,
liquidation, dissolution, arrangement, winding-up or composition or readjustment of debts, (iv) take any corporate action for the
purpose of effecting any of the foregoing or (v) have a proceeding or case commenced against it, without its application or consent, in
any court of competent jurisdiction, seeking (x) its reorganization, concurso mercantil, quiebra, liquidation, dissolution, arrangement,
winding-up or composition or readjustment of its debts, (y) the appointment of a receiver, custodian, síndico, conciliador, trustee,
examiner, liquidator or the like of it or of all or any substantial part of its Property or (z) similar relief in respect of it under any law
relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of its debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect for a period of 90 or more days or a declaration of bankruptcy shall be entered against the Borrower or any of
its Principal Subsidiaries under the Mexican federal bankruptcy laws as now or hereafter in effect.
10.07. Judgments. A judgment or court order shall be rendered against the Borrower or any Desc Entity or any of their
respective Subsidiaries in an amount exceeding $20,000,000 (or its equivalent in any other currency) and shall remain unsatisfied,
undischarged and in effect for a period of 60 consecutive days without a stay of execution, unless the same is adequately bonded or is
being contested by appropriate proceedings properly instituted and diligently conducted; or the Borrower or any Desc Entity shall fail
to pay when due to social security, INFONAVIT, IMSS or SAR any amount or amounts aggregating $20,000,000 or more (or the
equivalent in any other currency) unless the same is adequately bonded or is being contested by appropriate proceedings properly
instituted and diligently conducted.
10.08. Currency Restrictions. (i) Any Mexican Governmental Authority shall impose exchange controls adversely affecting
the making of payments in Dollars in respect of Indebtedness; or (ii) any Mexican Governmental Authority shall take any action to
condemn, seize, nationalize or appropriate any substantial (on a consolidated basis) portion of the Property of the Borrower and its
Consolidated Subsidiaries (with or without the payment of compensation), if such action referred to in this clause (ii) results in a
Material Adverse Effect; or (iii) any action is taken by a Mexican Governmental Authority, including without limitation the
declaration of a moratorium on payment of any Indebtedness, that has a material adverse effect on (a) the performance or observance
of the obligations of the Borrower or any Desc Entity under this Agreement or any Loan Document, (b) the ability of the Borrower to
repay the
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Loans, (c) the schedule of payments of the Borrower hereunder or under the Notes, (d) the currency in which the Loans may be repaid
or (e) the availability of Dollars to the Borrower or any Desc Entity; or (iv) Mexico shall cease to be a member, or shall cease to be
entitled to use the general resources, of the International Monetary Fund; or (v) the Borrower or any Desc Entity or a Mexican
Governmental Authority contests the validity of this Agreement, the Notes or any Loan Document; or (vi) the Borrower or any Desc
Entity denies liability under this Agreement, the Notes or any Loan Document (whether by general suspension of payments or by a
moratorium or otherwise).
10.09. Change in Control. A Change in Control shall occur, or the Borrower shall cease to Control any Desc Entity other
than pursuant to a transaction permitted under Section 9.01.
10.10. Revocation of Licenses, Etc. Any license, consent, authorization, registration or approval at any time necessary to
enable the Borrower or any Desc Entity to comply with any of its material obligations under this Agreement, the Notes or any Loan
Document to which it is a party shall be revoked, withdrawn or withheld or shall be modified or amended in a manner prejudicial, in
the reasonable opinion of the Majority Banks, to the interests of the Banks hereunder.
10.11. Unenforceability of Obligations. This Agreement, the Notes or any Loan Document shall become unenforceable or
cease to be in full force and effect or the performance of the obligations of the Borrower or a Desc Entity hereunder or thereunder
becomes unenforceable or illegal.
10.12. Security Documents. The Security Documents (together with any other documents delivered or to be delivered
thereunder) shall for any reason fail to create or for any reason cease to maintain a valid and duly perfected first priority security
interest in and Lien upon any of the Collateral until such Collateral is released in accordance with the terms hereof or of any of the
Security Documents or any Collateral shall become subject to any Lien (except for any Permitted Collateral Liens).
10.13. Material Adverse Effect. Any event or circumstance shall occur that has a Material Adverse Effect.
10.14. Prepayments. Prior to the first Principal Payment Date, the Borrower shall not have prepaid the Loans in accordance
with Section 2.06 or 2.07 in an aggregate principal amount, when added to the aggregate principal amount of the loans outstanding
under the Peso Facility prepaid, equal to at least $100,000,000 (using for this purpose, in the case of amounts prepaid in Pesos under
the Peso Facility, the relevant exchange rate described in Section 2.07(e) as in effect on the date of any such prepayment).
THEREUPON: in any such event and at any time thereafter, if such event is continuing, the Administrative Agent shall, upon request
of the Majority Banks or with the consent of the Majority Banks, (1) by notice to the Borrower declare the principal amount then
outstanding of, and the accrued interest on, the Loans and the Notes and all other amounts payable by the
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Borrower hereunder (including, without limitation, any amounts payable under Section 5.04) to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any
kind, all of which are hereby expressly waived by the Borrower (provided that, in the case of an Event of Default of the kind
described in Section 10.06 above with respect to the Borrower, the principal amount then outstanding of, and the accrued interest on,
the Loans and the Notes and/or all other amounts payable hereunder and under the other Loan Documents shall automatically
forthwith become due and payable) and/or (2) exercise any other rights available under the Loan Documents or other document or
instrument entered into in connection therewith (including, without limitation, directing the Collateral Agent to do the same).
SECTION 11. THE ADMINISTRATIVE AGENT
11.01. Appointment, Powers and Immunities. Each Bank hereby appoints and authorizes the Administrative Agent to act as
its agent hereunder with such powers as are specifically delegated to the Administrative Agent by the terms of this Agreement,
together with such other powers as are reasonably incidental thereto (including, without limitation, entering into the Collateral
Agency Agreement and the Guaranty Agreement for the benefit of the Banks). The Administrative Agent (which term as used in this
sentence and in Section 11.05 and the first sentence of Section 11.06 shall include reference to its Affiliates and its own and its
Affiliates’ officers, directors, employees and agents):
(a) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this
Agreement be a trustee for any Bank;
(b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this
Agreement or the Loan Documents, or in any certificate or other document referred to or provided for in, or received by any of them
under, this Agreement or the Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of
this Agreement, Notes or the Loan Documents or any other document referred to or provided for herein or for any failure by the
Borrower or any Desc Entity or any other Person to perform any of its obligations hereunder or thereunder;
(c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder and shall not commence an
action or proceeding on behalf of any Bank without obtaining the consent of such Bank thereto; and
(d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under the Notes or the Loan
Documents or under any other document or instrument referred to or provided for herein or in connection herewith, except for its own
gross negligence or willful misconduct.
The Administrative Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of
any such agents or attorneys-in-fact selected by it in good faith (except for their gross negligence or willful misconduct).
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11.02. Reliance by Agent. The Administrative Agent shall be entitled to rely upon any certification, notice or other
communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) reasonably believed by it
to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel and other experts selected by the Administrative Agent. As to any matters not expressly provided for by
this Agreement or the other Loan Documents, the Administrative Agent shall in all cases be fully protected in acting, or in refraining
from acting, hereunder in accordance with instructions given by the Majority Banks, and such instructions of the Majority Banks and
any action taken or failure to act pursuant thereto shall be binding on all of the Banks.
11.03. Defaults. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of a Default
(other than a failure to make a payment of principal of or interest on the Loans) unless the Administrative Agent has received notice
from a Bank or the Borrower specifying such Default and stating that such notice is a “Notice of Default”. In the event that the
Administrative Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof
to the Banks. The Administrative Agent shall (subject to Section 11.07) take such action with respect to such Default as shall be
directed by the Majority Banks, provided that, unless and until the Administrative Agent shall have received such directions, the
Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such
Default as it shall deem advisable in the best interest of the Banks except to the extent that this Agreement or the other Loan
Documents expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the
Majority Banks or all of the Banks.
11.04. Rights and Obligations as a Bank. With respect to its Commitment and the Loans made by it, Citibank, N.A. (and
any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights, powers and obligations
hereunder as any other Bank and may exercise such rights and powers as though it were not acting as the Administrative Agent, and
the term “Bank” or “Banks” shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity.
Citibank, N.A. (and any successor acting as Administrative Agent) and its Affiliates may (without having to account therefor to any
Bank) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business
with the Borrower and its Subsidiaries as if it were not acting as the Administrative Agent, and Citibank, N.A. (and any such
successor) and its Affiliates may accept fees and other consideration from the Borrower and said other Persons for services in
connection with this Agreement or otherwise without having to account for the same to the Banks.
11.05. Indemnification. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed under
Section 12.03, but without limiting the obligations of the Borrower under said Section 12.03) ratably in accordance with the aggregate
principal amount of the Loans held by the Banks (or, if no Loans are at the time outstanding, ratably in accordance with their
respective Commitments), for any and all liabilities, obligations, losses, damages,
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penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on,
incurred by or asserted against the Administrative Agent arising out of or by reason of any investigation in any way relating to or
arising out of this Agreement, any Loan Document or any other documents contemplated by or referred to herein or the transactions
contemplated hereby (including, without limitation, the costs and expenses that the Borrower is obligated to pay under Section 12.03,
but excluding, unless an Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the
performance of its agency duties hereunder) or the enforcement of any of the terms hereto or thereto, provided, that no Bank shall be
liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified.
11.06. Non-Reliance on Agents and Other Banks. Each Bank agrees that it has, independently and without reliance on the
Administrative Agent, the Joint Lead Arrangers, the Lead Arranger or any other Bank, and based on such documents and information
as it has deemed appropriate, made its own credit analysis of the Borrower and each Desc Entity and its own decision to enter into
this Agreement and that it will, independently and without reliance upon the Administrative Agent, the Joint Lead Arrangers, the
Lead Arranger or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to
make its own analysis and decisions in taking or not taking action under this Agreement, the Notes and the other Loan Documents.
The Administrative Agent shall not be required to keep itself informed as to the performance or observance by the Borrower of this
Agreement, the Notes or any other Loan Document to which it is a party, by any Desc Entity of any Loan Document to which it is a
party or by the Borrower or any Desc Entity of any other document referred to or provided for herein or to inspect the Property or
books of the Borrower or any Desc Entity. Except for notices, reports and other documents and information expressly required to be
furnished to the Banks by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrower or any
Desc Entity that may come into the possession of the Administrative Agent or any of its Affiliates.
11.07. Failure to Act. Except for action expressly required of the Administrative Agent hereunder, the Administrative
Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall receive further assurances to its
satisfaction from the Banks of their indemnification obligations under Section 11.05 against any and all liability and expense that may
be incurred by it by reason of taking or continuing to take any such action.
11.08. Resignation or Removal of Administrative Agent. Subject to the appointment and acceptance of a successor
Administrative Agent as provided below, the Administrative Agent may resign at any time by giving notice thereof to the Banks and
the Borrower, and the Administrative Agent may be removed at any time with or without cause by the Majority Banks. Upon any
such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent, which successor
Administrative Agent shall be approved by the Borrower (such approval not to be unreasonably withheld). Such successor
Administrative Agent shall be a bank that has an office in New York, New York, shall be registered as a “foreign financial
institution” with the Ministry of Finance for purposes of Article
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195 of the Mexican Income Tax Law, and shall have a combined capital and surplus of at least $500,000,000. If no successor
Administrative Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within 30 days
after the retiring Administrative Agent’s giving of notice of resignation or the Majority Banks’ removal of the retiring Administrative
Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be
a bank that has an office in New York, New York, shall be registered as a “foreign financial institution” with the Ministry of Finance
for purposes of Article 195 of the Mexican Income Tax Law, and shall have a combined capital and surplus of at least $500,000,000.
Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor
Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under
the Guaranty Agreement. Notwithstanding the foregoing, no removal of the Administrative Agent shall be effective until all amounts
then due and owing to the removed Administrative Agent shall be paid in full. After any retiring Administrative Agent’s resignation
or removal hereunder as Administrative Agent, the provisions of this Section 11 shall continue in effect for its benefit in respect of
any actions taken or omitted to be taken by it while it was acting as the Administrative Agent.
11.09. Sole Global Coordinator, Sole Bookrunner, Joint Lead Arrangers and Lead Arranger. The Sole Global Coordinator,
Sole Bookrunner, each Joint Lead Arranger and the Lead Arranger, each in its capacity as such, shall have no obligations, duties or
liabilities whatsoever under this Agreement, the Notes or the other Loan Documents.
11.10. Collateral Release. Each Bank and the Administrative Agent hereby agree that, notwithstanding any other
provisions in the Loan Documents, all Liens created under any Security Document on any Collateral sold or otherwise disposed of in
a sale or disposition expressly permitted hereunder shall be automatically released by it upon such sale or disposition becoming
effective and, upon the receipt by the Administrative Agent of a certification by a senior executive officer of the Borrower that such a
sale or disposition has been made in compliance with the terms hereof, the Administrative Agent is hereby authorized to take any and
all action (including authorizing and directing the Collateral Agent) to effect such release. In addition, each Bank and the
Administrative Agent hereby agree to release all Liens created under any Security Documents upon payment in full of all principal,
interest and other amounts owing under any Loan Document and the Administrative Agent is hereby authorized to take any and all
action (including authorizing and directing the Collateral Agent) to effect such release. Notwithstanding the foregoing, the Borrower
acknowledges and agrees that the release of the Collateral may require the consent of the agents and/or lenders under the Other
Facilities and, therefore, the Banks and the Administrative Agent may not have the ability to effect such release.
SECTION 12. MISCELLANEOUS
12.01. Waiver. No failure on the part of the Administrative Agent or any Bank to exercise and no delay in exercising, and
no course of dealing with respect to, any right, power or
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privilege under this Agreement, the Notes or any other Loan Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege under this Agreement, the Notes or any other Loan Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
12.02. Notices. (a) All notices, requests and other communications provided for herein (including, without limitation, any
modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing delivered to the intended
recipient at the “Address for Notices” specified below its name on the signature pages hereof; or, as to any party, at such other
address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when personally delivered or, in the case of a telecopy, email or mailed
notice, upon receipt, in each case given or addressed as aforesaid.
(b) Notwithstanding the foregoing, the Borrower hereby agrees that it will provide to the Administrative Agent all
information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to the Loan
Documents, including, without limitation, all notices, requests, financial statements, financial and other reports, certificates and other
information materials, but excluding any such communication that (i) relates to any election of an Interest Period, (ii) relates to the
payment of any principal or other amount due under this Agreement prior to the scheduled date therefor, (iii) provides notice of any
Default or Event of Default or (iv) is required to be delivered to satisfy any condition precedent under Section 6 of this Agreement
(all non-excluded communications being referred to herein collectively as “Communications”) by transmitting the Communications in
an electronic/soft medium in a format acceptable to the Administrative Agent to [email protected]. In addition, the
Borrower agrees to continue to provide the Communications to the Administrative Agent in the manner specified in the Loan
Documents but only to the extent requested by the Administrative Agent.
(c) The Borrower further agrees that the Administrative Agent may make the Communications available to the Banks by
posting the Communications on Intralinks or a substantially similar electronic transmission systems (the “Platform”).
(d) THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE”. THE AGENT PARTIES (AS DEFINED
BELOW) DO NOT WARRANT AS TO THE ACCURACY OR COMPLETENESS OF THE COMMUNICATIONS, OR THE
ADEQUACY OF THE PLATFORM AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS OR OMISSIONS IN THE
COMMUNICATIONS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY
THE AGENT PARTIES IN CONNECTION WITH THE COMMUNICATIONS OR THE PLATFORM. IN NO EVENT SHALL
THE ADMINSTRATIVE AGENT OR ANY OF ITS AFFILIATES OR ANY OF THEIR
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RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ADVISORS OR REPRESENTATIVES (COLLECTIVELY,
THE “AGENT PARTIES”) HAVE ANY LIABILITY TO THE BORROWER, ANY BANK, THE COLLATERAL AGENT OR
ANY OTHER PERSON FOR DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, DIRECT OR INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOSSES OR EXPENSES (WHETHER IN TORT, CONTRACT
OR OTHERWISE) ARISING OUT OF THE BORROWER’S OR THE ADMINISTRATIVE AGENT’S TRANSMISSION OF
COMMUNICATIONS THROUGH THE INTERNET, EXCEPT TO THE EXTENT THE LIABILITY OF ANY AGENT PARTY IS
FOUND IN A FINAL NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE
RESULTED PRIMARILY FROM SUCH AGENT PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(e) The Administrative Agent agrees that the receipt of the Communications by the Administrative Agent at its e-mail
address set forth above shall constitute effective delivery of the Communications to the Administrative Agent for purposes of the
Loan Documents. Each Bank agrees that notice to it (as provided in the next sentence) specifying that the Communications have been
posted to the Platform shall constitute effective delivery of the Communications to such Bank for purposes of the Loan Documents.
Each Bank agrees (i) to notify the Administrative Agent in writing (including by electronic communication) from time to time of such
Bank’s e-mail address to which the foregoing notice may be sent by electronic transmission and (ii) that the foregoing notice may be
sent to such e-mail address.
(f) Nothing herein shall prejudice the right of the Administrative Agent or any Bank to give any notice or other
communication pursuant to any Loan Document in any other manner specified herein or in such Loan Document.
12.03. Expenses, Etc. The Borrower agrees to pay or reimburse (a) the Administrative Agent for all of its out-of-pocket
costs and expenses (including, without limitation, the fees and expenses of Cleary, Gottlieb, Steen & Hamilton, special New York
counsel to the Administrative Agent, and of Ritch, Heather y Mueller, S.C., special Mexican counsel to the Administrative Agent, and
printing, reproduction, document delivery, communication and travel costs) in connection with the syndication, negotiation,
preparation, execution, delivery of this Agreement and the other Loan Documents, the filing and perfection of security interests in the
Collateral, and the making of the Loans hereunder (subject to such limit as has heretofore been agreed in writing) and (b) each of the
Administrative Agent and the Banks for all of their out-of-pocket costs and expenses (including, without limitation, the fees and
expenses of legal counsel) in connection with the negotiation or preparation of any modification, supplement or waiver of any of the
terms of this Agreement, the Notes and the other Loan Documents and the other documents referred to herein (whether or not
consummated) and any enforcement or collection proceedings resulting from the occurrence of an Event of Default hereunder.
The Borrower hereby agrees to indemnify the Administrative Agent and the Banks and their respective directors, officers,
employees, attorneys and agents (each, an
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“Indemnified Party”) from and against any and all claims, damages, losses, liabilities, obligations, penalties, actions, judgments, suits,
costs and expenses of any kind (including, without limitation, fees and disbursements of counsel), joint or several, that may be
incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or relating to any
investigation, litigation or proceeding or the preparation of any defense with respect thereof arising out of or in connection with or
relating to this Agreement, any Note or the other Loan Documents or the transactions contemplated hereby or thereby or any use
made or proposed to be made with the proceeds of the Loans, whether or not such investigation, litigation or proceeding is brought by
the Borrower, any of its shareholders or creditors, an Indemnified Party or any other Person, or an Indemnified Party is otherwise a
party thereto, and whether or not any of the conditions precedent set forth in Section 6 are satisfied or the other transactions
contemplated by this Agreement are consummated, except to the extent such claim, damage, loss, liability, obligation, penalty, action,
judgment, suit, cost or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from
such Indemnified Party’s gross negligence or willful misconduct. The Borrower also agrees not to assert any claim against any
Indemnified Party for special, indirect, consequential or punitive damages arising out of or otherwise relating to this Agreement or
any of the transactions contemplated hereby or the actual or proposed use of the proceeds of the Loans.
12.04. Amendments, Etc. Except as otherwise expressly provided in this Agreement or any other Loan Document, any
provision of this Agreement or such Loan Document may be modified or supplemented only by an instrument in writing signed by
the Borrower or relevant Desc Entity party thereto, as applicable, and the Majority Banks, or by the Administrative Agent acting with
the consent of the Majority Banks (including in the case of any Loan Document executed by the Administrative Agent for the benefit
of the Banks), and any provision of this Agreement or any other Loan Document may be waived by the Majority Banks or by the
Administrative Agent acting with the consent of the Majority Banks (including in the case of any Loan Document executed by the
Administrative Agent for the benefit of the Banks), provided, that (a) no modification, supplement or waiver shall, unless by an
instrument signed by each Bank affected thereby or by the Administrative Agent acting with the consent of all of the Banks (i)
increase or extend the term of any of the Commitments, (ii) extend the date fixed for the prepayment or payment of principal of or
interest on any Loan or any fee or any other payment due hereunder, (iii) reduce the amount of any such payment of principal or any
such other payment, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the terms of
Sections 4.02, 4.07(b), 9.07(b) or this Section 12.04, (vi) modify Sections 2.01, 2.02, 2.03 or 2.04 of the Guaranty Agreement or
release any Guarantor from its obligations under the Guaranty Agreement to which it is a party, (vii) release any Collateral except as
expressly contemplated herein or by the Security Documents; or (viii) modify the definition of the term “Majority Banks” or modify
in any other manner the number or percentage of the Banks required to make any determinations or waive any rights hereunder or to
modify any provision hereof; and (b) any modification or supplement of Section 11, or of any of the rights or obligations of the
Administrative Agent hereunder, shall require the consent of the Administrative Agent. This Agreement and the Notes and the Loan
Documents and the other documents referred to herein shall constitute the entire agreement with respect to the subject matter hereof
and thereof.
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12.05. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
12.06. Assignments and Participations.
(a) The Borrower may not assign any of its rights or obligations hereunder without the prior written consent of all of the
Banks and the Administrative Agent.
(b) Each Bank may, in accordance with applicable law, with the prior written consent of the Administrative Agent and
without prejudice to Section 5.05(i), assign any of its Loans or any portion thereof to any bank, financial institution or other Person
(each an “Assignee”), provided that
(i) except to the extent the Administrative Agent shall otherwise consent, any such partial assignment shall be in an amount
at least equal to $1,000,000 or in an integral multiple of $1,000,000 in excess thereof; and
(ii) each such Assignee must (A) be registered as a foreign financial institution with the Ministry of Finance for purposes
of Article 195 of the Mexican Income Tax Law and be resident of (or the main office of such financial institution, if acting through a
branch or an agency, must be a resident of) a jurisdiction that is party to a treaty for the avoidance of double taxation with Mexico and
comply with the requirements provided in such treaty for the application of a reduced withholding tax rate on interest, and agrees to
comply with clause (iii) of Section 5.05(f) or (B) be a Mexican Bank or (C) accept a gross-up for withholding taxes not greater than
the gross-up amount payable to the assignor.
Upon execution and delivery by the assignor and the assignee to the Borrower and the Administrative Agent of an Assignment and
Assumption Agreement, and upon consent thereto by the Administrative Agent to the extent required above, the Assignee shall have,
to the extent of such assignment (unless otherwise consented to by the Administrative Agent), the obligations, rights and benefits of a
Bank hereunder holding the assigned Loan (or portion thereof) assigned to it and specified in such Assignment and Assumption
Agreement (in addition to the Loans, if any, theretofore held by such Assignee). Upon its receipt of an Assignment and Assumption
Agreement executed by an assigning Bank and an Assignee together with payment by the assigning Bank of an administrative fee of
$3,500, the Administrative Agent shall (i) promptly accept and acknowledge such Assignment and Assumption Agreement, (ii) on the
effective date determined pursuant thereto record the information contained therein in the Register (as hereinafter defined) and give
notice of such acceptance and recordation to the Banks and the Borrower and (iii) request by notice to the Borrower, that the
Borrower issue a replacement Note in favor of (x) the assigning Bank, if such assigning Bank is assigning a portion of the assigned
Loan, and (y) the Assignee, which will be delivered against the previous Note issued by the Borrower. The Borrower shall not be
obligated to pay to any Assignee any amount under Section 5.01 or Section 5.05 that is greater than the amount the Borrower would
have had to pay to such assigning Bank had no assignment been made by such assigning Bank unless the circumstances giving rise to
such greater amount did not exist at the time such assignment was made.
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(c) The Administrative Agent shall maintain at the address of the Administrative Agent referred to in Section 12.02 a copy
of each notice of assignment delivered to it and a register (the “Register”) for the recordation of the names and addresses of the Banks
and the Commitment of, and principal amounts of the Loans owing to, each Bank from time to time. The Borrower, the
Administrative Agent and the Banks shall treat each Person whose name is recorded in the Register as the owner of a Loan or other
obligations hereunder as the owner thereof for all purposes of this Agreement, notwithstanding any notice to the contrary. Any
assignment of any Loan or other obligation hereunder shall be effective only upon appropriate entries with respect thereto being made
in the Register. The Register shall be available for inspection by the Borrower, the Administrative Agent or any Bank at any
reasonable time and from time to time upon reasonable prior notice.
(d) A Bank may, in accordance with applicable law, sell or agree to sell to one or more banks or other financial institutions
(each a “Participant”) a participation in all or any part of a Loan held by it, or in its Commitment, provided, that if the Participant is
not registered with the Mexican Ministry of Finance and Public Credit or not resident in a country with which Mexico has executed a
treaty for the avoidance of double taxation, such Bank shall promptly notify the Borrower as to the date such participation was
granted, the amount of such participation and the country of residence of the Participant and, to the extent not prohibited by law or
otherwise, supply further information in its possession to the Borrower to enable the Borrower to determine the Participant’s tax
withholding status, and provided further that no Participant shall have any rights or obligations under this Agreement (the
Participant’s rights against such Bank in respect of such participation to be those set forth in the agreements executed by such Bank in
favor of the Participant). All amounts payable by the Borrower to any Bank under Section 5 in respect of such Loan held by it, and its
Commitment, shall be determined as if such Bank had not sold or agreed to sell any participations in such Loan and Commitment, and
as if such Bank were funding each of such Loan and Commitment in the same way that it is funding the portion of such Loan and
Commitment in which no participations have been sold. In the event that a Bank sells a participating interest to a Participant, such
Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall
continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrower. In no event shall a Bank that sells a participation agree with the
Participant to take or refrain from taking any action hereunder except that such Bank may agree with the Participant that it will not,
without the consent of the Participant, agree to (i) increase or extend the term of such Bank’s Commitment, (ii) extend the date fixed
for the payment of principal of or interest on the related Loan or any portion of any fee hereunder payable to the Participant, (iii)
reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon to a level below the rate
at which the Participant is entitled to receive such interest, (v) change the definition of “Majority Banks” or (vi) release the Guarantor
from its obligations under the Guaranty Agreement.
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(e) In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.06, any
Bank may (without notice or consent of the Borrower, the Administrative Agent or any other Bank and without payment of any fee)
assign and pledge all or any portion of any of its Loans or Note to any Federal Reserve Bank as collateral security pursuant to
Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve
Bank. No such assignment shall release the assigning Bank from its obligations hereunder.
(f) A Bank may furnish any information concerning the Borrower and its Subsidiaries obtained by such Bank hereunder
from time to time to assignees and participants (including prospective assignees and participants), subject to Section 12.17.
12.07. Survival. The obligations of the Borrower under Sections 5.01, 5.04, 5.05 and 12.03, and the obligations of the
Banks under Section 11.05, shall survive the repayment of the Loans and the termination of the Commitments and, in the case of any
Bank that assigns any interest in its Commitment or Loans hereunder, shall survive the making of such assignment, notwithstanding
that such assigning Bank may cease to be a “Bank” hereunder. In addition, each representation and warranty made or deemed made
herein or pursuant hereto shall survive the making of such representation and warranty.
12.08. Captions. The table of contents and captions and section headings appearing herein are included solely for
convenience of reference and are not intended to affect the interpretation of any provision of this Agreement.
12.09. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. A
set of the copies of this Agreement signed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent.
12.10. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New
York.
12.11. Jurisdiction, Service of Process and Venue.
(a) Each of the parties hereto agrees that any suit, action or proceeding with respect to this Agreement or the Notes or any
judgment entered by any court in respect thereof may be brought in the United States District Court for the Southern District of New
York or the Supreme Court of the State of New York, County of New York, and in the courts of its own corporate domicile, in respect
of actions brought against it as a defendant, and irrevocably submits to the jurisdiction of each such court for the purpose of any such
suit, action, proceeding or judgment.
(b) The Borrower hereby irrevocably appoints CT Corporation System, in New York, New York (the “Process Agent”),
with an office on the date hereof at 111 8th Avenue, 13th Floor, New York, NY 10011, as its agent and true and lawful attorney-infact in its
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name, place and stead to accept on behalf of the Borrower and its Property service of copies of the summons and complaint and any
other process which may be served in any such suit, action or proceeding brought in the State of New York. Such appointment shall
be irrevocable as long as the Loans are outstanding, except that if for any reason the Process Agent appointed hereby ceases to act as
such, the Borrower will, by an instrument reasonably satisfactory to the Administrative Agent, appoint another Person in the Borough
of Manhattan, New York as such Process Agent subject to the approval of the Administrative Agent (not to be unreasonably
withheld). The Borrower hereby further irrevocably consents to the service of process in any suit, action or proceeding in said courts
by the mailing thereof by the Administrative Agent or any Bank by registered or certified mail, postage prepaid, at its address set
forth beneath its signature hereto. The Borrower covenants and agrees that it shall take any and all reasonable action, including the
execution and filing of any and all documents, that may be necessary to continue the designation of a Process Agent pursuant to this
Section 12.11(b) in full force and effect and to cause the Process Agent to act as such.
(c) Nothing herein shall in any way be deemed to limit the ability of the Administrative Agent or any Bank to serve any
such process or summons in any other manner permitted by applicable law.
(d) Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection
that it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this
Agreement or the Notes brought in the United States District Court for the Southern District of New York or in the Supreme Court of
the State of New York, County of New York, and hereby further irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum and any right to which it may be entitled on account
of place of residence or domicile. A final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in
any court to the jurisdiction of which any party hereto is or may be subject, by suit upon judgment.
12.12. Waiver of Jury Trial. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT,
THE NOTES OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
12.13. Waiver of Immunity. To the extent that the Borrower may be or become entitled to claim for itself or its Property
any immunity on the ground of sovereignty or the like from suit, court jurisdiction, attachment prior to judgment, attachment in aid of
execution of a judgment or execution of a judgment, and to the extent that in any such jurisdiction there may be attributed such an
immunity (whether or not claimed), the Borrower hereby irrevocably agrees not to claim and hereby irrevocably waives such
immunity with respect to its obligations under this Agreement and the Notes.
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12.14. Judgment Currency. This is an international loan transaction in which the specification of Dollars and payment in
New York, New York is of the essence, and the obligations of the Borrower under this Agreement, the Notes and the other Loan
Documents to each Bank and the Administrative Agent to make payment in Dollars shall not be discharged or satisfied by any
currency or recovery pursuant to any judgment expressed in or converted into any other currency or in another place except to the
extent that on the Business Day following receipt of any sum adjudged to be so due in the judgment currency, such Bank or the
Administrative Agent may in accordance with normal banking procedures purchase Dollars in the amount originally due to such Bank
or the Administrative Agent with the judgment currency. If for the purpose of obtaining judgment in any court it is necessary to
convert a sum due hereunder in Dollars into another currency (in this Section 12.14 called the “judgment currency”), the rate of
exchange that shall be applied shall be that at which in accordance with normal banking procedures the Administrative Agent could
purchase such Dollars in New York, New York with the judgment currency on the Business Day next preceding the day on which
such judgment is rendered. The obligation of the Borrower in respect of any such sum due from it to the Administrative Agent or any
Bank hereunder (in this Section 12.14 called an “Entitled Person”) shall, notwithstanding the rate of exchange actually applied in
rendering such judgment, be discharged only to the extent that on the Business Day following receipt by such Entitled Person of any
sum adjudged to be due hereunder in the judgment currency, such Entitled Person may in accordance with normal banking procedures
purchase and transfer Dollars to New York, New York with the amount of the judgment currency so adjudged to be due; and the
Borrower hereby, as a separate obligation and notwithstanding any such judgment, agrees, to the fullest extent that it may effectively
do so to indemnify such Entitled Person against, and to pay such Entitled Person on demand, in Dollars, the amount (if any) by which
the sum originally due to such Entitled Person in Dollars hereunder exceeds the amount of the Dollars so purchased and transferred. If
the amount of Dollars so purchased exceeds the sum originally due to the Entitled Person, such Entitled Person shall remit such
excess to the Borrower.
12.15. Use of English Language. This Agreement has been negotiated and executed in the English language. All
certificates, reports, notices and other documents and communications given or delivered pursuant to this Agreement (including,
without limitation, any modifications or supplements hereto) shall be in the English language, or accompanied by a certified English
language translation thereof.
12.16. No Fiduciary Relationship. The Borrower acknowledges that neither the Administrative Agent nor any Bank has
any fiduciary relationship with or fiduciary duty to the Borrower or any of the Desc Entities arising out of or in connection with this
Agreement, the Notes or the other Loan Documents and the relationship between (i) the Administrative Agent and the Banks, on the
one hand, and (ii) the Borrower and the Desc Entities on the other, in connection herewith or therewith is solely that of creditor and
debtor. None of this Agreement, the Notes or the other Loan Documents creates a joint venture among the parties.
12.17. Confidentiality. Each of the Administrative Agent and the Banks agrees that it will not, without the prior written
consent of the Borrower (which shall not be unreasonably withheld), disclose (other than to its Affiliates and to its and its Affiliates’
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84
directors, employees, auditors and counsel, in each case, on a confidential basis and only to the extent necessary for the
Administrative Agent’s or such Bank’s administration and enforcement of this Agreement, any Note or the other Loan Documents)
any Confidential Information with respect to the Borrower furnished to it under this Agreement, except (i) as may be required to
comply with any applicable law or regulation or pursuant to legal process or otherwise as required in connection with litigation (and
the Administrative Agent and each Bank agrees that it will, to the extent reasonably practicable and if permitted by applicable law and
regulation, give the Borrower prior written notice of such disclosure reasonably sufficient to permit the Borrower to contest such
disclosure), (ii) in accordance with any ruling or regulatory practice of any bank regulatory agency having jurisdiction over the
Administrative Agent and/or the relevant Bank, as applicable, (iii) to a proposed assignee or participant permitted under Section 12.06
(provided, that such proposed assignee or participant agrees to be bound by the provisions of this Section 12.17) and (iv) in
connection with the Administrative Agent’s or any Bank’s enforcement of its rights hereunder or under any Note or any other Loan
Document after an Event of Default has occurred and is continuing. Notwithstanding anything herein to the contrary, except as
reasonably necessary to comply with applicable securities laws, each of the Banks and the Administrative Agent (and each employee,
representative or other agent of such Banks and the Administrative Agent) may disclose to any and all persons, without limitation of
any kind, the tax treatment and tax structure of the transactions contemplated in the Loan Documents and all materials of any kind
(including opinions or other tax analyses) that are provided to the Banks and the Administrative Agent relating to such tax treatment
and tax structure. For this purpose, “tax structure” means any facts relevant to the federal income tax treatment of the transactions
contemplated in the Loan Documents but does not include information relating to the identity of the Borrower.
12.18. Severability. In case any provision in this Agreement shall be held to be invalid, illegal or unenforceable, such
provision shall be severable from the rest of this Agreement, and the validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
12.19. Regulation D. Certain of the Refinanced Debt was, and certain of the Loans will be, “IBF loans” within the meaning
of Regulation D, and therefore the proceeds of the Refinanced Debt and the Loans can be and will be used by the Borrower only to
finance operations outside of the United States as specified in Section 204.8(a)(3)(vi) of Regulation D of the Board of Governors of
the United States Federal Reserve System, as in effect from time to time.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day
and year first above written.
[SIGNATURE BLOCKS ARE POSTED SEPARATELY]
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Exhibit 2.3
EXECUTION COPY
GUARANTY AGREEMENT
GUARANTY AGREEMENT dated as of December 23, 2003 between each of the guarantors that is a signatory hereto
under the caption “GUARANTORS” on the signature pages hereof (collectively the “Guarantors” and each a “Guarantor”), and
CITIBANK, N.A., as Administrative Agent under the Credit Agreement referred to below.
Desc, S.A. de C.V. (together with its successors and assigns, the “Borrower”), a Mexican corporation and the direct or
indirect parent of each Guarantor, and certain Banks and the Administrative Agent are parties to a Credit Agreement dated as of
December 19, 2003 (as from time to time modified or amended, the “Credit Agreement”), providing, subject to the terms and
conditions thereof, for the making of loans by the Banks to the Borrower in an aggregate principal amount of up to $445,749,991.78.
To induce the Banks and the Administrative Agent to enter into the Credit Agreement and to extend credit thereunder, and
for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Guarantor has agreed
to guarantee the Guaranteed Obligations (as hereinafter defined). Accordingly, the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Credit Agreement are used herein as defined therein.
Section 2. The Guarantee.
2.01 The Guarantee. Each Guarantor hereby jointly and severally guarantees to the Banks and the Administrative Agent the
prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the
Loans and the Notes and all other amounts whatsoever now or hereafter payable or becoming payable by the Borrower under the
Credit Agreement, the Notes and the other Loan Documents, in each case strictly in accordance with the terms thereof (such
obligations being herein collectively called the “Guaranteed Obligations”). Each Guarantor hereby further jointly and severally agrees
that if the Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed
Obligations, such Guarantor will promptly pay the same upon receipt from the Administrative Agent of written demand for payment
thereof, without any other demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of
the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or
otherwise) in accordance with the terms of such extension or renewal. This Agreement is a continuing guaranty and is a guaranty of
payment and is not merely a guaranty of collection.
2.02 Acknowledgments, Waivers and Consents. Each Guarantor agrees that the obligations of such Guarantor under
Section 2.01 hereof shall, to the fullest extent permitted by applicable law, be primary, absolute, irrevocable and unconditional under
any and all circumstances. Without limiting the foregoing, each Guarantor agrees that, to the fullest extent permitted by applicable
law:
(a) The occurrence of any one or more of the following shall not affect the enforceability or effectiveness of this
Agreement in accordance with its terms or affect, limit, reduce, discharge or terminate the liability of any Guarantor, or the rights,
remedies, powers and privileges of the Administrative Agent or any Bank under this Agreement:
(i) any modification or amendment (including without limitation by way of amendment, extension, renewal or waiver), or
any acceleration or other change in the time for payment or performance of the terms of all or any part of the Guaranteed Obligations
or any Loan Document, or any other agreement or instrument whatsoever relating thereto, or any modification of the Commitments;
(ii) any release, termination, waiver, abandonment, lapse or expiration, subordination or enforcement of the liability of any
Guarantor under this Agreement or of any other guarantee of all or any part of the Guaranteed Obligations;
(iii) any application of the proceeds of any other guarantee (including without limitation any letter of credit or the
obligations of any other guarantor of all or any part of the Guaranteed Obligations) to all or any part of the Guaranteed Obligations in
any such manner and to such extent as the Administrative Agent may determine;
(iv) any release of any other Person (including without limitation any other guarantor with respect to all or any part of the
Guaranteed Obligations) from any personal liability with respect to all or any part of the Guaranteed Obligations;
(v) any settlement, compromise, release, liquidation or enforcement, upon such terms and in such manner as the
Administrative Agent may determine or as applicable law may dictate, of all or any part of the Guaranteed Obligations or any other
guarantee of (including without limitation any letter of credit issued with respect to) all or any part of the Guaranteed Obligations;
(vi) the giving of any consent to the merger or consolidation of, the sale of substantial assets by, or other restructuring or
termination of the corporate existence of the Borrower or any other Person or any disposition of any shares of any Guarantor;
(vii) any proceeding against the Borrower or any other guarantor of (including without limitation any issuer of any letter of
credit issued with respect to) all or any part of the Guaranteed Obligations or any collateral provided by any other Person or the
exercise of any rights, remedies, powers and privileges of the Administrative Agent and the Banks under the Loan Documents or
otherwise in such order and such manner as the Administrative Agent may determine, regardless of whether the Administrative Agent
or the Banks shall have proceeded against or exhausted any collateral, right, remedy, power or privilege before proceeding to call
upon or otherwise enforce this Agreement;
(viii) the entering into such other transactions or business dealings with the Borrower, any Subsidiary or Affiliate of the
Borrower or any other guarantor of all or any part of the Guaranteed Obligations as the Administrative Agent or any Bank may desire;
or
Guaranty Agreement
2
(ix) all or any combination of any of the actions set forth in this Section 2.02(a).
(b) The enforceability and effectiveness of this Agreement and the liability of each Guarantor, and the rights, remedies,
powers and privileges of the Administrative Agent and the Banks under this Agreement shall not be affected, limited, reduced,
discharged or terminated, and each Guarantor hereby expressly waives to the fullest extent permitted by law any defense now or in
the future arising, by reason of:
(i) the illegality, invalidity or unenforceability of all or any part of the Guaranteed Obligations, any Loan Document or any
other agreement or instrument whatsoever relating to all or any part of the Guaranteed Obligations;
(ii) any disability or other defense with respect to all or any part of the Guaranteed Obligations (other than, subject to
Section 2.03 hereof, by reason of the full and final payment of all Guaranteed Obligations), including the effect of any statute of
limitations that may bar the enforcement of all or any part of the Guaranteed Obligations or the obligations of any such other
guarantor;
(iii) the illegality, invalidity or unenforceability of any security for or other guarantee (including without limitation any
letter of credit) of all or any part of the Guaranteed Obligations or the lack of perfection or continuing perfection or failure of the
priority of any Lien on any collateral for all or any part of the Guaranteed Obligations;
(iv) the cessation, for any cause whatsoever, of the liability of the Borrower or any other guarantor with respect to all or
any part of the Guaranteed Obligations (other than, subject to Section 2.03 hereof, by reason of the full and final payment of all
Guaranteed Obligations);
(v) any failure of the Administrative Agent or any Bank to marshal assets in favor of the Borrower or any other Person
(including any other guarantor of all or any part of the Guaranteed Obligations), to exhaust any collateral for all or any part of the
Guaranteed Obligations, to pursue or exhaust any right, remedy, power or privilege it may have against the Borrower or any other
guarantor of all or any part of the Guaranteed Obligations (including any issuer of any letter of credit) or any other Person or to take
any action whatsoever to mitigate or reduce such or any other Person’s liability under this Agreement, the Administrative Agent and
the Banks being under no obligation to take any such action notwithstanding the fact that all or any part of the Guaranteed Obligations
may be due and payable and that the Borrower may be in default of its obligations under any Loan Document;
(vi) any counterclaim, set-off or other claim which the Borrower or any other guarantor of all or any part of the Guaranteed
Obligations has or claims with respect to all or any part of the Guaranteed Obligations (other than, subject to Section 2.03 hereof, by
reason of the full and final payment of all Guaranteed Obligations);
(vii) any failure of the Administrative Agent or any Bank or any other Person to file or enforce a claim in any bankruptcy
or other proceeding with respect to any Person;
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(viii) any bankruptcy, insolvency, reorganization, winding-up or adjustment of debts, or appointment of a custodian,
síndico, conciliador, liquidator or the like of it, or similar proceedings commenced by or against any Person, including any discharge
of, or bar or stay against collecting, all or any part of the Guaranteed Obligations (or any interest on all or any part of the Guaranteed
Obligations) in or as a result of any such proceeding;
(ix) any action taken by the Administrative Agent or any Bank that is authorized by this Section 2.02 or otherwise in this
Agreement or by any other provision of any Loan Document or any omission to take any such action;
(x) any law of any jurisdiction, or any event, affecting any term of any Guaranteed Obligation or the rights of the
Administrative Agent, the Collateral Agent or any Bank with respect thereto, including without limitation: (A) the application of any
such law, including any prior approval, which would prevent the exchange of a currency other than Dollars for Dollars or the
remittance of funds outside of such jurisdiction or the unavailability of Dollars in any legal exchange market in such jurisdiction in
accordance with normal commercial practice; or (B) a declaration of a banking moratorium or any suspension of payments by banks
in such jurisdiction or the imposition by such jurisdiction or any Governmental Authority thereof of any moratorium on, the required
rescheduling or restructuring of, or required approval of payments on, any indebtedness in such jurisdiction; or (C) any expropriation,
confiscation, nationalization or requisition by any country or any Governmental Authority that directly or indirectly deprives any
Person in such country otherwise entitled thereto of any claim for payment under all or any part of the Guaranteed Obligations; or (D)
any war (whether or not declared), insurrection, revolution, hostile act, civil strife or similar events occurring in such jurisdiction
which has the same effect as the events described in clause (A), (B) or (C) above (in each of the cases contemplated in clauses (A)
through (D) above, to the extent occurring or existing on or at any time after the date of this Agreement); or
(xi) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety
or guarantor (other than, subject to Section 2.03 hereof, by reason of the full and final payment of all Guaranteed Obligations).
(c) To the fullest extent permitted by law, each Guarantor expressly waives, for the benefit of the Administrative Agent and
the Banks, all set-offs and counterclaims and all diligence, presentment, demand for payment or performance, notices of nonpayment
or nonperformance, protest, notices of protest, notices of dishonor and all other notices or demands of any kind or nature whatsoever
(other than the written demand for payment pursuant to Section 2.01 hereof), and any requirement that the Administrative Agent or
any Bank exhaust any right, power or remedy or proceed against the Borrower under the Credit Agreement, any Note or any other
Loan Document or other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee
of, or security for, any of the Guaranteed Obligations, and all notices of acceptance of this Agreement or of the existence, creation,
incurring or assumption of new or additional Guaranteed Obligations. Each Guarantor further expressly waives the benefit of any and
all statutes of limitation and of any law that exonerates or limits the liability of guarantors or sureties, and any defenses provided by
these laws, to the fullest extent permitted by applicable law.
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(d) Each Guarantor further waives, to the fullest extent permitted by law, any right to which it may be entitled, including,
without limitation:
(i) that the assets of the Borrower first be used, depleted and/or applied in satisfaction of the Borrower’s obligations under
the Credit Agreement prior to any amounts being claimed from or paid by any Guarantor;
(ii) to require that the Borrower be sued and all claims against the Borrower be completed prior to an action or proceeding
being initiated against any Guarantor;
(iii) to have its obligations hereunder be divided among other guarantors; and
(iv) to the extent applicable, under Articles 2813, 2814, 2815, 2816, 2817, 2818, 2819, 2820, 2821, 2822, 2823, 2826,
2827, 2830 (subject to what is provided herein), 2836, 2837 (subject to what is provided herein, to the extent amounts due are not
paid in full), 2842, 2846 and 2848 of Mexico’s Federal Civil Code (and the corresponding provisions of the Civil Code of the States
of Mexico).
2.03 Reinstatement. The obligations of each Guarantor under this Section 2 shall be automatically reinstated if and to the
extent that for any reason any payment by or on behalf of the Borrower in respect of the Guaranteed Obligations is rescinded or must
otherwise be restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify the Administrative Agent and the Banks on demand for
all costs and expenses (including, without limitation, fees of counsel, but without duplication of the obligations of the Borrower under
the Credit Agreement) incurred by them in connection with such rescission or restoration, including any such costs and expenses
incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or the like under any
bankruptcy, insolvency or similar law.
2.04 Subrogation. Each Guarantor hereby agrees that, until the final payment in full of all Guaranteed Obligations and the
expiration or termination of the Commitments under the Credit Agreement, it shall not exercise any right or remedy arising by reason
of any performance by it of its guarantee in Section 2.01 hereof, whether by subrogation, reimbursement, contribution or otherwise,
against the Borrower or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed
Obligations.
2.05 Remedies. Each Guarantor agrees that, as between such Guarantor and the Administrative Agent and the Banks, the
obligations of the Borrower under the Credit Agreement, the Notes or any other Loan Documents may be declared to be forthwith due
and payable as provided in Section 10 of the Credit Agreement (and shall be deemed to have become automatically due and payable
in the circumstances provided in said Section 10) for purposes of Section 2.01 hereof, notwithstanding any stay, injunction or other
prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Borrower
and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such
obligations (whether or not due and payable by the Borrower) shall to the fullest extent permitted by applicable law forthwith become
due and payable by such Guarantor for purposes of said Section 2.01.
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5
2.06 Payments. (a) All payments by any Guarantor under this Agreement shall be made in Dollars, without deduction, setoff or counterclaim at the place specified in the Credit Agreement and free and clear of any and all present and future Covered Taxes.
In the event that any Guarantor, any Person making a payment hereunder on behalf of any Guarantor or the Administrative Agent
shall be required by applicable law, decree or regulation to deduct or withhold Covered Taxes from any amounts payable on, under or
in respect of this Agreement, the sum payable shall be increased as necessary so that after making all required deductions and
withholdings the recipient of such payment receives an amount equal to the sum it would have received had no such deduction or
withholding been made, except to the extent that the Borrower would not have been required to make such payments under Section
5.05(i) of the Credit Agreement.
(b) Each Guarantor shall indemnify the Administrative Agent and each Bank against, and reimburse them upon demand
for, any Covered Taxes paid at any time by the Administrative Agent or such Bank (as the case may be) and any loss, liability, claim
or expense, including interest, penalties, surcharges and reasonable and documented, when possible, legal fees, that the
Administrative Agent or such Bank may incur at any time arising out of or in connection with any failure of the Borrower to make
any payment of Covered Taxes when due except to the extent that the Borrower would not have been required to make such payments
under Section 5.05(i) of the Credit Agreement.
(c) Each Guarantor agrees to pay all Other Applicable Taxes.
Section 3. Representations and Warranties. Each Guarantor represents and warrants to the Administrative Agent and the
Banks that:
3.01 Organization; Power and Authority. Such Guarantor (a) is a corporation duly organized and validly existing under the
laws of the jurisdiction of its incorporation, (b) has all requisite corporate or other power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be
conducted, (c) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify could reasonably be expected to (either individually or in the aggregate) have a
Material Adverse Effect, (d) has full power, authority and legal right to make and perform this Agreement, (e) is in material
compliance with all applicable laws and regulations and (f) is a Subsidiary of the Borrower and thus will derive substantial direct and
indirect benefit from the Guaranteed Obligations.
3.02 Due Authorization, Legality, Etc. The making and performance by such Guarantor of this Agreement and all other
documents and instruments to be executed and delivered hereunder by such Guarantor have been duly authorized by all necessary
corporate action, and do not and will not contravene (a) the estatutos sociales of such Guarantor, (b) any applicable law, decree,
regulation, judgment, award, injunction or similar legal restriction, as
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6
now in effect, or (c) any material agreement or instrument or contractual restriction binding on or affecting such Guarantor or any of
its Property, and do not and will not result in the imposition of any Lien on any Property of such Guarantor, except for Liens created
pursuant to the Security Documents.
3.03 No Additional Authorization Required. No license, consent, authorization or approval or other action by, or notice to
or registration or filing with, any Governmental Authority, and no other third-party consent or approval is necessary, for the due
execution, delivery and performance by such Guarantor of this Agreement or for the legality, validity or enforceability of this
Agreement.
3.04 Legal Effect. This Agreement has been duly executed and delivered by such Guarantor and is the legal, valid and
binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms except (i) as may be limited by
bankruptcy, insolvency or similar laws affecting creditors’ rights generally and (ii) as rights of acceleration, indemnification,
contribution and the availability of equitable remedies may be limited by equitable principles of general applicability.
3.05 Ranking. The payment obligations of such Guarantor hereunder are unconditional, secured (but only to the extent of
the Collateral and otherwise unsecured) and unsubordinated general obligations of such Guarantor, and rank and will at all times rank
at least pari passu in priority of payment with all other present and future unsecured and unsubordinated Indebtedness of such
Guarantor, other than statutorily preferred obligations, and will have priority with respect to such unsecured and unsubordinated
Indebtedness, other that statutorily preferred obligations, to the extent of the Collateral, except that (i) certain limited labor claims for
salaries and indemnities provided for in the Mexican Constitution, and bankruptcy-related expenses, and (ii) in respect of amounts
due in excess of the Collateral, other labor claims, claims of tax authorities for unpaid taxes, social security quotas, workers’ housing
fund quotas, retirement fund quotas and other secured obligations (to the extent of the value of the relevant collateral) will have
priority over the claims of the Administrative Agent and the Banks in any bankruptcy proceeding initiated in Mexico pursuant to the
laws of Mexico (x) in the case of (i), with respect to both the secured and unsecured obligations of such Guarantor, and (y) in the case
of (ii), with respect to unsecured obligations of such Guarantor.
3.06 No Actions or Proceedings. There are no legal or arbitral proceedings, or proceedings by or before any Governmental
Authority, now pending or (to the knowledge of such Guarantor) threatened against such Guarantor that (a) could reasonably be
expected to have a Material Adverse Effect or (b) purport to affect the legality, validity or enforceability of this Agreement.
3.07 Commercial Activity; Absence of Immunity. Such Guarantor is subject to civil and commercial law with respect to its
obligations under this Agreement, and the making and performance of this Agreement by such Guarantor constitute private and
commercial acts rather than public or governmental acts. Such Guarantor is not entitled to any immunity on the ground of sovereignty
or the like from the jurisdiction of any court or from any action, suit or proceeding, or the service of process in connection therewith,
arising under this Agreement.
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3.08 Taxes. There is no income, stamp or other tax, levy, assessment, impost, deduction, charge or withholding of any kind
imposed by Mexico (or any municipality or other political subdivision or taxing authority thereof or therein that exercises de facto or
de jure power to impose such tax, levy, assessment, impost, deduction, charge or withholding) either (a) on or by virtue of the
execution or delivery of this Agreement or (b) on any payment to be made by such Guarantor pursuant to this Agreement, other than
any such tax, levy, assessment, impost, deduction, charge or withholding imposed on any Person as a result of such Person being
organized under the laws of Mexico or by virtue of its having a permanent establishment in Mexico to which income under this
Agreement is attributable or its Applicable Lending Office being located in Mexico, except for withholding tax on payments of
interest and fees deemed to be interest to Banks other than Mexican Banks (acting directly and not acting through non-Mexican
agencies or branches) and EDC. Such Guarantor has filed all tax returns required to be filed and paid all taxes shown to be due
thereon except such as are being contested in good faith by appropriate proceedings and for which adequate reserves have been made
if required in accordance with GAAP.
3.09 Environmental Matters. The operations and Property of such Guarantor comply with all applicable Environmental
Laws, except to the extent the failure to so comply, either individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
3.10 Investment Company Act. Such Guarantor is not an “investment company” or a company “controlled” by an
“investment company” within the meaning of the Investment Company Act of 1940, as amended.
3.11 Solvency. Such Guarantor is, and after giving effect to the making of the Loans and the use of proceeds thereof (but
without taking into account the incurrence of the Guaranteed Obligations or any liabilities arising from the Guarantees provided by
such Guarantor in respect of Other Facilities) will be, Solvent.
3.12 Legal Form. This Agreement is in proper legal form under the law of Mexico for the enforcement thereof against such
Guarantor under such law, and if it were stated to be governed by such law, it would constitute a legal, valid and binding obligation of
such Guarantor under such law, enforceable in accordance with its terms, except (i) as it would be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors’ rights generally and (ii) as it would be limited by equitable principles of
general applicability. All formalities required in Mexico for the validity and enforceability of this Agreement have been accomplished
and no Covered Taxes are required to be paid and no notarization is required for the validity and enforceability hereof, provided that,
in the event any legal proceedings are brought to the courts of Mexico, a Spanish translation of the documents required in such
proceedings needs to be prepared by a court-approved translator and would have to be approved by such court after the defendant had
been given an opportunity to be heard with respect to the accuracy of the translation, and proceedings would thereafter be based upon
the translated documents.
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3.13 Guarantor’s Credit Decision, Etc. Such Guarantor has, independently and without reliance on the Banks or the
Administrative Agent and based on such documents and information as such Guarantor has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Such Guarantor has adequate means to obtain from the Borrower on a continuing
basis information concerning the financial condition, operations and business of the Borrower, and such Guarantor is not relying on
the Banks or the Administrative Agent to provide such information now or in the future. Such Guarantor acknowledges that it will
receive substantial direct and indirect benefit from the extensions of credit contemplated by the Credit Agreement.
3.14 Foreign Exchange Regulations. There are no foreign exchange controls or other similar legal restrictions in effect in
Mexico that would affect the ability of such Guarantor to make any payment under this Agreement, or that would restrict the ability
of such Guarantor to convert Pesos into Dollars (or other foreign currencies) for subsequent payment thereunder.
Section 4. Covenants. Each Guarantor covenants and agrees with the Banks and the Administrative Agent that, so long as
any Commitment or Loan is outstanding and until payment in full of all amounts payable by the Borrower under the Credit
Agreement:
4.01 Corporate Existence. Such Guarantor will (i) preserve and maintain its legal existence and (ii) preserve and maintain
all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 4.01 shall prohibit any transaction
expressly permitted under Section 9.01 of the Credit Agreement).
4.02 Compliance with Law. Such Guarantor will comply in all material respects with the requirements of all applicable
laws, rules, regulations and orders of Governmental Authorities (including without limitation IMSS, INFONAVIT and SAR and all
Environmental Laws and laws relating to social security) except where the necessity of compliance therewith is being contested in
good faith by appropriate proceedings.
4.03 Payment of Obligations. Such Guarantor will pay and discharge, at or before maturity all of its material obligations
and liabilities (including, without limitation, claims of materialmen, warehousemen and the like which if unpaid might by law give
rise to a Lien) and pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or
profits or on any of its Property prior to the date on which penalties attach thereto, except for any such obligation, liability, tax,
assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which
adequate reserves are being maintained in accordance with GAAP and where the failure to pay or discharge such obligation, liability,
tax, assessment, charge or levy would not result in a Material Adverse Effect.
4.04 Maintenance of Property; Insurance. Such Guarantor will (a) maintain all of its Property useful and necessary in the
business conducted by the Borrower and its Subsidiaries in good working order and condition, ordinary wear and tear excepted,
provided, however, that such Guarantor shall not be prevented by this Section 4.04 from discontinuing such operations or disposing of
or suspending the maintenance of those Properties which, in the reasonable
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9
judgment of the Borrower, are no longer necessary or useful in the conduct of the business of the Borrower or such Guarantor, as the
case may be, and if such discontinuation, disposition or suspension would not result in a Material Adverse Effect; and (b) maintain
insurance with creditworthy insurance companies against such risks and in such amounts as are usually maintained or insured against
in Mexico (or other relevant jurisdictions in which each Guarantor conducts its operations) by other companies of established repute
engaged in the same or a similar business; and will furnish to the Banks, upon reasonable request from the Administrative Agent,
information presented in reasonable detail as to the insurance so carried.
4.05 Governmental Authorizations. Such Guarantor will promptly from time to time obtain or make and maintain in full
force and effect all licenses, consents, authorizations and approvals of, and filings and registrations with, any Governmental Authority
from time to time necessary under the laws of Mexico for the making and performance by each Guarantor of this Agreement
4.06 Ranking. Such Guarantor will ensure that the payment obligations of such Guarantor under this Agreement will at all
times constitute unconditional, secured (but only to the extent of the Collateral, and otherwise unsecured) and unsubordinated general
obligations of such Guarantor ranking at least pari passu in priority of payment with all other present and future unsecured and
unsubordinated Indebtedness of such Guarantor (other than Indebtedness or obligations having priority by operation of law).
Section 5. Miscellaneous.
5.01 Waiver. No failure on the part of the Administrative Agent or any Bank to exercise and no delay in exercising, and no
course of dealing with respect to, any right, power or privilege under this Agreement, the Credit Agreement, the Notes or the other
Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this
Agreement, the Credit Agreement, the Notes or the other Loan Documents preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
5.02 Notices. (a) All notices, requests and other communications provided for herein (including, without limitation, any
modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing delivered to the intended
recipient at the “Address for Notices” specified below its name on the signature pages hereof; or, as to any party, at such other
address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when personally delivered or, in the case of a telecopy, email or mailed
notice, upon receipt, in each case given or addressed as aforesaid.
(b) Notwithstanding the foregoing, each Guarantor hereby agrees that it will provide to the Administrative Agent all
information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to the Loan
Documents, including, without limitation Communications by transmitting the Communications in an electronic/soft
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10
medium in a format acceptable to the Administrative Agent to [email protected]. In addition, each Guarantor agrees
to continue to provide the Communications to the Administrative Agent in the manner specified in the Loan Documents but only to
the extent requested by the Administrative Agent.
(c) Each Guarantor further agrees that the Administrative Agent may make the Communications available to the Banks by
posting the Communications on the Platform.
(d) THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE”. THE AGENT PARTIES DO NOT WARRANT
AS TO THE ACCURACY OR COMPLETENESS OF THE COMMUNICATIONS, OR THE ADEQUACY OF THE PLATFORM
AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS OR OMISSIONS IN THE COMMUNICATIONS. NO WARRANTY
OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR
FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY THE AGENT PARTIES IN CONNECTION WITH
THE COMMUNICATIONS OR THE PLATFORM. IN NO EVENT SHALL THE AGENT PARTIES HAVE ANY LIABILITY TO
ANY GUARANTOR, ANY BANK, THE COLLATERAL AGENT OR ANY OTHER PERSON FOR DAMAGES OF ANY KIND,
INCLUDING, WITHOUT LIMITATION, DIRECT OR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, LOSSES OR EXPENSES (WHETHER IN TORT, CONTRACT OR OTHERWISE) ARISING OUT OF SUCH
GUARANTOR’S OR THE ADMINISTRATIVE AGENT’S TRANSMISSION OF COMMUNICATIONS THROUGH THE
INTERNET, EXCEPT TO THE EXTENT THE LIABILITY OF ANY AGENT PARTY IS FOUND IN A FINAL NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED PRIMARILY FROM
SUCH AGENT PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(e) The Administrative Agent agrees that the receipt of the Communications by the Administrative Agent at its e-mail
address set forth above shall constitute effective delivery of the Communications to the Administrative Agent for purposes of the
Loan Documents.
(f) Nothing herein shall prejudice the right of the Administrative Agent to give any notice or other communication pursuant
to any Loan Document in any other manner specified herein or in such Loan Document.
5.03 Expenses, Indemnifications, Etc. Each Guarantor agrees to pay or reimburse the Administrative Agent and each of the
Banks for all of their out-of-pocket costs and expenses (including, without limitation, the fees and expenses of legal counsel) in
connection with any enforcement or collection proceedings resulting from the occurrence of an Event of Default. In addition, each
Guarantor hereby jointly and severally agrees to indemnify the Administrative Agent and the Banks and their respective directors,
officers, employees, attorneys and agents (each, an “Indemnified Party”) from and against any and all claims, damages, losses,
liabilities, obligations, penalties, actions, judgments, suits, costs and expenses of any kind (including, without limitation, fees and
disbursements of counsel), joint or several, that may be
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incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or relating to any
investigation, litigation or proceeding or the preparation of any defense with respect thereof arising out of or in connection with or
relating to this Agreement or the transactions contemplated hereby, whether or not such investigation, litigation or proceeding is
brought by any Guarantor, any of its shareholders or creditors, an Indemnified Party or any other Person, or an Indemnified Party is
otherwise a party thereto, except to the extent such claim, damage, loss, liability, obligation, penalty, action, judgment, suit, cost or
expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified
Party’s gross negligence or willful misconduct. Each Guarantor also agrees not to assert any claim against any Indemnified Party for
special, indirect, consequential or punitive damages arising out of or otherwise relating to this Agreement or any of the transactions
contemplated hereby.
5.04 Amendments, Etc. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may
be modified or supplemented only by an instrument in writing signed by the Borrower (which for this purpose is appointed the
attorney-in-fact of each Guarantor, which appointment is irrevocable and coupled with an interest) and the Administrative Agent. Any
such amendment or waiver shall be binding upon the Banks, each holder of any of the Guaranteed Obligations and each Guarantor.
This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.
5.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and each
holder of any of the Guaranteed Obligations and their respective successors and assigns, provided, that, except as expressly permitted
by Section 9.01 of the Credit Agreement, no Guarantor may assign any of its rights or obligations under this Agreement without the
prior written consent of the Administrative Agent.
5.06 Captions. The captions and section headings appearing herein are included solely for convenience of reference and are
not intended to affect the interpretation of any provision of this Agreement.
5.07 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.
5.08 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New
York.
5.09 Jurisdiction, Service of Process and Venue.
(a) Each of the parties hereto agrees that any suit, action or proceeding with respect to this Agreement or the transactions
contemplated hereby or any judgment entered by any court in respect thereof may be brought in the United States District Court for
the Southern District of New York or the Supreme Court of the State of New York, County of New York, and in the courts of its own
corporate domicile, in respect of actions brought against it as a defendant, and irrevocably submits to the jurisdiction of each such
court for the purpose of any such suit, action, proceeding or judgment.
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(b) Each Guarantor hereby irrevocably appoints CT Corporation System in New York, New York (the “Process Agent”),
with an office on the date hereof at 111 Eighth Avenue, 13th Floor, New York, NY 10011, as its agent and true and lawful attorneyin-fact in its name, place and stead to accept on behalf of such Guarantor and its Property, service of copies of the summons and
complaint and any other process which may be served in any such suit, action or proceeding brought in the State of New York. Such
appointment shall be irrevocable as long as the Loans are outstanding, except that if for any reason the Process Agent appointed
hereby ceases to act as such, the affected Guarantor will, by an instrument reasonably satisfactory to the Administrative Agent,
appoint another Person in the Borough of Manhattan as such Process Agent subject to the approval (which approval shall not be
unreasonably withheld) of the Administrative Agent. Each Guarantor hereby further irrevocably consents to the service of process in
any suit, action or proceeding in said courts by the mailing thereof by the Administrative Agent or any Bank by registered or certified
mail, postage prepaid, at its address set forth beneath its signature hereto. Each Guarantor covenants and agrees that it shall take any
and all reasonable action, including the execution and filing of any and all documents, that may be necessary to continue the
designation of a Process Agent pursuant to this Section in full force and effect and to cause the Process Agent to act as such.
(c) Nothing herein shall in any way be deemed to limit the ability of the Administrative Agent or any Bank to serve any
such process or summonses in any other manner permitted by applicable law.
(d) Each of the parties hereto hereby irrevocably waives, to the extent permitted by applicable law, any objection that it
may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement
brought in the United States District Court for the Southern District of New York or any New York State Court sitting in the Borough
of Manhattan, New York and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum and any right to which it may be entitled on account of place of residence or
domicile. A final judgment (in respect of which time for all appeals has elapsed) in any such suit, action or proceeding shall be
conclusive and may be enforced in any court to the jurisdiction of which any party hereto is or may be subject, by suit upon judgment.
5.10 Waiver of Jury Trial. EACH GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
5.11 Waiver of Immunity. To the extent that any Guarantor may be or become entitled to claim for itself or its Property any
immunity on the ground of sovereignty or the like from suit, court jurisdiction, attachment prior to judgment, attachment in aid of
execution of a judgment or execution of a judgment, and to the extent that in any such jurisdiction there may be attributed such an
immunity (whether or not claimed), such Guarantor hereby irrevocably agrees not to claim and hereby irrevocably waives such
immunity with respect to its obligations under this Agreement.
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5.12 Judgment Currency. This is a guaranty of an international loan transaction in which the specification of Dollars and
payment in New York City is of the essence, and the obligations of each Guarantor under this Agreement to make payment in Dollars
shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other
currency or in another place except to the extent that on the Business Day following receipt of any sum adjudged to be so due in the
judgment currency the recipient may in accordance with normal banking procedures purchase Dollars in the amount originally due to
such recipient with the judgment currency. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due
hereunder in Dollars into another currency (in this Section 5.12 called the “judgment currency”), the rate of exchange that shall be
applied shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase such Dollars at
New York, New York with the judgment currency on the Business Day next preceding the day on which such judgment is rendered.
The obligation of each Guarantor in respect of any such sum due from it to the Administrative Agent or any Bank hereunder (in this
Section 5.12 called an “Entitled Person”) shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be
discharged only to the extent that on the Business Day following receipt by such Entitled Person of any sum adjudged to be due
hereunder in the judgment currency such Entitled Person may in accordance with normal banking procedures purchase and transfer
Dollars to New York City with the amount of the judgment currency so adjudged to be due; and each Guarantor hereby, as a separate
obligation and notwithstanding any such judgment, agrees jointly and severally to indemnify such Entitled Person against, and to pay
such Entitled Person on demand, in Dollars, the amount (if any) by which the sum originally due to such Entitled Person in Dollars
hereunder exceeds the amount of the Dollars so purchased and transferred. If the amount of Dollars so purchased exceeds the sum
originally due to the Entitled Person, such Entitled Person shall remit such excess to the Borrower.
5.13 Use of English Language. This Agreement has been negotiated and executed in the English language. All certificates,
reports, notices and other documents and communications given or delivered pursuant to this Agreement (including, without
limitation, any modifications or supplements hereto) shall be in the English language, or accompanied by a certified English
translation thereof. In the case of any document originally issued in a language other than English, the English language version of
any such document shall for purposes of this Agreement, and absent manifest error, control the meaning of the matters set forth
therein.
5.14 Set-Off. Without limiting any of the obligations of the Guarantors or the rights of the Banks or the Administrative
Agent hereunder, if any Guarantor shall fail to pay when due (whether at stated maturity, by acceleration or otherwise) any amount
payable by it hereunder, each Bank and the Administrative Agent is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, without prior notice to any Guarantor (which notice is expressly waived by each Guarantor to the fullest
extent permitted by applicable law), to set off and appropriate and apply against such amount any and all deposits (general or special,
time or demand, provisional or final, in any currency, matured or unmatured) and any other obligations at any time held or owing by
such Bank, the Administrative Agent or any Subsidiary, Affiliate, branch or agency thereof to or for the credit or account of any
Guarantor. Such Bank or the Administrative Agent, as applicable, shall promptly provide notice to each Guarantor of such set-off,
provided, that failure by such Bank or the Administrative Agent, as applicable, to
Guaranty Agreement
14
provide such notice to each Guarantor shall not give any Guarantor any cause of action or right to damages or affect the validity of
such set-off and application. The rights of each Bank and the Administrative Agent under this Section are in addition to any other
rights and remedies (including, without limitation, any other rights of set-off) that such Bank and the Administrative Agent may have.
5.15 Severability. In case any provision in this Agreement shall be held to be invalid, illegal or unenforceable, such
provision shall be severable from the rest of this Agreement, and the validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby.
5.16 Administrative Agent. Each reference herein to any right granted to, benefit conferred upon or power exercisable by
the Administrative Agent shall be a reference to the Administrative Agent for the benefit of the Banks under the Credit Agreement.
5.17 Additional Guarantors. Each Person that is required to become a party to this Agreement pursuant to Section 8.14 of
the Credit Agreement shall become a Guarantor for all purposes of this Agreement upon execution and delivery by such Person of an
Assumption Agreement in the form of Annex I hereto.
[Remainder of this page intentionally left blank]
Guaranty Agreement
15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day
and year first above written.
CITIBANK, N.A.,
as Administrative Agent
By
Name:
Title:
Address for Notices:
Guaranty Agreement
16
GUARANTORS
DESC AUTOMOTRIZ, S.A DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
17
MORESA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
18
COMERCIALIZADORA MORESA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
19
MORESTANA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
20
PISTONES MORESA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
21
INMOBILIARIA CORCEL, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
22
INMOBILIARIA UNIK, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
23
PINTURA ESTAMPADO Y MONTAJE,
S.A. DE C.V
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
24
AGROKÉN, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
25
CORPORATIVO DINE, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
26
PROMOCIONES BOSQUES, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
27
CANTILES DE MITA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
28
AEROPYCSA, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
29
CORPORATIVO ARCOS DESC, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
30
CAÑADA DE SANTA FÉ, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
31
CORPORATIVO ARCOS II, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
32
OPERADORA DE NAYARIT, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
Address for Notices:
Guaranty Agreement
33
ANNEX I
ASSUMPTION AGREEMENT dated as of [•][•], [•], between [•], a [•] corporation (the “Additional Guarantor”), and
CITIBANK, N.A., as Administrative Agent under the Credit Agreement referred to below.
Desc, S.A. de C.V. (together with its successors and assigns, the “Borrower”), a Mexican corporation and the [direct]
[indirect] parent of the Additional Guarantor, and certain Banks and the Administrative Agent are parties to a Credit Agreement dated
as of December 19, 2003 (as from time to time modified or amended, the “Credit Agreement”), providing, subject to the terms and
conditions thereof, for the making of loans by the Banks to the Borrower in an aggregate principal amount of up to $445,749,991.78.
In connection with the Credit Agreement, the Borrower and certain of its Subsidiaries (other than the Additional
Guarantor) have entered into the Guarantee Agreement, dated as of December 23, 2003 (as amended, supplemented or otherwise
modified form time to time, the “Guarantee”).
The Credit Agreement requires the Additional Guarantor to become a party to the Guarantee. Accordingly, the parties
hereto agree as follows:
1. Definitions. Terms defined in the Credit Agreement are used herein as defined therein.
2. Guarantee. By executing and delivering this Assumption Agreement, the Additional Guarantor, as provided in Section
5.17 of the Guarantee, hereby becomes a party to the Guarantee as a Guarantor thereunder with the same force and effect as if
originally named therein as a Guarantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations
and liabilities of a Guarantor thereunder. The Additional Guarantor hereby represents and warrants that each of the representations
and warranties contained in Section 3 of the Guarantee is true and correct with respect to such Additional Guarantor on and as the
date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date.
3. Governing Law. This Assumption Agreement shall be governed by and construed in accordance with the law of the
State of New York.
Guaranty Agreement
34
IN WITNESS WHEREOF, the parties hereto have caused this Assumption Agreement to be duly executed and delivered
as of the day and year first above written.
CITIBANK, N.A.,
as Administrative Agent
By
Name:
Title:
[GUARANTOR]
By
Name:
Title:
Address for Notices:
Guaranty Agreement
35
Exhibit 2.4
EXECUTION COPY
CONSENT, WAIVER AND FIRST AMENDMENT TO THE CREDIT AGREEMENT
THIS CONSENT, WAIVER AND FIRST AMENDMENT TO THE CREDIT AGREEMENT, dated as of April 27, 2004 (this
“First Amendment”), among DESC, S.A. DE C.V. (the “Borrower”); each of the lenders that is a signatory hereto under the caption
“BANKS” on the signature pages hereof (individually, a “Bank” and, collectively, the “Banks”); and CITIBANK, N.A., as
administrative agent for the Banks (in such capacity, together with its successors in such capacity, the “Administrative Agent”).
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Administrative Agent are all parties to that certain Credit Agreement dated as of
December 19, 2003 (as hereafter amended, modified, restated and supplemented from time to time, the “Credit Agreement”).
WHEREAS, the Borrower has requested amendments to, and waivers of, certain provisions of the Credit Agreement and certain
other Loan Documents (as defined in the Credit Agreement) and, subject to the terms and conditions set forth herein, the Banks are
willing to amend and waive certain provisions of the Credit Agreement and other Loan Documents as more specifically set forth
herein.
NOW, THEREFORE, in consideration of the premises set forth above, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby agree that all capitalized terms used and not defined
herein shall have the meanings ascribed to such terms in the Credit Agreement, and further hereby agree as follows:
1. Amendments to the Credit Agreement.
(a) Amendment to “Applicable Margin” Definition. The definition of “Applicable Margin” in the Credit Agreement is
hereby amended by deleting such definition in its entirety and substituting in lieu thereof the following:
“‘Applicable Margin’ shall mean (i) for the period from the closing date of the First Amendment through and
including December 31, 2004, the rate of 2.500% per annum and (ii) thereafter, the rate per annum set forth below in the chart
based upon the Consolidated Net Indebtedness to Consolidated EBITDA Ratio as of the last day of the most recently concluded
period of four consecutive fiscal quarters of the Borrower as set forth in the then most recent certificate delivered pursuant to
Section 8.07(e); provided that, if the Borrower shall fail to deliver such certificate on the date required pursuant to said Section
8.07(e), the Applicable Margin shall be determined as if said ratio were greater than 4.00 to 1 until such certificate is delivered,
whereupon the Applicable Margin shall be determined on the basis of such certificate:
Consolidated Net Indebtedness to Consolidated EBITDA Ratio
Greater than 4.00 to 1.00
At any time prior to the Relevant Margin Date
At any time on and after the Relevant Margin Date
Greater than 3.50 to 1.00 but less than or equal to 4.00 to 1.00
Greater than 3.00 to 1.00 but less than or equal to 3.50 to 1.00
Greater than 2.50 to 1.00 but less than or equal to 3.00 to 1.00
Less than or equal to 2.50 to 1.00
Rate
3.250%
3.750%
3.000%
2.750%
2.000%
1.625%
(b) Amendment to “Collateral Agency Agreement” Definition. The definition of “Collateral Agency Agreement” in the
Credit Agreement is hereby amended by deleting such definition in its entirety and substituting in lieu thereof the following:
“‘Collateral Agency Agreement’ shall mean the Collateral Agency Agreement, to be dated on or prior to the Closing
Date among the Borrower, the Administrative Agent, the Collateral Agent, Citibank, N.A., as administrative agent under the
Revolving Facility, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as
administrative agent under the Peso Facility, the Asset Pledgors from time to time and the Equity Pledgors from time to time, in
substantially the form attached hereto as Exhibit G and as hereafter amended, modified, restated and supplemented from time to
time.”
(c) Amendment to “Desc Entities” Definition. The definition of “Desc Entities” in the Credit Agreement is hereby
amended by deleting such definition in its entirety and substituting in lieu thereof the following:
“‘Desc Entities” shall mean the Guarantors, the Asset Pledgors, the Equity Pledgors and the Encumbered Entities
(that are also Subsidiaries of the Borrower) from time to time, provided that Non-Strategic Subsidiaries shall not be considered
Desc Entities at any time.”
(d) Amendment to “Trigger Event” Definition. The definition of “Trigger Event” in the Credit Agreement is hereby is
deleted in its entirety.
(e) Other Amendments to Section 1. The following definition shall be added to Section 1.01 of the Credit Agreement
immediately after the definition of Federal Funds Rate:
“‘First Amendment’ shall mean the consent, waiver and first amendment to this Agreement dated as of April 27,
2004, among the Borrower, the Banks and the Administrative Agent.”
(f) Amendments to Section 8.14(a). Section 8.14(a) of the Credit Agreement is hereby amended by deleting such Section in
its entirety and substituting in lieu thereof the following:
“(a) In the event and to the extent that the existing contractual limitations relating to the Guarantee by any Joint Venture
Entity no longer apply and all or substantially all of the capital stock or other interests, if any, evidencing ownership rights in
such Joint Venture Entity are owned directly or indirectly by the Borrower, the Borrower promptly will (i) cause such Joint
Venture Entity and its Subsidiaries that are not separately Joint
2
Venture Entities (unless the capital stock or other interests, if any, evidencing ownership rights in such Joint Venture Entity (in
the aggregate) have a book value of less than $5,000,000 at such time) to Guarantee the Indebtedness hereunder by duly
executing and delivering an Assumption Agreement substantially in the form attached as Annex I to the Guaranty Agreement
and (ii) deliver or cause to be delivered to the Administrative Agent an opinion of counsel or counsels to such Guarantor or
Guarantors, addressed to the Administrative Agent, the Collateral Agent and the Banks, in form and substance and from such
counsels and in such jurisdictions reasonably satisfactory to legal counsel or counsels to the Administrative Agent and the
Collateral Agent; provided that this paragraph (a) shall not apply to Non-Strategic Subsidiaries.”
(g) Amendments to Section 8.18(a). Section 8.18(a) of the Credit Agreement is hereby amended by deleting such Section
in its entirety and substituting in lieu thereof the following:
“(a) The Borrower will (i) analyze and evaluate its business and the business of its Subsidiaries (and explore potential
sources of non-operating cash and cost and expense savings) to enable the Borrower to develop a new strategic plan for it and its
Subsidiaries, (ii) revise the existing financial projections to take into account such new strategic plan, and (iii) furnish to the
Administrative Agent for distribution to each Bank (and in sufficient copies for each Bank), no later than July 31, 2004, a copy
of the revised financial projections developed by the Borrower in accordance with clause (ii) above and a report of the Borrower
describing in reasonable detail the work performed by it in accordance with clause (i) above.”
2. Consent to Amendment to the Collateral Agency Agreement. The Banks hereby consent to the execution and delivery by the
Administrative Agent and the Collateral Agent of the First Amendment to the Collateral Agency Agreement in substantially the form
attached hereto as Exhibit A.
3. Waivers and Consents related to the Ponderosa Transaction. In connection with the Borrower’s desire to enter into a
transaction to acquire the business and the assets of Ponderosa Industrial de México, S.A. de C.V. through Rexcel, S.A. de C.V.
(“Rexcel”) the Banks hereby:
(a) consent and authorize the release by the Collateral Agent of the Lien on all the 459,509 Series A-II shares and the
40,990 series B-II shares of Rexcel that are pledged to the Collateral Agent pursuant to a Contrato de Prenda de Acciones dated as of
December 23, 2003, among the Borrower, certain other pledgors signatories thereto and the Collateral Agent (the “Pledge
Agreement”), for the purpose of permitting the Borrower to transfer such shares (and any other Rexcel shares held by the Borrower)
to Girsa Concentradora, S.A. de C.V. (“Girsa”), and permitting Girsa (and Rexcel’s other minority shareholders) to contribute 100%
of the shares of Rexcel owned by Girsa and by Rexcel’s other minority shareholders, to a trust created under the laws of Mexico (the
“Trust”), with terms and conditions reasonably satisfactory to the Collateral Agent, provided that (A) the Borrower transfers to Rexcel
all the 50 class 1 series A shares and the 31,608 class 2 series A shares of Forestaciones Operativas, S.A. de C.V. (“Forestaciones”)
owned by the Borrower and Rexcel thereafter contributes such shares to the
3
Trust, (B) (i) Girsa grants to the Collateral Agent, for the benefit of the Secured Parties and in a form reasonably satisfactory to the
Collateral Agent, a perfected first-priority security interest in its shares of Rexcel for the period prior to the contribution of such
shares to the Trust and (ii) Girsa and Rexcel each grants to the Collateral Agent, for its benefit and for the benefit of the Secured
Parties and in a form satisfactory to the Collateral Agent, a perfected first-priority security interest to all of Girsa’s and Rexcel’s
interests and rights in the Trust, including to any distributions of funds thereof, after the Rexcel and Forestaciones shares are
transferred to the Trust, such interests and rights to be reasonably satisfactory to the Banks, (C) delivers to the Administrative Agent
in connection therewith an opinion of counsel or counsels to Girsa and Rexcel addressed to the Administrative Agent, the Collateral
Agent and the Banks, in form and substance and from such counsels and in such jurisdictions reasonably satisfactory to legal counsel
or counsels to the Administrative Agent and the Collateral Agent and (D) takes all actions necessary or reasonably requested by the
Collateral Agent (including executing and delivering all documents and instruments necessary or appropriate for the filing and/or
recording thereof in all applicable jurisdictions) to perfect the first priority Lien in such shares and interests and shall pay all taxes,
fees and other charges (including registration fees) then payable in connection with such perfection;
(b) waive compliance with Sections 9.02(a)(ii) and 9.02(c)(ii) of the Credit Agreement solely to permit the transfer of the
Rexcel shares to Girsa and the transfer of the Forestaciones to Rexcel, in the manner described above;
(c) waive compliance with Section 9.09 of the Credit Agreement solely to permit Girsa to transfer the Rexcel shares to the
Trust and Rexcel to transfer the Forestaciones shares to the Trust, in the manner described above;
(d) waive their right to obtain repayment under Section 2.07 of the Credit Agreement with respect to the proceeds derived
from the capital increase in Rexcel and Forestaciones in accordance with the definition of “Permitted Joint Venture” in the Credit
Agreement, to allow new investors to acquire preferred stock convertible in up to 80% of the Voting Stock of Rexcel and
Forestaciones in consideration of approximately $30,000,000;
(e) waive the obligation of the Borrower under Section 8.13 of the Credit Agreement to maintain a majority of the Voting
Stock in Rexel and Forestaciones; and
(f) waive the requirements set forth in Section 9.02(a)(i), 9.02(a)(v), 9.02(a)(vi), 9.02(c)(i) and 9.02(c)(iii) of the Credit
Agreement if and only to the extent that Girsa and Rexcel are required, in the context of the exercise of a drag-along right by a third
party, to sell (directly or indirectly through the Trust) the capital stock in Rexcel and Forestaciones;
provided, however, that all consents and waivers and the performance of all actions described in this Section 3 shall be
conditioned upon the Borrower, Girsa and Rexcel obtaining from the International Finance Corporation, in a 120 day period
following the Amendment Closing Date, a consent or waiver to their agreements with the International Finance Corporation which
shall permit Girsa and Rexcel to grant the security interests described in Section 3(a)(B) above without breaching such agreements.
4
4. Waivers and Consents related to the repurchase of Guaranteed Notes. The Banks hereby agree to waive the limitation of
prepayment of indebtedness described in Section 9.08 of the Credit Agreement in connection with the repurchase or discharge of
Guaranteed Notes by the Borrower provided that the Borrower applies an amount of not more than Pesos 839,063,800, plus any
accrued interest, additional amounts resulting from tax gross-up obligations and third party fees payable in connection with such
repurchase or discharge.
5. Consent to Amendments to Other Facilities. The Banks hereby consent to the execution and delivery by the Borrower of an
amendment to the Revolving Facility and the Peso Facility in terms substantially similar to this First Amendment to the extent such
consent is required under Section 4.01 of the Intercreditor Agreement.
6. No Other Amendments. Except for the amendments set forth above, the text of the Credit Agreement and all other Loan
Documents shall remain unchanged and in full force and effect. No amendment, waiver or consent by the Administrative Agent or the
Banks under the Credit Agreement or any other Loan Document is granted or intended except as expressly set forth herein, and the
Administrative Agent and the Banks expressly reserve the right to require strict compliance in all other respects. Except as set forth
herein, the amendments agreed to herein shall not constitute a modification of the Credit Agreement or any of the other Loan
Documents, or a course of dealing with the Administrative Agent and the Banks at variance with the Credit Agreement or any of the
other Loan Documents, such as to require further notice by the Administrative Agent, the Banks or the Majority Banks to require
strict compliance with the terms of the Credit Agreement and the other Loan Documents in the future. In accordance with the
foregoing, the Loan Documents shall be deemed to be amended solely to the extent necessary to give effect to the amendments set
forth herein.
7. Conditions Precedent.
(a) The effectiveness of this First Amendment is subject to the Administrative Agent having received on or prior to May 11,
2004 (the “Amendment Closing Date”) the following documents, each of which shall be in form and substance reasonably
satisfactory to the Administrative Agent:
(i) (A) in respect of Section 1(b), 1(c), 1(d), 1(e), 1(f), 1(g), 2 and 4, this First Amendment, duly executed and delivered by
the Majority Banks, the Borrower, the Pledgors (as defined in Section 11(a) hereof) and the Guarantors (as defined in Section 11(a)
hereof) and (B) and in respect of Sections 1(a), 3 and 5, this First Amendment, duly executed and delivered by all Banks, the
Borrower, the Pledgors and the Guarantors;
(ii) a certificate, dated the Amendment Closing Date, of the Chief Executive Officer or Chief Financial Officer of the
Borrower, and attested to by the Secretary or other senior executive officer of such Person, certifying as to the satisfaction of the
conditions set forth in Section 7(b)(iii);
(iii) an opinion, dated the Amendment Closing Date, of (A) De Ovando y Martínez del Campo, S.C., special Mexican
counsel to the Borrower and the Guarantors, in substantially the form of Exhibit B hereto, and (B) Weil, Gotshal & Manges LLP,
special New York counsel to the Borrower and the Guarantors, in substantially the form of Exhibit C hereto;
5
(iv) evidence of prepayment of the Loans in accordance with Section 2.07 of the Credit Agreement in an aggregate
principal amount, when added to the aggregate principal amount of the loans outstanding under the Peso Facility prepaid, equal to
approximately Pesos 1,821,240,000;
(v) evidence of compliance by the Borrower of the applicable requirements of Sections 8.14(a) and 8.15(b) of the Credit
Agreement (after giving effect to Section 1(f) of this First Amendment) in respect of the direct or indirect acquisition by the
Borrower, as the case may be, of all or substantially all of the stock of Corfuerte, S.A. de C.V., Authentic Acquisition Corporation,
Pesquera Nair, S.A. de C.V., Nair Industrias, S.A. de C.V., Propemaz, S.A. de C.V. and Steel Wheels de México, S.A. de C.V.; and
(vi) such other documents as the Administrative Agent may reasonably request in connection with this First Amendment
and the transactions contemplated hereby.
(b) The effectiveness of this First Amendment is subject to the further conditions precedent that:
(i) since December 31, 2003, no event or circumstance shall have occurred which has had a Material Adverse Effect;
(ii) there shall not have occurred a material adverse change in Mexico or the United States and no material disruption of or
material adverse change in loan syndication or financial banking or capital market conditions in Mexico, the United States or
internationally;
(iii) after giving effect to this First Amendment the following statements shall be true:
(A) no Default shall have occurred and be continuing or would result from this First Amendment; and
(B) the representations and warranties made by the Borrower and by each Desc Entity in each Loan Document to
which it is a party shall be in all material respects true as of the Amendment Closing Date, both before and after giving
effect to this First Amendment, except to the extent previously fulfilled in accordance with the terms of the Loan
Agreement or such other Loan Document, as applicable, or to the extent relating specifically to the earlier date;
(iv) no law, regulation or decree shall be applicable which, in the reasonable opinion of the Majority Banks, restrains,
prevents or imposes materially adverse conditions upon the transactions contemplated hereby; and
(v) the effectiveness of the amendments to the Other Facilities, which amendment shall be on terms substantially similar to
this First Amendment, shall occur simultaneously with the effectiveness of the amendments contemplated in this First Amendment.
6
8. Counterparts. This First Amendment may be executed in any number of counterparts, each of which taken together shall
constitute one and the same instrument and any of the parties hereto may execute this First Amendment by signing any such
counterpart. A set of copies of this First Amendment signed by all parties hereto shall be lodged with the Borrower and the
Administrative Agent.
9. Governing Law. This First Amendment shall be governed and construed in accordance with and governed by the law of the
State of New York.
10. Severability. In case any provision of this First Amendment shall be held to be invalid, illegal or unenforceable, such
provision shall be severable from the rest of this First Amendment, and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
11. Guarantor and Pledgor Acknowledgment.
(a) Each of Desc Automotriz, S.A. de C.V., Moresa, S.A. de C.V., Comercializadora Moresa, S.A. de C.V., Morestana,
S.A. de C.V., Pistones Moresa, S.A. de C.V., Inmobiliaria Corcel, S.A. de C.V., Inmobiliaria Unik, S.A. de C.V., Pintura Estampado
y Montaje, S.A. de C.V., Agrokén, S.A. de C.V., Corporativo Dine, S.A. de C.V., Promociones Bosques, S.A. de C.V., Cantiles de
Mita, S.A. de C.V., Aeropycsa, S.A. de C.V., Corporativo Arcos Desc, S.A. de C.V., Cañada de Santa Fé, S.A. de C.V., Corporativo
Arcos II, S.A. de C.V., Operadora de Nayarit, S.A. de C.V., Corfuerte, S.A. de C.V., Alimentos del Fuerte, S.A. de C.V., Nair
Industrias, S.A. de C.V., Pesquera Nair, S.A. de C.V., Authentic Acquisition Corporation, Authentic Specialty Foods Inc. and
Inmobiliaria El Puente, S.A. de C.V. are collectively referred to herein as the “Guarantors,” and each of the Borrower, Pistones
Moresa, S.A. de C.V., Inmobiliaria Corcel, S.A. de C.V., Inmobiliaria Unik, S.A. de C.V., Pintura Estampado y Montaje, S.A. de
C.V., Corporativo Arcos Desc, S.A. de C.V., Corporativo Arcos II, S.A. de C.V., Cantiles de Mita, S.A. de C.V., Cañada de Santa Fé,
S.A. de C.V., Promociones Bosques, S.A. de C.V., Desc Automotriz, S.A. de C.V., Moresa, S.A. de C.V., Operadora de Nayarit, S.A.
de C.V., Corporativo Dine, S.A. de C.V., Corfuerte, S.A. de C.V. and Authentic Acquisition Corporation are collectively referred to
herein as the “Pledgors”.
(b) Each Guarantor and each Pledgor hereby acknowledges that it has reviewed the terms and provisions of the Credit
Agreement and this First Amendment. Each Guarantor hereby confirms that the Guaranty Agreement continues to guarantee to the
fullest extent possible in accordance with its terms the payment and performance of all “Guaranteed Obligations” thereunder (as such
term is defined in the applicable Guaranty Agreement), including without limitation the payment and performance of all obligations
of the Borrower now or hereafter existing under or in respect of the Credit Agreement and the Notes defined therein. Each Pledgor
hereby confirms that each pledge agreement to which it is a party continues to guarantee to the fullest extent possible in accordance
with its terms the payment and performance of all “Secured Obligations” thereunder (as such term is defined in the Collateral Agency
Agreement), including without limitation the payment and performance of all obligations of the Borrower now or hereafter existing
under or in respect of the Credit Agreement and the Notes defined therein.
7
(c) Each Guarantor and each Pledgor acknowledges and agrees that any of the other Loan Documents to which it is a party
or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable, and
shall not be impaired or limited by the execution or effectiveness of this First Amendment. Each Guarantor and each Pledgor
represents and warrants that all representations and warranties contained in this First Amendment and any other Loan Documents to
which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the date hereof to the same
extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier
date, in which case they were true, correct and complete in all material respects on and as of such earlier date.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day
and year first above written.
DESC, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
9
CITIBANK, N.A.,
as Administrative Agent
By
Name:
Title:
10
BANKS
CITIBANK, N.A., NASSAU BRANCH
SOLELY IN ITS CAPACITY AS LENDER
By
Name:
Title:
11
CALIFORNIA COMMERCE BANK
By
Name:
Title:
By
Name:
Title:
12
DEUTSCHE BANK AG, NEW YORK
By
Name:
Title:
By
Name:
Title:
13
JPMORGAN CHASE BANK
By
Name:
Title:
14
BANCO NACIONAL DE COMERCIO
EXTERIOR, S. N. C.
By
Name:
Title:
By
Name:
Title:
15
COMERICA BANK
By
Name:
Title:
16
EXPORT DEVELOPMENT CANADA
By
Name:
Title:
17
[THIS PAGE INTENTIONALLY LEFT BLANK]
18
BBVA BANCOMER, S. A., INSTITUCIÓN DE
BANCA MÚLTIPLE, GRUPO FINANCIERO
BBVA BANCOMER
By
Name:
Title:
By
Name:
Title:
19
CREDIT LYONNAIS NEW YORK BRANCH
By
Name:
Title:
20
CREDIT SUISSE FIRST BOSTON, ACTING
THROUGH ITS LONDON BRANCH
By
Name:
Title:
By
Name:
Title:
21
HSBC BANK USA
By
Name:
Title:
22
BANCO INBURSA, S.A., INSTITUCIÓN
MÚLTIPLE, GRUPO FINANCIERO INBURSA
By
Name:
Title:
23
GUARANTORS
DESC AUTOMOTRIZ, S.A DE C.V.
MORESA, S.A. DE C.V.
COMERCIALIZADORA MORESA, S.A. DE C.V.
MORESTANA, S.A. DE C.V.
PISTONES MORESA, S.A. DE C.V.
INMOBILIARIA CORCEL, S.A. DE C.V.
INMOBILIARIA UNIK, S.A. DE C.V.
PINTURA ESTAMPADO Y MONTAJE, S.A. DE
C.V
AGROKÉN, S.A. DE C.V.
CORPORATIVO DINE, S.A. DE C.V.
PROMOCIONES BOSQUES, S.A. DE C.V.
CANTILES DE MITA, S.A. DE C.V.
AEROPYCSA, S.A. DE C.V.
CORPORATIVO ARCOS DESC, S.A. DE C.V.
CAÑADA DE SANTA FÉ, S.A. DE C.V.
CORPORATIVO ARCOS II, S.A. DE C.V.
OPERADORA DE NAYARIT, S.A. DE C.V.
CORFUERTE, S.A. DE C.V.
ALIMENTOS DEL FUERTE, S.A. DE C.V.
NAIR INDUSTRIAS, S.A. DE C.V.
PESQUERA NAIR, S.A. DE C.V.
AUTHENTIC ACQUISITION CORPORATION
AUTHENTIC SPECIALTY FOODS INC.
INMOBILIARIA EL PUENTE, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
24
PLEDGORS
DESC, S.A. DE C.V.
PISTONES MORESA, S.A. DE C.V.
INMOBILIARIA CORCEL, S.A. DE C.V.
INMOBILIARIA UNIK, S.A. DE C.V.
PINTURA ESTAMPADO Y MONTAJE, S.A. DE
C.V.
CORPORATIVO ARCOS DESC, S.A. DE C.V.
CORPORATIVO ARCOS II, S.A. DE C.V.
CANTILES DE MITA, S.A. DE C.V.
CAÑADA DE SANTA FÉ, S.A. DE C.V.
PROMOCIONES BOSQUES, S.A. DE C.V.
DESC AUTOMOTRIZ, S.A. DE C.V.
MORESA, S.A. DE C.V.
OPERADORA DE NAYARIT, S.A. DE C.V.
CORPORATIVO DINE, S.A. DE C.V.
CORFUERTE, S.A. DE C.V.
AUTHENTIC ACQUISITION CORPORATION
INMOBILIARIA EL PUENTE, S.A. DE C.V.
By
Name:
Title:
By
Name:
Title:
25
Exhibit 4.1
ENGLISH TRANSLATION OF SPANISH ORIGINAL
Mexico City, February 17, 2004.
DESC, S.A. de C.V.
Paseo de los Tamarindos 400-B, Planta Baja,
Col. Bosques de las Lomas
Mexico City
Attention: Mr. Fernando Senderos Mestre
Re.: Cooperation Agreement for the Subscription of Shares
Dear Sirs:
We refer to (i) the financial restructuring that we have been discussing recently, which contemplates a possible capital
increase; (ii) your request for cooperation in procuring investors, of any type and at the sole discretion of Inversora Bursatil, S.A. de
C.V., Casa de Bolsa, Grupo Financiero Inbursa (“Inversora”), to subscribe for a capital increase (the “Capital Increase”) by DESC,
S.A. de C.V. (the “Issuer”); and (iii) the proposal by Inversora regarding its subscription, on its own behalf or on behalf of third
parties, for shares in the Capital Increase, subject to the terms and conditions set forth below (all investors, including Inversora, are
hereinafter collectively referred to as the “Investors”). The Capital Increase shall be effected through a private placement without a
public offer pursuant to the Ley del Mercado de Valores (the “Mexican Stock Exchange Law”), but shall grant, in Mexico,
preemptive rights to the Issuer’s current shareholders. The foregoing shall be effected pursuant to the second paragraph of Article 13
of the Mexican Stock Exchange Law and any applicable regulations.
In this regard, you have represented and warranted that the Issuer’s board of directors and its finance and planning
committee have approved the execution of this Agreement; that the execution of this Agreement does not contravene the Issuer’s
bylaws or any other agreement or legal instrument binding upon the Issuer and/or its subsidiaries; that except for the authorizations
and registrations referred to herein in connection with the Capital Increase, neither the Issuer nor its subsidiaries require any
authorization, license, registration or additional consent to carry out the Capital Increase and that there are no pending legal actions or
proceedings against the Issuer and/or its subsidiaries that could prevent or limit, in any manner, the execution of this Agreement, or
the subscription of shares deriving from the Capital Increase.
For purposes of entering into an agreement by way of this Agreement, we hereby confirm the terms and conditions of our
services and of our participation in the Capital Increase:
(i) Capital Increase: As soon as practicable and convenient to the Issuer, the Issuer shall convene a general shareholders’
meeting to propose a Capital Increase in the amount of Ps. 2,738,158,752 through the issuance of 912,719,584 ordinary shares,
without par value. For each series of its outstanding shares, and depending on the series of shares held by each shareholder exercising
its preemptive rights, the Issuer shall issue 2 (two) new shares for every 3 (three) of its currently outstanding shares at a subscription
price of Ps. 3.00 per share (the “Subscription Price”), and shall grant, upon the approval of the Capital Increase, a preemptive right to
its current shareholders to subscribe for the new shares pursuant to Article 132 of the Ley General de Sociedades Mercantiles (the
“General Law of Commercial Companies”) and the Issuer’s by-laws.
In accordance with applicable law, the Issuer shall disclose the terms and conditions of this Agreement to its shareholders,
and shall take such action as may be necessary to effect the Capital Increase. Such action shall include, without limitation, if
necessary, causing the issuance of any ordinary participation certificates as may be required for the subscription by Investors,
preparing an information statement detailing the terms of this Agreement as referred to in Article 35 Section II and such other action
as may be required by section I of Article 14 of the Disposiciones de caracter general aplicables a las emisoras de valores y otros
participantes del mercado de valores published in the Federal Official Gazette (Diario Oficial de la Federacion) on March 19, 2003,
that is applicable to issuers of securities and other stock exchange participants.
(ii) Subscription: If the current shareholders, or other third parties with preemptive rights, do not subscribe for all of the
shares issued as part of the Capital Increase, and if such shares remain (as determined by the Issuer) unsubscribed and unpaid for (the
“Remaining Shares”), upon the expiration of all legal time periods and requirements and the satisfaction of all of the terms and
conditions set forth for the Capital Increase in the Issuer’s by-laws and the general shareholders’ meeting approving the Capital
Increase, the Issuer undertakes to offer to the Investors, and the Investors shall subscribe for, the Remaining Shares at the
Subscription Price, in an amount of up to Ps. 2,000,000,000. In any case, Inversora hereby makes a firm commitment to subscribe for
up to such amount of Remaining Shares, and will either acquire them for its own account or for the account of third parties, at the
Subscription Price described herein (the “Firm Commitment”).
For purposes of determining the number of Remaining Shares that the Investors are obligated to subscribe for pursuant to
the preceding paragraph, the number of common shares subscribed for by Investors based on their preemptive rights (which shall be
proven to the Issuer), shall be subtracted from the Firm Commitment and shall, therefore, be excluded. The Issuer shall not publicly
offer the Remaining Shares for subscription in Mexico if the provisions of the Mexican Stock Exchange Law and any regulations
thereunder have not been fulfilled.
2
Inversora shall not, under any circumstances, offer any of the Remaining Shares (x) outside of Mexico; (y) to any broker,
whether through a syndication or not, that has not expressly provided in writing that it shall not offer or sell such Remaining Shares
outside of Mexico; or (z) to any person that it believes has the intention of offering or selling, either directly or indirectly, the
Remaining Shares outside of Mexico unless such offer or sale is made pursuant to Regulation “S” of the U.S. Securities and
Exchange Commission, or any other applicable regulation of which it is aware.
The Issuer shall be responsible for structuring the Capital Increase and the preemptive rights offering associated with the
Capital Increase such that each is exempted from the registration requirements that would otherwise be applicable under the laws of
the United States America. The Issuer shall obtain a legal opinion from United States counsel to this effect.
Furthermore, the Issuer shall not contact, or attempt to contact, in any manner, any investor in the United States of America
in regards to the Capital Increase.
(iii) Price: The Investor shall subscribe for the Remaining Shares at a price equivalent to the Subscription Price, without
premium or discounts.
(iv) Remaining Shares for Subscription: The Issuer’s shares shall be ordinary common voting shares, and the Capital
Increase and the subscription of the Issuer’s shares by the Investors shall be carried out in accordance with the Mexican Stock
Exchange Law and the legal provisions issued hereunder. The Issuer shall, after receiving the Subscription Price: (y) deliver to
Inversora, or its designee, the stock certificates representing the Remaining Shares for which it has subscribed at Inversora’s address
or to any other address located in Mexico City, by either physically delivering such shares or by crediting Inversora’s account at S.D.
Indeval, S.A. de C.V., Institucion para el Deposito de Valores, and (z) shall register the Investors in its share record book (Libro de
Registro de Acciones) in accordance with its by-laws.
(v) Subscription through CPOs: Inversora acknowledges that the fifth clause of the Issuer’s bylaws provides the following:
“FIFTH. – No foreign person, whether a natural person, a corporate entity or Mexican company that does not have a
foreign-investor exclusion clause in its bylaws, may have any direct or indirect participation in the company, or own share of the
company. If for any reason any such person, investor or company acquires an equity interest in the company or becomes the owner of
one or more company shares, thereby contravening the above mentioned provision, it is hereby agreed that said participation will be
null and void and consequently cancelled, that the equity interest in question and the stock certificates that represent such interest will
have no value, and that the Company’s capital stock will be reduced by an amount equal to the value of the cancelled participation.”
Consequently, if it is necessary to offer the shares to foreign persons or Mexican entities without a foreign-investor exclusion clause
in its bylaws, and if fifth clause of the Issuer’s bylaws have not been amended, Inversora shall offer such shares
3
through Ordinary Participation Certificates (“CPOs”) in accordance with the trust that the Issuer has established for such purpose,
which establishes that the holders of the CPOs will not be entitled to the corporate rights conferred to the underlying trust assets.
(vi) Conditions Subsequent: If, in the judgment of Inversora, any of the conditions listed below occur, at any time from the
date hereof until the subscription of the Remaining Shares by the Investors, or while this Agreement is in effect, Inversora shall be
released from its obligations hereunder. In particular, Inversora shall be released from its obligation to subscribe for the Remaining
Shares as if such obligation had never existed (except for the Issuer’s obligation to pay the corresponding fee):
a. Approval of the Capital Increase. If for any reason whatsoever, including force majeure, the shareholders at the Issuer’s
shareholders’ meeting do not approve the Capital Increase;
b. Material Adverse Effect. The occurrence of any event, as a result of force majeure or any other reason, which has a
material adverse effect on the Issuer’s economic, financial, tax or legal condition;
c. Litigation. If the Issuer is notified of any pending and/or threatened legal proceeding or investigation which could be
expected to have an adverse effect on the Capital Increase, the subscription of shares derived therefrom and/or the execution of this
Agreement;
d. Markets. If, for reasons beyond Inversora’s control, abnormal or disorderly circumstances in the national and/or
international securities markets make it generally impossible or more difficult to subscribe for the shares issued in the Capital
Increase;
e. Registration. If the registration of the shares filed by the Issuer with the Registro Nacional de Valores (the “National
Registry of Securities”) or with the Bolsa Mexicana de Valores, S.A. de C.V. (the “Mexican Stock Exchange”) is suspended or
cancelled; or
f. Fortuitous Event or Force Majeure. If for reasons that are beyond Inversora’s control, fortuitous or force majeure events
occur which prevent the subscription of the shares issued as part of the Capital Increase, or which otherwise substantially affect
Inversora; such events include but not limited to: strikes, walkouts, wars, insurrections, governmental acts, fires, earthquakes or any
other similar or analogous event;
g. Impossibility. If it becomes impossible for Inversora or the Investors procured by Inversora, as a result of a statute, an
order from a competent governmental authority, their by-laws or the requirement of the Capital Increase, to subscribe for the Issuer’s
shares in accordance with the terms of this Agreement;
4
h. Insolvency. If the Issuer becomes bankrupt or insolvent (quiebra o concurso mercantil), or if any legal action that
prevents the Issuer from carrying on its usual operations or that is related to the Capital Increase is commenced against the Issuer;
i. Trading Suspension. If the registration of the shares filed by the Issuer with the Seccion de Valores o Especial del
Registro Nacional de Valores (the “Special Section of the National Registry of Securities”) or with the Bolsa Mexicana de Valores,
S.A. de C.V. (the “Mexican Stock Exchange”) is suspended (for more than five days) or cancelled; or
j. Senderos’ Family Participation. If Mr. Fernando Senderos Mestre or members of his immediate family do not subscribe
for at least Ps. 222,138,000 of shares either by exercising their preemptive rights or by subscribing for the Remaining Shares
simultaneously with the Investors.
(vii) Fees:
a. Global Fee. By entering into this Agreement, and regardless of whether this Agreement is terminated, the conditions
subsequent to which this Agreement is subject are satisfied, the conditions precedent to which this Agreement is subject are not
satisfied, or a single share is subscribed for pursuant to the Firm Commitment, the Issuer shall pay Inversora a fee equivalent to 1.5%
on the global amount of the Capital Increase (the “Global Fee”), which is the equivalent to Ps. 41,072,381.28 plus value added tax.
The Issuer shall pay such fee on precisely the date on which the preemptive rights of the Issuer’s shareholders shall expire.
b. Subscribed Shares. In addition to the Global Fee, and as consideration for the subscription of shares pursuant to the Firm
Commitment, the Issuer shall pay Inversora a fee equivalent to 2.25% of the subscription price paid for the shares that are subscribed
by the Investors independently of the amount that is obtained from such subscription, which amount shall be the equivalent to Ps.
45,000,000 plus value added tax.
Such fee shall be paid by the Issuer on the date that Inversora delivers the subscription price to the Issuer, which date shall
be no later than May 21, 2004. Such amount shall be aggregated with the corresponding value added tax pursuant to applicable law,
and shall be invoiced by Inversora to reflect its services.
In addition, the Issuer shall reimburse Inversora for the costs and expenses incurred by Inversora in connection with the
preparation, negotiation and execution of this Agreement, provided that such reimbursement for such costs and expenses shall not
exceed Ps. 1,500,000.
(viii) Notices and Authorizations; Conditions Precedent: The participation of Inversora or the Investors pursuant to this
Agreement is also conditioned on the shares corresponding to the Capital Increase being legally and validly issued; the
5
performance of all obligations undertaken herein; the veracity of the representations made by the Issuer herein, the delivery of all
notices required herein and on all governmental authorizations being duly obtained as required by (i) applicable law, (ii) the Issuer’s
by-laws, or in the case of the Investor’s by-laws, as may be reasonably required and (iii) the shareholders’ meeting approving the
Capital Increase. All governmental authorizations shall be obtained by the person required by applicable law to obtain them. The
subscription of the Remaining Shares shall include, but not be limited to, the following conditions precedent:
a. Comision Federal de Competencia (the “Federal Antitrust Commission”). The filing, pursuant to applicable statutory
provisions of any required notification with the Federal Antitrust Commission, which shall depend on the circumstances of the
Capital Increase and the subscription of Remaining Shares.
This obligation shall be an obligation of the relevant Investors, as the case may be, and shall not affect the rights of the
Issuer under the Firm Commitment.
b. Comision Nacional Bancaria y de Valores (the “National Banking and Securities Commission” or “CNBV”). Depending
on the circumstances of the subscription of the Remaining Shares, obtaining confirmation from the National Banking and Securities
Commission that the Reglas Generales aplicables a las adquisiciones de valores que deban ser reveladas y de ofertas publicas de
compra de valores published in the Federal Official Gazette on April 25, 2002 are not applicable. The parties shall inform the Issuer
of all developments related to this point.
The parties shall use their best efforts to obtain the authorizations that are required for the transactions contemplated by this
Agreement.
(ix) Termination: This agreement shall remain in full force and effect until May 19, 2004, the date on which it shall
automatically terminate without requiring any judicial resolution or any further action by any of the parties, unless the parties agree to
an extension; provided that that if any governmental approvals required for the Firm Commitment have yet to be obtained, this
Agreement shall be automatically extended for such time as may be necessary to obtain such governmental authorization; provided
further that such extension shall not exceed two (2) months.
(x) Cooperation: In the event that shares are subscribed pursuant to the Capital Increase, the Issuer shall, for a period of
five (5) years beginning on the date of such subscription, use its best efforts to comply with any reasonable written request for
assistance by the Investors in carrying out an offer or sale of the subscribed shares in the capital markets, through a stock exchange or
other public offer in other markets. The Issuer shall use its best efforts to, as soon as practicable upon receipt of any reasonable
request, take any action and provide any assistance that may be reasonable in any offer or sale. Such assistance shall include (with the
understanding that the costs associated with such assistance shall be borne by each of the Issuer and Inversora equally if the offering
is a secondary offering, and that the Issuer shall bear 75% of such costs and Inversora shall bear 25% of such costs if the offering is a
mixed offering):
a. Authorizations. Complying with all applicable statutes, regulations and norms in order to permit the offering of the
shares, including (i) preparing all applications and registrations that are applicable and reasonable and (ii) obtaining all approvals and
authorizations that are required by any governmental authority or by any self-regulated authority in Mexico or abroad;
6
b. Documents. Cooperating in the preparation of documents that are reasonably necessary for the offering of the shares,
including but not limited to the preparation of a prospectus, as the case may be;
c. Presentations. Participating in presentations regarding the Issuer with prospective subscribers, underwriters, brokers,
dealers and investors in general, through its duly authorized officers;
d. Due Diligence. Using its best efforts to cooperate in a reasonable and necessary inquiry of any matters related to the
organization, operation and performance of the Issuer;
e. Contracts. Entering into and performing any contracts for the subscription, placement or offering of the shares with
subscribers, underwriters, brokers or dealers selected by the relevant Investor, which among others will contain indemnity obligations
of the Issuer standard in this type of transactions, whereby the Issuer undertakes to supply information, legal opinions and
independent audit letters that are reasonably required by the subscribers, underwriters, brokers or dealers.
f. Advisors. Hiring independent auditors and counsel as may be necessary in order to comply with the aforementioned
obligations, both in Mexico and in any other locations.
g. Request for Registration. Preparing and filing with the CNBV the application for the registration of the shares or the
offering, as may be necessary; as well as preparing and filing with that National Banking and Securities Commission any amendments
to the application for registration and any offering prospectus that may be required in order to comply with the Mexican Stock
Exchange Law and other applicable general provisions. Furthermore, the Issuer shall prepare and submit any documents and requests
for registration with any foreign authority as may be reasonable and applicable.
(xi) Indemnity:
a. The Issuer, without limitation, undertakes to indemnify and hold harmless Inversora and its affiliates, shareholders,
officers, directors, employees or advisors, from any damages and/or losses suffered by Inversora as a result of the Capital Increase
and/or the execution of this Agreement, as well as from damages arising from any
7
claim before a competent governmental authority, proceeding, trial, suit or legal action against them, which is based on any omission
or misrepresentation, which is directly attributable to the Issuer.
b. The Issuer, without limitation, undertakes to reimburse Inversora and its respective affiliates, shareholders, officers,
directors, employees and advisors, for any expenses, costs or expenditures incurred by them (including all reasonable attorneys’ fees
and expenses), or for any damages and losses suffered by them as a result of any claim before a competent governmental authority,
proceeding, trial, suit or legal action against them, which is based on any omission or misrepresentation resulting from the Capital
Increase or the subscription of the Remaining Shares, either in Mexico or abroad.
c. The obligations and undertakings of the Issuer pursuant to this clause shall become effective on the date of execution of
this Agreement and shall remain in full force and effect notwithstanding the termination of this Agreement, in conformity with
applicable law.
(xii) Assignment: The rights granted hereby in favor of Inversora may not be assigned or transferred to any person without
the prior written consent of the Issuer, except for (i) the transfer to subsidiaries and affiliates of the financial conglomerate to which
Inversora belongs; or (ii) in the event that Inversora enters into any agreements with prospective Investors for the subscription of the
Remaining Shares derived from the Capital Increase in order to cover its Firm Commitment.
(xiii) Amendments: This Agreement may only be amended, modified or supplemented by means of a new written
agreement by and between the parties hereto, their successors and permitted assigns.
(xiv) Liability: The Issuer shall be solely and exclusively responsible for complying with any law to which it is subject,
either national or foreign, and with any contracts or any agreements to which it is a party, in connection with the Capital Increase,
including but not limited to, any applicable law in the United States of America. The Issuer undertakes to hold harmless Inversora or
the Investors from any claim or liability derived from their participation in this Agreement, the Capital Increase or the subscription of
the Remaining Shares. In particular, we assume, and you have represented and warranted, that neither the Issuer nor any of its
affiliates or subsidiaries, nor any person acting on their behalf, has made or will make “any directed selling efforts” of any securities
issued by the Issuer, as described in Regulation “S” of the Securities and Exchange Commission of the United States of America, and
that you have not offered or sold, and that you undertake to offer the shares as a part of the Capital Increase in Mexico, or in any other
offer or sale, solely in transactions that comply with the requirements of Regulation “S;” furthermore, you will obtain from any
person with whom you enter into a contract a certification to that effect.
8
(xv) Publicity: The Issuer hereby authorizes Inversora and its affiliates to disclose this Agreement in any document or
information that it must disclose pursuant to applicable legal provisions in Mexico or abroad.
(xvi) Settlement: The Investors shall settle the Firm Commitment no later than May 21, 2004.
(xvii) Governing Law and Jurisdiction: This agreements shall be construed in accordance with and governed by the law of
Mexico City, United Mexican States, expressly accepting the jurisdiction of a competent court sitting in Mexico City, for the
resolution of any dispute that may arise in connection herewith, and expressly waiving any other jurisdiction to which they might be
entitled by reason of their current or future domiciles, or for any other reason.
If you agree with the contents hereof, please sign this Agreement as an indication of your agreement with its contents.
Sincerely,
Inversora Bursatil, S.A. de C.V.,
Casa de Bolsa, Grupo Financiero Inbursa
Name: Lic. Eduardo Valdes Acra
We hereby accept and, accordingly, we confirm and
agree:
DESC, S.A. de C.V.
Name: Fernando Senderos Mestre
President of the Board and Chief Executive Officer
Date: February 17, 2004
9
EXHIBIT 4.2
PARTNERSHIP INTERESTS PURCHASE AGREEMENT
ENTERED INTO ON THE ONE HAND BY MR. FERNANDO SENDEROS MESTRE HEREINAFTER THE “SELLER”,
AND ON THE OTHER HAND
“DESC”, S.A. DE C.V., REPRESENTED HEREIN BY MR. ARTURO D’ACOSTA RUIZ, HEREINAFTER THE “BUYER”,
IN ACCORDANCE WITH THE FOLLOWING DECLARATIONS AND CLAUSES:
DECLARATIONS
I.
II.
The “Seller” declares:
a.
That he is an individual of Mexican nationality, of legal age and legally able to enter into this Agreement.
b.
That he is the legal and exclusive owner of the partnership interests issued by the corporation “Club Ecuestre Chiluca”, S.
de R. L. de C.V. which are described in full detail in Appendix 1 of this Agreement, and that such interests are free of all
liens and ownership restrictions.
c.
That it is his wish to sell to Buyer the partnership interests that he holds in the Company’s capital, under the terms and
conditions agreed upon in this Agreement.
The “Buyer” declares, through its legal representative:
a.
That it is a corporation organized under the jurisdiction of the laws of the United Mexican States.
b.
That its representative, Mr. Arturo D’Acosta Ruiz, has sufficient faculties to enter into this agreement, which have not been
revoked or modified in any way.
c.
That its corporate charter permits the execution of agreements such as this agreement and that it has the corporate authority
necessary to execute this Agreement.
d.
That it is interested in acquiring from the Seller the partnership interests that each one holds in the Company’s capital,
which are identified in Appendix 1 of this Agreement (the “Partnership Interests”).
In accordance with the Declarations stated above, the parties agree to be bound by the terms and conditions established by
mutual agreement in the following:
CLAUSES
FIRST: Purpose
The Seller hereby sells the Partnership Interests owned by Seller to the Buyer, free of all liens and ownership restrictions and the
Buyer hereby acquires the Partnership Interests.
The Seller hereby delivers the Partnership Interests to the Buyer, who receives such Partnership Interests to its satisfaction.
SECOND: Price of the Partnership Interests; terms and conditions of payment
The parties agree that the price for the Partnership Interests is the price set forth in Appendix 2 of this Contract, which the Buyer
agrees to pay in full to the Seller in the proportions, under the terms, and payment conditions stipulated in the aforementioned
Appendix 2. Once the total amount of the Partnership Interests has been paid, the Seller agrees to provide a receipt thereof in favor of
the Buyer.
THIRD: Formalizing this Contract
The requirements established by Articles 65 and 66 of the General Corporate Law (Ley General de Sociedades Mercantiles) having
been met, the Seller agrees to ask the Secretary of the Company’s Board of Directors, the entry into the corresponding Partnership
Registry of the acquisition of the Partnership Interests by the Buyer, for purposes of the provisions of Article 73 of the General
Corporate Law (Ley General de Sociedades Mercantiles).
FOURTH: Guarantee in the case of Eviction
The Seller agrees to provide a indemnify Buyer in the event of eviction under the terms of Article 384 of the Code of Commerce
(Código de Comercio) and article 2119 of the Federal Civil Code (Código Civil Federal) regarding the transfer of Partnership
Interests transferred under this Agreement.
FIFTH: Taxes
The tax obligations generated by virtue of the execution of this Agreement, will be borne by the party required to comply with such
obligations in accordance with the tax legislation currently in effect.
2
SIXTH: Address
For all applicable purposes and by virtue of the execution of this Agreement, the parties designate the following as their addresses:
The Seller
Paseo de los Tamarindos No. 400, Torre B, Piso 27
Colonia Bosques de las Lomas, Cuajimalpa, 05120 Mexico, Distrito Federal
The Buyer
Paseo de los Tamarindos No. 400, Torre B, Piso 28
Colonia Bosques de las Lomas, Cuajimalpa, 05120 Mexico, Distrito Federal
Both parties agree to notify indubitably of any change in the addresses set forth in this clause.
SEVENTH: Severability
The invalidity, illegality or lack of enforceability of any of the provisions of this Agreement, will in no way affect the validity and
enforceability of the other provisions of this Agreement.
EIGHTH: Headings
The headings of this Contract and each of its clauses have been included for quick reference and for the convenience of both parties
and they in no way modify or in any way affect the terms, conditions and agreements established herein.
NINTH: Modifications and Waivers
Any modification to this Agreement must be made by in writing between both parties. The waiver by any of the parties to any
provision of this Agreement must also be made in writing.
TENTH: Subsequent Partial Nullity
In case one or various stipulations of this Agreement were null or unattainable, such circumstance will not affect the validity and
compliance of the other provisions of this Agreement. In the event of such occurrence, the parties agree to promptly substitute the null
and unattainable provisions for other legal provisions that to the extent possible yield the same intended result.
ELEVENTH: Non-compliance
Total or partial non-compliance with any of the obligations set forth in this Agreement will be sufficient reason to enable the affected
party to elect between the rescission of this Agreement or mandatory compliance. In both cases the affected party will be entitled to
seek from the counterparty the payment of losses and damages (daños y perjuicios) resulting from such non-compliance.
3
TWELTH: Jurisdiction
For the interpretation and due compliance of the provisions of this Agreement, both parties submit to the laws and jurisdiction of the
competent courts of Mexico City, Federal District, and expressly waive any other forum to which they may be entitled by reason of
their current or future addresses or any other circumstance.
Both parties being aware of the contents and scope of this Agreement, by virtue of having stated that they have entered into this
Agreement voluntarily and in the absence of any defect that could yield the nullity hereof in whole or in part, both parties sign this
agreement in 2 (two) counterparts in the presence of two witnesses in Mexico City, Federal District, on May 29, 2003.
“The Seller”
Mr. Fernando Senderos Mestre
“The Buyer”
Desc, S.A. de C.C.
Mr. Arturo D’Acosta Ruiz
Witnesses
Mr. Raul Calleja Ortega
Mr. Luis Mayer Romero
4
Appendix 1
Partnership Interests Purchase Agreement dated May 29, 2003 between Sr. Fernando Senderos Mestre and “DESC”, S.A. de C.V.
Partnership Interests, subject of this Agreement
The Seller
Fernando Senderos Mestre
5
Fixed Capital
Equity Capital
50
1,041,487
Votes
1,041,537
Appendix 2
Partnership Interests Purchase Agreement dated May 29, 2003 between Mr. Fernando Senderos Mestre and “DESC”, S.A. de C.V.
Price of Partnership Interests and Form of Payment
I.
Price
The parties of this Agreement agree that the price of the Partnership Interests is the following:
$5,168,700.00 (Five million, one hundred sixty-eight thousand, seven hundred) dollars, legal currency of the United States of
America.
II. Terms and Conditions of Payment
The Buyer agrees to pay to the Seller the price stipulated in this Appendix 2 in installments. The dates on which the several and
successive installments of said price will be agreed upon in each case by the Buyer and Seller, and such agreement will be based on
the cash flow condition of the Buyer, with the understanding that the parties agree as of this date that the total price will be paid by
the Buyer within a term that will not exceed 5 (five) calendar years from the date of execution of this Agreement.
6
EXHIBIT 4.3
PARTNERSHIP INTERESTS PURCHASE AGREEMENT
ENTERED INTO ON THE ONE HAND BY MS. LUCIA SENDEROS MESTRE DE GOMEZ HEREINAFTER THE
“SELLER”, AND ON THE OTHER HAND
“DESC”, S.A. DE C.V., REPRESENTED HEREIN BY MR. ARTURO D’ACOSTA RUIZ, HEREINAFTER THE “BUYER”,
IN ACCORDANCE WITH THE FOLLOWING DECLARATIONS AND CLAUSES:
DECLARATIONS
I.
II.
The “Seller” declares:
a.
That she is an individual of Mexican nationality, of legal age and legally able to enter into this Agreement.
b.
That she is the legal and exclusive owner of the partnership interests issued by the corporation “Club Ecuestre Chiluca”,
S.A. de C.V. which are described in full detail in Appendix 1 of this Agreement, and that such interests are free of all liens
and ownership restrictions.
c.
That it is her wish to sell to Buyer the partnership interests that she holds in the Company’s capital, under the terms and
conditions agreed upon in this Agreement.
The “Buyer” declares, through its legal representative:
a.
That it is a corporation organized under the jurisdiction of the laws of the United Mexican States.
b.
That its representative, Mr. Arturo D’Acosta Ruiz, has sufficient faculties to enter into this agreement, which have not been
revoked or modified in any way.
c.
That its corporate charter permits the execution of agreements such as this agreement and that it has the corporate authority
necessary to execute this Agreement.
d.
That it is interested in acquiring from the Seller the partnership interests that each one holds in the Company’s capital,
which are identified in Appendix 1 of this Agreement (the “Partnership Interests”).
In accordance with the Declarations stated above, the parties agree to be bound by the terms and conditions established by
mutual agreement in the following:
CLAUSES
FIRST: Purpose
The Seller hereby sells the Partnership Interests owned by Seller to the Buyer, free of all liens and ownership restrictions and the
Buyer hereby acquires the Partnership Interests.
The Seller hereby delivers the Partnership Interests to the Buyer, who receives such Partnership Interests to its satisfaction.
SECOND: Price of the Partnership Interests; terms and conditions of payment
The parties agree that the price for the Partnership Interests is the price set forth in Appendix 2 of this Agreement, which the Buyer
agrees to pay in full to the Seller in the proportions, under the terms, and payment conditions stipulated in the aforementioned
Appendix 2. Once the total amount of the Partnership Interests has been paid, the Seller agrees to provide a receipt thereof in favor of
the Buyer.
THIRD: Formalizing this Agreement
The requirements established by Articles 65 and 66 of the General Corporate Law (Ley General de Sociedades Mercantiles) having
been met, the Seller agrees to ask the Secretary of the Company’s Board of Directors, the entry into the corresponding Partnership
Registry of the acquisition of the Partnership Interests by the Buyer, for purposes of the provisions of Article 73 of the General
Corporate Law (Ley General de Sociedades Mercantiles).
FOURTH: Guarantee in the case of Eviction
The Seller agrees to provide a indemnify Buyer in the event of eviction under the terms of Article 384 of the Code of Commerce
(Código de Comercio) and article 2119 of the Federal Civil Code (Código Civil Federal) regarding the transfer of Partnership
Interests transferred under this Agreement.
FIFTH: Taxes
The tax obligations generated by virtue of the execution of this Agreement, will be borne by the party required to comply with such
obligations in accordance with the tax legislation currently in effect.
SIXTH: Address
For all applicable purposes and by virtue of the execution of this Agreement, the parties designate the following as their addresses:
The Seller
Paseo de los Tamarindos No. 400, Torre B, Piso 27
Colonia Bosques de las Lomas, Cuajimalpa, 05120 Mexico, Distrito Federal
2
The Buyer
Paseo de los Tamarindos No. 400, Torre B, Piso 28
Colonia Bosques de las Lomas, Cuajimalpa, 05120 Mexico, Distrito Federal
Both parties agree to notify indubitably of any change in the addresses set forth in this clause.
SEVENTH: Severability
The invalidity, illegality or lack of enforceability of any of the provisions of this Agreement, will in no way affect the validity and
enforceability of the other provisions of this Agreement.
EIGHTH: Headings
The headings of this Agreement and each of its clauses have been included for quick reference and for the convenience of both parties
and they in no way modify or in any way affect the terms, conditions and agreements established herein.
NINTH: Modifications and Waivers
Any modification to this Agreement must be made by in writing between both parties. The waiver by any of the parties to any
provision of this Agreement must also be made in writing.
TENTH: Subsequent Partial Nullity
In case one or various stipulations of this Agreement were null or unattainable, such circumstance will not affect the validity and
compliance of the other provisions of this Agreement. In the event of such occurrence, the parties agree to promptly substitute the null
and unattainable provisions for other legal provisions that to the extent possible yield the same intended result.
ELEVENTH: Non-compliance
Total or partial non-compliance with any of the obligations set forth in this Agreement will be sufficient reason to enable the affected
party to elect between the rescission of this Agreement or mandatory compliance. In both cases the affected party will be entitled to
seek from the counterparty the payment of losses and damages (daños y perjuicios) resulting from such non-compliance.
3
TWELTH: Jurisdiction
For the interpretation and due compliance of the provisions of this Agreement, both parties submit to the laws and jurisdiction of the
competent courts of Mexico City, Federal District, and expressly waive any other forum to which they may be entitled by reason of
their current or future addresses or any other circumstance.
Both parties being aware of the contents and scope of this Agreement, by virtue of having stated that they have entered into this
Agreement voluntarily and in the absence of any defect that could yield the nullity hereof in whole or in part, both parties sign this
agreement in 2 (two) counterparts in the presence of two witnesses in Mexico City, Federal District, on May 29, 2003.
“The Seller”
Ms. Lucia Senderos Mestre de Gomez
“The Buyer”
Desc, S.A. de C.C.
Mr. Arturo D’Acosta Ruiz
Witnesses
Mr. Raul Calleja Ortega
Mr. David Reyes Gonzalez
4
Appendix 1
Partnership Interests Purchase Agreement dated May 29, 2003 between Ms. Lucia Senderos Mestre de Gomez and “DESC”, S.A. de
C.V.
Partnership Interests, subject of this Agreement
The Seller
Fixed Capital
Lucia Senderos Mestre de Gómez
—
5
Equity Capital
2,432,683
Votes
2,432,683
Appendix 2
Partnership Interests Purchase Agreement dated May 29, 2003 between Ms. Lucia Senderos Mestre de Gomez and “DESC”, S.A. de
C.V.
Price of Partnership Interests and Form of Payment
I. Price
The parties of this Agreement agree that the price of the Partnership Interests is the following:
$12,072,500 (twelve million, seventy-two thousand, five hundred) dollars, legal currency of the United States of America.
II. Terms and Conditions of Payment
The Buyer agrees to pay to the Seller the price stipulated in this Appendix 2 in installments. The dates on which the several and
successive installments of said price will be agreed upon in each case by the Buyer and Seller, and such agreement will be based on
the cash flow condition of the Buyer, with the understanding that the parties agree as of this date that the total price will be paid by
the Buyer within a term that will not exceed 5 (five) calendar years from the date of execution of this Agreement.
6
EXHIBIT 4.4
EXECUTION COPY
*** Portions marked with asterisks within brackets have been omitted pursuant to a request for confidential treatment, and have been
filed separately with the Commission in connection with such request.
ASSET PURCHASE AGREEMENT
BY AND AMONG
DESC AUTOMOTRIZ, S.A. DE C.V.,
HAYES WHEELS DE MEXICO, S.A. DE C.V.,
HAYES WHEELS ALUMINIO, S.A. DE C.V.,
INMOBILIARIA EL PUENTE, S.A. DE C.V.,
HAYES WHEELS ACERO, S.A. DE C.V.,
ADMINISTRACION Y CONTROL HAYES, S.A. DE C.V.,
HAYES LEMMERZ INTERNATIONAL, INC.,
HAYES LEMMERZ INTERNATIONAL-MEXICO, INC.,
AND
HAYES LEMMERZ ALUMINIO, S. de R.L. de C.V.
DATED AS OF
January 15, 2004
TABLE OF CONTENTS
Page
I.
II.
DEFINITIONS
2
1.01 Certain Definitions
2
TRANSFER OF ASSETS AND LIABILITIES
8
2.01
2.02
2.03
2.04
2.05
2.06
2.07
2.08
2.09
2.10
2.11
Assets to be Sold
Excluded Assets
Liabilities
Transfer of Assets and Assumed Liabilities
Consideration
Closing
Deliveries by DESC and the JV Entities
Deliveries by the Hayes Entities
Allocation of Purchase Price
Contracts and Permits
Simultaneous Transactions
8
9
10
11
12
12
12
13
14
15
17
III. RELATED MATTERS
3.01
3.02
3.03
3.04
17
Support Services
Mail Received After Closing
Use of Names
Employees, Benefit Plans, Etc.
17
17
17
17
IV. REPRESENTATIONS AND WARRANTIES OF DESC AND THE JV ENTITIES
4.01
4.02
4.03
4.04
4.05
4.06
4.07
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
Organization; Authority
No Violation; Consents and Approvals
Title to Assets
Litigation
Assets
Patents, Trademarks, Trade Names, Etc.
Employee Benefit Plan
Employees
Certain Contracts and Arrangements
Compliance with Laws, Licenses, etc.
Brokers
Product Liability
Labor Matters
Customers
Environmental Matters
Taxes
EXCLUSIVITY OF REPRESENTATIONS
19
19
20
21
21
21
22
22
23
23
23
24
24
24
24
25
26
27
i
V.
VI.
VII.
REPRESENTATIONS AND WARRANTIES OF THE HAYES ENTITIES
27
5.01
5.02
5.03
5.04
5.05
5.06
5.07
5.08
27
28
28
28
29
29
29
29
Organization; Authority
No Violation; Consents and Approvals
Litigation
Product Liability
Title to Shares
Financing
Brokers
Environmental Matters.
COVENANTS OF THE PARTIES
29
6.01
6.02
6.03
6.04
6.05
6.06
6.07
29
31
32
32
33
33
33
Conduct of the Business
Access to Information; Confidentiality; Solicitation of Employees
Commercially Reasonable Efforts
Cooperation
Public Announcements
Access to Books and Records Following the Closing
Supplemental Disclosure
ADDITIONAL AGREEMENTS
33
7.01
7.02
7.03
7.04
7.05
7.06
7.07
33
34
34
35
36
36
36
Tax Matters
Nissan Recall
Product Liability
Resignations; Employee Releases
Existing Agreements and Indebtedness
Dismissal of Litigation
Accounts Payable; Water Extraction
VIII. CONDITIONS TO OBLIGATIONS OF DESC AND THE JV ENTITIES
8.01
IX.
X.
XI.
Conditions
36
36
CONDITIONS TO OBLIGATIONS OF THE HAYES ENTITIES
37
9.01
37
Conditions
TERMINATION, AMENDMENT AND WAIVER
38
10.01
10.02
10.03
10.04
38
38
38
38
Termination
Procedure and Effect of Termination
Remedies
Amendment, Modification and Waiver
FEES AND EXPENSES: SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
39
11.01 Fees and Expenses
39
ii
11.02
11.03
11.04
11.05
11.06
11.07
Survival of Representations
Agreement of DESC and the JV Entities to Indemnify
Agreement of the Hayes Entities to Indemnify
Limitations on Indemnification
Conditions of Indemnification
Exclusive Remedies
XII. MISCELLANEOUS
12.01
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
12.10
12.11
39
39
39
40
40
42
42
Further Assurances
Notices
Entire Agreement
Severability
Binding Effect; Assignment
Joint and Several Liability
Third-Party Beneficiaries
Counterparts
Interpretation
Sections, Schedules, and Exhibits
Governing Law
42
42
43
44
44
44
44
44
44
44
44
iii
LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A
Exhibit B
Exhibit C
Exhibit D
Exhibit E
Exhibit F
Exhibit G
Exhibit H
Exhibit I
Exhibit J
Exhibit K
Form of Puente Factura
Form of Aluminio Factura
Form of Deed
Form of General Assignment
Form of DESC Employee Release
Form of DESC and JV General Release
Form of Unicorp Consent
Form of Hayes Employee Release
Form of Hayes General Release
Form of Officer’s Certificate of the Hayes Entities
Form of Officer’s Certificate of DESC and the JV Entities
SCHEDULES
2.01 (b)(i)
2.01 (b)(ii)
2.01 (b)(iv)
2.01 (b)(vi)
2.01 (b)(vii)
2.05
2.09
2.10 (b)
3.04 (a)
3.04 (b)
3.04 (d)
7.05
Real Property
Motor Vehicle
Transferred Intellectual Property
Assigned Contracts
Assigned Permits
Mexican VAT Taxes
Allocation of Purchase Price
Special Permits
Business Employees
Employee Benefit Plans
Union Agreements
Existing Agreements
DESC DISCLOSURE SCHEDULE
4.04
4.09 (b)
4.10
4.12
4.13
4.15
4.16
Litigation
Other Aluminio Agreements
Compliance with Laws and Licenses
Product Liability Claims
Labor Matters
Environmental Matters; Environmental Permits
Taxes
HAYES DISCLOSURE SCHEDULE
5.04
Product Liability Claims
iv
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of January 15, 2004 (this “Agreement”), by and among DESC Automotriz,
S.A. de C.V., a corporation organized under the laws of Mexico (“DESC”), Hayes Wheels de Mexico, S.A. de C.V., a corporation
organized under the laws of Mexico (the “JV”), Hayes Wheels Aluminio, S.A. de C.V., a corporation organized under the laws of
Mexico (“Aluminio”), Inmobiliaria el Puente, S.A. de C.V., a corporation organized under the laws of Mexico (“Puente”), Hayes
Wheels Acero, S.A. de C.V., a corporation organized under the laws of Mexico (“Acero”), Administracion y Control Hayes, S.A. de
C.V., a corporation organized under the laws of Mexico (“Adyco” and, collectively with the JV, Aluminio, Puente, and Acero, the
“JV Entities”), Hayes Lemmerz International, Inc., a Delaware corporation (“Hayes Parent”), Hayes Lemmerz International –
Mexico, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Hayes Parent (“Hayes Mexico”), and Hayes
Lemmerz Aluminio, S. de R.L. de C.V., a company organized under the laws of Mexico and an indirect wholly owned subsidiary of
Hayes Parent (“Buyer” and, collectively with Hayes Parent and Hayes Mexico, the “Hayes Entities”).
WITNESSETH
WHEREAS, DESC (f.k.a. UNIK, S.A. de C.V.) and Hayes Mexico (f.k.a. Hayes Wheels International-Mexico, Inc.) are
each parties to that certain Shareholders Agreement, dated as of November 10, 1995 (as amended, the “Shareholders Agreement”),
and Hayes Mexico and the JV are each parties to that certain Marketing and Support Services Agreement, dated as of November 10,
1995, and that certain Technology License and Technical Assistance Agreement, dated as of November 10, 1995 (collectively, as
amended, the “Marketing and License Agreements”), pursuant to which DESC and Hayes Mexico agreed to jointly form and operate
the JV, for the purpose of designing, manufacturing and marketing aluminum and steel wheels for sale in and for export from Mexico;
and
WHEREAS, DESC currently owns approximately 59.72% of the total issued and outstanding shares of capital stock of the
JV, and Hayes Mexico currently owns approximately 40% of the total issued and outstanding shares of capital stock of the JV; and
WHEREAS, the JV controls, directly or indirectly, Aluminio, Puente, Acero, and Adyco;
WHEREAS, Aluminio currently operates an aluminum wheel manufacturing plant in Chihuahua, Mexico (the “Business”);
and
WHEREAS, certain disputes have arisen between DESC and Hayes Parent and certain of their respective Affiliates
regarding the operation and funding of the JV, including (i) the proofs of claim, applications for payment of administrative claims and
other certain contested matters pending before the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy
Court”) (Case No. 01-11490 (MFW)); (ii) the adversary proceeding pending before the Bankruptcy Court (Adv. Proc. No. 03-53431
(MFW)); and (iii) the appeal pending before the United States District Court for the District of Delaware (Civil Action No. 03-CV871 (SLR)) (collectively, the “Litigation”); and
1
WHEREAS, DESC and Hayes Parent are parties to that certain letter of intent, dated October 22, 2003 (the “Letter of
Intent”), which sets forth the principles of agreement of a proposed transaction between DESC and Hayes Parent;
WHEREAS, Hayes Mexico wishes to convey to DESC, and DESC wishes to acquire from Hayes Mexico, all of the shares
of capital stock of the JV held by Hayes Mexico; and
WHEREAS, Buyer desires to purchase from DESC and the JV Entities, and DESC and the JV Entities desire to sell to
Buyer all of the Assets (as defined below) upon the terms and subject to the conditions hereinafter set forth.
WHEREAS, DESC and the JV Entities, on the one hand, and the Hayes Entities, on the other hand, wish to settle the
Litigation and to fully and unconditionally release each other and their respective Affiliates from and against certain claims and
causes of action; and
NOW, THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants, agreements,
releases and conditions contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:
I. DEFINITIONS
1.01 Certain Definitions. As used in this Agreement, the following terms have the following meanings:
“Accounts Receivable” shall have the meaning set forth in Section 2.02(ii).
“Acero” shall have the meaning set forth in the Preamble.
“Adyco” shall have the meaning set forth in the Preamble.
“Affiliate” shall have the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended.
“Agreement” shall have the meaning set forth in the Preamble.
“Aluminio” shall have the meaning set forth in the Preamble.
“Aluminio Factura” shall have the meaning set forth in Section 2.04(a)(ii).
“Assets” shall have the meaning set forth in Section 2.01.
“Assigned Contracts” shall have the meaning set forth in Section 2.01(b)(vi).
“Assumed Liabilities” shall have the meaning set forth in Section 2.03.
“Assigned Permits” shall have the meaning set forth in Section 2.01(b)(vii).
2
“Books and Records” shall have the meaning set forth in Section 2.01(b)(viii).
“Business” shall have the meaning set forth in the Recitals.
“Business Day” shall mean any day other than a Saturday, Sunday, or any other day on which banking institutions in
Mexico City, Mexico or Detroit, Michigan are authorized or required by applicable law to close.
“Business Employees” shall have the meaning set forth in Section 3.04(a).
“Buyer” shall have the meaning set forth in the Preamble.
“Buyer Indemnified Claims” shall have the meaning set forth in Section 11.04(b).
“Buyer Related Instruments” shall have the meaning set forth in Section 5.01.
“CFE Contract” shall have the meaning set forth in Section 2.10(c).
“Claims” shall have the meaning set forth in Section 11.06.
“Closing” shall have the meaning set forth in Section 2.01.
“Closing Date” shall mean the date on or as of which the Closing occurs.
“Code” shall mean the United States Internal Revenue Code of 1986, as amended.
“Compensation” shall have the meaning set forth in Section 3.04(c).
“Damages” shall have the meaning set forth in Section 11.03.
“Deed” shall have the meaning set forth in Section 2.04(a)(iii).
“DESC” shall have the meaning set forth in the Preamble.
“DESC and JV Dismissal Documents” shall have the meaning set forth in Section 2.07(e).
“DESC and JV General Release” shall have the meaning set forth in Section 2.07(d).
“DESC Designee” shall have the meaning set forth in Section 7.04.
“DESC Employee Release” shall have the meaning set forth in Section 2.07(c).
“DTA Amount” shall mean an amount equal to [*****], which amount is agreed to equal [*****]% of the DTA Duties.
“DTA Duties” shall mean the derecho de tramite aduanal payable to Mexican governmental authorities under applicable
Law in order to withdraw from the Mexican preferential import duty regime the equipment and machinery being transferred to Buyer
at Closing pursuant hereunder.
3
“Disclosure Schedule” shall have the meaning set forth in Section 4.04(a).
“EcoGas Contract” shall have the meaning set forth in Section 2.10(c).
“Employer Substitution Agreement” shall mean the employer substitution agreement to be executed by the Union, the
Buyer and Aluminio, dated the Closing Date, with respect to the substitution of employer set forth in Section 3.04(a).
“Employer Substitution Instruments” shall mean: (i) the employer substitution letter (three copies of which are to be
delivered by Buyer on the Closing Date to all non-union (confianza) Business Employees, and two copies of which are to be signed
by each such Business Employee with one such copy to be returned to each of Buyer and Aluminio); (ii) the notice to Senator
Doroteo Zapata delivered by Buyer; (iii) the letter of notice delivered by Buyer to the general secretary of the Union; and (iv) the
Employer Substitution Agreement, in each case with respect to the substitution of employer set forth in Section 3.04(a).
“Environmental Claim” shall mean any claim, counterclaim, demand, cause of action, notice of violation, order, or right to
contribution or indemnification or other remedy made, asserted or prosecuted by or on behalf of any third party, including, without
limitation, any governmental authority or employee, arising out of or related to Environmental Laws.
“Environmental Laws” shall have the meaning set forth in Section 4.15(a)(i).
“Environmental Liabilities” shall mean all costs, damages, fines and penalties, monitoring, investigation and response
activities, remediation activities, compliance costs, including settlement payments, fees of counsel, technical experts, consultants and
contractors, incurred, imposed or required pursuant to or in response to any Environmental Laws or Environmental Claim, or incurred
in order to achieve and maintain compliance with any Environmental Law.
“Environmental Permits” shall have the meaning set forth in Section 4.15(c).
“Excluded Assets” shall have the meaning set forth in Section 2.02.
“Former Employee” shall have the meaning set forth in Section 3.04(b).
“General Assignment” shall have the meaning set forth in Section 2.04(b).
“Hayes Designee” shall have the meaning set forth in Section 7.04.
“Hayes Disclosure Schedule” shall have the meaning set forth in Section 5.04.
“Hayes Dismissal Documents” shall have the meaning set forth in Section 2.08(f).
“Hayes Employee Release” shall have the meaning set forth in Section 2.08(d).
4
“Hayes Entities” shall have the meaning set forth in the Preamble.
“Hayes General Release” shall have the meaning set forth in Section 2.08(e).
“Hayes JV Shares” shall have the meaning set forth in Section 5.05.
“Hayes Mexico” shall have the meaning set forth in the Preamble.
“Hayes Parent” shall have the meaning set forth in the Preamble.
“Hazardous Materials” shall have the meaning set forth in Section 4.15(a)(ii).
“Initial Payment” shall have the meaning set forth in Section 2.05.
“Instruments of Assignment” shall have the meaning set forth in Section 2.04(b).
“Intellectual Property” shall mean all intellectual property rights in and to (i) trademarks, trade dress and service marks and
applications for registration thereof, trade names, logos and slogans and the goodwill associated with any of the foregoing; (ii) patents
and patent applications and inventions (whether or not patentable); (iii) registered and unregistered copyrights, writings and other
works of authorship; (iv) trade secrets, know-how and confidential information; and (v) software.
“IRS” shall mean the United States Internal Revenue Service.
“JV” shall have the meaning set forth in the Preamble.
“JV Entities” shall have the meaning set forth in the Preamble.
“Law” shall mean any applicable U.S., Mexican, or other foreign, federal, state or local law, act, statute, ordinance,
regulation, rule, code, order, writ, judgment, decree, or other requirement or rule of law.
“Letter of Intent” shall have the meaning set forth in the Recitals.
“Liabilities” shall mean any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent,
matured or unmatured or determined or undeterminable, including those arising under any Law and those arising under any contract,
agreement, commitment or undertaking or otherwise.
“License Agreement” shall mean the License Agreement entered into simultaneously herewith and dated as of the date
hereof between Hayes Parent and DESC.
“Lien” shall mean any mortgage, pledge, hypothecation, security interest, encumbrance, transfer restriction, claim, lease or
charge of any kind.
“Litigation” shall have the meaning set forth in the Recitals.
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“Marketing and License Agreements” shall have the meaning set forth in the Recitals.
“Mexican Laws” shall mean the Laws of Mexico, including the Laws of any state, municipality, subdivision or
instrumentality thereof.
“Mexican ISAI Taxes” shall mean the Impuesto sobre Adquisicion de Inmuebles imposed under Mexican Laws.
“Mexican Registration Expenses” shall mean all registration and similar expenses arising in Mexico in connection with the
transfer of the Real Property to Buyer pursuant hereunder.
“Mexican Pesos” shall mean the lawful currency of Mexico.
“Mexican Tax Statutes” shall have the meaning set forth in Section 2.09.
“Mexican VAT Taxes” shall mean the amount set forth on Schedule 2.05.
“Mexico” shall mean the United Mexican States, including all states, instrumentalities and subdivisions thereof.
“New Mexican Environmental Law” shall have the meaning set forth in Section 4.15(a)(iii).
“Nissan Recall” shall have the meaning set forth in Section 7.02.
“Nissan Recall Liability” shall have the meaning set forth in Section 7.02.
“Permitted Liens” shall mean the following Liens: (a) Liens for Taxes, assessments or other governmental charges or
levies not yet due and payable; (b) Liens of carriers, warehousemen, mechanics, materialmen and other like Liens imposed by Law
and arising in the ordinary course of business, in each case for amounts not yet due; (c) Liens incurred or deposits made in the
ordinary course of business in connection with worker’s compensation, unemployment insurance or other types of social security; (d)
minor defects of title, easements, rights-of-way, restrictions and other similar charges and encumbrances not interfering with the
continued use and operation of the Assets to which they relate in the ordinary conduct of the Business; and (e) Liens incurred for the
benefit of any of the Hayes Entities.
“PEMEX Contract” shall have the meaning set forth in Section 2.10(c).
“Person” shall mean an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization or a
government or any department or agency thereof.
“PITEX VAT Taxes” shall mean the Mexican value-added Taxes resulting from the termination of the PITEX benefits
program to which a portion of the Assets were subject prior to the Closing (it being understood that the PITEX VAT Taxes are not
included in the Mexican VAT Taxes).
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“Plan” shall have the meaning set forth in Section 3.04(b).
“Product Liability Damages” shall have the meaning set forth in Section 7.03(a).
“Puente” shall have the meaning set forth in the Preamble.
“Puente Factura” shall have the meaning set forth in Section 2.04(a)(i).
“Puente Lease” shall have the meaning set forth in Section 2.10(d).
“Purchase Price” shall have the meaning set forth in Section 2.05.
“Real Property” shall mean the interests set forth under the heading, “Real Property”, on Schedule 2.01(b)(i), together with
all easements, air and mineral rights thereto, which shall be transferred to Buyer in the manner specified therein, and the use of
appurtenant easements, strips and rights-of-way abutting, adjacent or contiguous thereto.
“Release” shall have the meaning set forth in Section 4.15(a)(iv).
“Relevant Taxes” shall have the meaning set forth in Section 4.16(g).
“Relevant Tax Return” shall have the meaning set forth in Section 4.16(h).
“Retained Liabilities” shall have the meaning set forth in Section 2.03.
“Seller Indemnified Claims” shall have the meaning set forth in Section 11.03(c).
“Seller Related Instruments” shall have the meaning set forth in Section 4.01.
“Shareholders Agreement” shall have the meaning set forth in the Recitals.
“Special Permits” shall have the meaning set forth in Section 2.10(b).
“Supplemental Compensation Amount” shall mean an amount equal to US$30,752.61, which amount is agreed to equal
forty percent (40%) of the sum of (i) all vacation pay, holiday pay and sick pay that is accrued by the Business Employees but unpaid
as of the Closing Date, plus (ii) the portion of the Christmas bonus that is to be payable to the Business Employees for the year ending
December 31, 2004 and is accrued but unpaid by such Business Employee as of the Closing Date.
“Tax or Taxes” shall have the meaning set forth in Section 4.16(f).
“Transaction Documents” shall have the meaning set forth in Section 12.03.
“Transferred Intellectual Property” shall have the meaning set forth in Section 2.01(b)(iv).
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“Transition Services Agreement” shall mean the Transition Services Agreement entered into simultaneously herewith and
dated the date hereof by and among DESC Corporativo, S.A. de C.V., DESC (solely as guarantor), and the Hayes Entities.
“Union” shall mean the Sindicato Unico de Trabajadores de Hayes Wheels Aluminio, C.T.M.
“Union Agreements” shall have the meaning set forth in Section 3.04(d).
“US$”, and “U.S. Dollars” shall mean the lawful currency of the United States of America.
“Water Deeds” shall mean the: (i) public deed duly executed by Aluminio transferring from Aluminio to Buyer the rights
relating to water extraction by the Business, (ii) public deed duly executed by Aluminio transferring from Aluminio to Buyer the
rights relating to water discharge by the Business, and (iii) public deed duly executed by Aluminio relating to the water extraction
rights of a certain third party.
II. TRANSFER OF ASSETS AND LIABILITIES
2.01 Assets to be Sold. Upon the terms and subject to the conditions of this Agreement, at the closing provided for in Section
2.06 (the “Closing”), (a) Puente shall, and DESC and the JV Entities shall cause Puente to, sell, convey, assign, transfer and deliver to
Buyer all of the right, title and interest of Puente in the Real Property, and (b) DESC and the JV Entities shall sell, convey, assign,
transfer and deliver to Buyer all of the right, title and interest of DESC and the JV Entities in and to all of the assets, properties,
licenses and agreements of every kind, character and description, whether tangible, intangible, real, personal or mixed, and
wheresoever located, other than the Excluded Assets, that are used in the conduct of the Business as presently conducted as of the
date hereof (collectively, and together with the Real Property, the “Assets”), in each case free and clear of all Liens other than
Permitted Liens, including without limitation, all of the following:
(i) All buildings, improvements, plants, and facilities located on the Real Property;
(ii) All tangible personal property, including all furniture, fixtures, computer equipment, furnishings, tools, molds,
machinery, spare parts, and equipment owned by DESC or any of the JV Entities and currently used in the Business, including
without limitation, the motor vehicle set forth on Schedule 2.01(b)(ii), as well as all manufacturers’ warranties associated with such
items (to the extent such warranties are assignable by their terms);
(iii) All inventory (including warehoused, shipped and unbilled and consigned inventories, inventories located at the
real property leased by Puente and adjacent to the Real Property, and inventories covered by purchase orders), work-in-process,
components, finished goods, parts, scrap, containers, packaging materials, supplies, raw materials, and other similar items owned by
DESC or any of the JV Entities and currently used in the Business, as well as all manufacturers’ warranties associated with such items
(to the extent such warranties are assignable by their terms);
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(iv) All of the Intellectual Property identified on Schedule 2.01(b)(iv) (the “Transferred Intellectual Property”);
(v) Subject to Section 3.04(e), all the assets relating to the Plan to be transferred to Buyer pursuant to such Section
3.04(e);
(vi) Subject to Section 2.10, all rights under the contracts, licenses, agreements, and leases that are identified on
Schedule 2.01(b)(vi) (the “Assigned Contracts”);
(vii) Subject to Section 2.10, all franchises, licenses, permits, certificates, approvals and other authorizations of any
governmental authority (including, the rights to well water usage and discharge relating to the Real Property) that are identified on
Schedule 2.01(b)(vii) (the “Assigned Permits”);
(viii) All readily available books, records, and other documents (whether on paper, computer diskette, tape or other
storage media) (“Books and Records”) owned by DESC or any of the JV Entities and relating primarily to the Assets, the Assumed
Liabilities or the operation of the Business, including but not limited to, property records, import records and pediments, production
records, engineering records, engineering drawings, environmental compliance records, purchase and sale records, marketing,
advertising, and promotional materials, personnel and payroll records, customer lists, customer records, accounting records, fixed
asset lists, supplier lists, parts lists, manuals, technical and repair data, correspondence, files and any similar items, and all Books and
Records relating to Business Employees, and to the purchase of materials by, and supplies and services for, the Business;
(ix) All credits, security deposits, refunds, rebates, prepaid items, and advance payments relating to the Assets;
(x) All stationery, forms, labels, shipping materials, brochures, art work, photographs, advertising materials and any
similar items currently used in the operation of the Business;
(xi) All telephone numbers, including any toll-free telephone numbers and lines, currently used in the operation of
the Business; and
(xii) All claims, causes of action and rights to the extent relating to any other Asset or any Assumed Liability,
including without limitation, all guarantees, warranties, indemnities and similar rights in favor of any of DESC or the JV Entities in
respect of any such other Asset or any such Assumed Liability (in each case, to the extent such guarantees, warranties, indemnities
and similar rights are transferable by their terms).
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2.02 Excluded Assets. Notwithstanding anything to the contrary herein, the Assets do not include the following (the “Excluded
Assets”):
(i) the right, title and interest of DESC and the JV Entities in and to cash on hand and short-term instruments as of the Closing
Date;
(ii) the right, title and interest of DESC and the JV Entities in and to accounts receivable arising out of the operation of the
Business in the ordinary course prior to the Closing Date (the “Accounts Receivable”);
(iii) the minute books, stock ledgers, and tax records of Aluminio;
(iv) all rights of DESC or any of the JV Entities under this Agreement and the Seller Related Instruments;
(v) except as otherwise provided in the Transition Services Agreement, any rights of the Business to receive from DESC and the
JV Entities any corporate overhead and shared services, including treasury, legal, tax, human resources, risk management, finance and
group purchasing plans (and including the software used by DESC and the JV Entities to provide these services);
(vi) except for the Transferred Intellectual Property, any Intellectual Property used or held for use in the conduct and operation
of the Business, including without limitation, any software owned by or licensed to Aluminio (and any tangible embodiments of such
Intellectual Property);
(vii) except for the Assigned Contracts, any contracts, licenses, agreements, and leases to which DESC or any of the JV Entities
is a party;
(viii) except for the Assigned Permits, all franchises, licenses, permits, certificates, approvals and other authorizations of any
governmental authority issued or granted to DESC or any of the JV Entities;
(ix) the real property leased by Puente and adjacent to the Real Property being transferred to Buyer; and
(x) all claims, causes of action and rights of DESC or any of the JV Entities against any third party to the extent relating to any
Liability of any of DESC or the JV Entities, other than the Assumed Liabilities.
2.03 Liabilities. On the terms and subject to the conditions set forth in this Agreement, at the Closing, (a) the Hayes Entities will
assume, and from and after the Closing will be obligated to pay, perform and discharge when due, all, and DESC and the JV Entities
will not retain or have any responsibility for any, Assumed Liabilities, and (b) DESC and the JV Entities will retain, and will be fully
responsible for paying, performing and discharging when due, all, and the Hayes Entities will not assume or have any responsibility
for any, Liabilities in respect of the Assets or the Business or incurred by DESC or any of the JV Entities, other than the Assumed
Liabilities (the “Retained Liabilities”). For purposes of this Agreement, “Assumed Liabilities” shall mean:
(i) subject to Section 2.10, all Liabilities of DESC and the JV Entities under all Assigned Contracts to the extent
arising out of or relating to the conduct of the Business following the Closing; provided, however, that, for the avoidance of doubt,
neither Buyer nor any other Hayes Entity shall assume or be responsible for any Liabilities arising from or relating to any breach or
claimed breach by DESC or any of the JV Entities of any of the Assigned Contracts occurring prior to the Closing Date;
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(ii) subject to Section 3.04, all Liabilities under or in connection with the Plan and all Liabilities arising in
connection with the employment or termination of, and provision of employee benefits to, any Business Employee, including without
limitation, all Liabilities arising under Mexican Laws relating to the transfer of the Business Employees to Buyer in connection
herewith;
(iii) all Environmental Liabilities arising out of or related to the Assets or the Business, including but not limited to
all Environmental Liabilities of DESC and the JV Entities arising out of, or related to, the Assets or the Business under any
Environmental Law (including without limitation and for the avoidance of doubt, the New Mexican Environmental Law);
(iv) all liabilities and obligations assumed by Buyer pursuant to Section 7.03(a); and
(v) all other liabilities and obligations of the Hayes Entities under this Agreement and the Buyer Related
Instruments.
2.04 Transfer of Assets and Assumed Liabilities. The sale, conveyance, assignment, transfer and delivery of the Assets and
Assumed Liabilities pursuant to the terms hereof shall be effected by:
(a) delivery by DESC and the JV Entities to Buyer or its designees of:
(i) a factura duly executed by Puente (the “Puente Factura”), substantially in the form of Exhibit A and satisfactory to the
Hayes Entities in their reasonable discretion;
(ii) a factura duly executed by Aluminio (the “Aluminio Factura”), substantially in the form of Exhibit B and satisfactory
to the Hayes Entities in their reasonable discretion;
(iii) a public deed with respect to the Real Property, executed by a Mexican notary public to be appointed by Buyer,
substantially in the form of Exhibit C and in recordable form (the “Deed”), which Deed will reflect the portion of the applicable
Taxes and expenses arising pursuant to the allocation of the Purchase Price set forth in Schedule 2.09;
(iv) the Water Deeds; and
(b) execution by DESC, the JV Entities and the Hayes Entities of an assignment and assumption agreement, substantially in the
form of Exhibit D (the “General Assignment” and, together with the Puente Factura, the Aluminio Factura, the Deed, the Water
Deeds, and the General Assignment, the “Instruments of Assignment”).
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2.05 Consideration. Upon the terms and subject to the conditions of this Agreement, in consideration of the aforesaid sale,
conveyance, assignment, transfer and delivery of the Assets, Buyer shall deliver or cause to be delivered to DESC (or to a Person
designated by DESC in writing to Buyer) aggregate cash consideration of [*****] (the “Purchase Price”), payable in three
installments, with the first installment in the amount of [*****] (the “Initial Payment”) to be paid on the Closing Date (it being
understood that a portion of such first installment shall be payable to DESC or certain of the JV Entities pursuant to the Deed), the
second installment in the amount of [*****] to be paid [*****] calendar days after the Closing Date, and the third installment in the
amount of [*****] to be paid [*****] calendar days after the Closing Date, in each case to be delivered by wire transfer of
immediately available funds to an account or accounts designated in writing by DESC at least two Business Days prior to the date
such payment becomes due and payable. Together with each installment payable pursuant to this Section 2.05, Buyer shall deliver or
cause to be delivered to DESC an amount equal to the Mexican VAT Taxes to be owed, whether by any of DESC or the JV Entities
or by Buyer or any of the other Hayes Entities, in respect of the payment of such installment amount and the transfer of the Assets to
Buyer in connection therewith, as set forth on Schedule 2.05. The Purchase Price shall not be increased or decreased to reflect the
amount of any capital contributions made directly or indirectly by Hayes Parent or DESC to the JV at or prior to the Closing Date.
Buyer shall be responsible for, and shall pay to the appropriate Mexican notary or Mexican governmental authorities, all Mexican
ISAI Taxes and Mexican Registration Expenses incurred in respect of all payments of the Purchase Price and the transfer of the
Assets to Buyer in connection therewith, whether owed by Buyer or any of the Hayes Entities. DESC shall pay, or cause to be paid, to
the appropriate Mexican governmental authorities the (i) DTA Duties and (ii) the PITEX VAT Taxes, provided that, Buyer shall, and
Hayes Parent shall cause Buyer to, pay to DESC and the JV Entities at Closing the DTA Amount pursuant to Section 2.08(a).
2.06 Closing. Subject to the terms and conditions of this Agreement, the Closing of the transactions contemplated by this
Agreement shall take place at the offices of Cleary, Gottlieb, Steen & Hamilton at One Liberty Plaza in New York City, on January
15, 2004 (and substantially simultaneously therewith, certain transactions shall be effected in Chihuahua, Mexico), or at such other
location and on such other date as the parties may mutually agree.
2.07 Deliveries by DESC and the JV Entities. At the Closing, DESC and the JV Entities shall, and DESC shall cause the JV
Entities to, deliver or cause to be delivered to the Hayes Entities (unless delivered previously) the following:
(a) the Instruments of Assignment, duly executed by DESC and/or the appropriate JV Entities;
(b) the officer’s certificates referred to in Section 9.01(c);
(c) a release, substantially in the form of Exhibit E, duly executed by DESC and each of the JV Entities with respect to
each Hayes Designee (as defined below) and former Hayes Designee (the “DESC Employee Release”);
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(d) a release, substantially in the form of Exhibit F, duly executed by DESC and each of the JV Entities, with respect to
each of the Hayes Entities and its respective Affiliates (the “DESC and JV General Release”);
(e) all documents, certificates and other filings, in form and substance reasonably satisfactory to the Hayes Entities,
necessary to effect the dismissal with prejudice of the Litigation and the termination of any other litigation, arbitration, or other
proceedings by and among DESC and the JV Entities or any of their respective Affiliates, on the one hand, and any of the Hayes
Entities or any of their respective Affiliates, on the other hand (the “DESC and JV Dismissal Documents”);
(f) a certificate executed by Unicorp, S.A. de C.V. substantially in the form of Exhibit G;
(g) the Books and Records;
(h) a facsimile copy of a list of the Mexican Tax returns evidencing payment of the PITEX VAT Taxes;
(i) a facsimile copy of a list of the Mexican Tax returns evidencing payment of the DTA Duties;
(j) the License Agreement, duly executed by DESC;
(k) the Transition Services Agreement, duly executed by DESC Corporativo, S.A. de C.V. and, solely as guarantor, DESC;
and
(l) a cash payment in the amount of [*****], in consideration of the transfer to DESC of the Hayes JV Shares (as defined
below).
Immediately after the Closing, DESC and the JV Entities shall, and DESC shall cause the JV Entities to, deliver or cause to be
delivered to the Hayes Entities a facsimile copy of the Employer Substitution Agreement, duly executed by Aluminio.
2.08 Deliveries by the Hayes Entities. At the Closing, the Hayes Entities shall, and Hayes Parent shall cause the other Hayes
Entities to, deliver or cause to be delivered to DESC and the JV Entities (unless delivered previously) the following:
(a) an amount equal to the sum of (i) the Initial Payment, (ii) the Mexican VAT Taxes payable in respect of such Initial
Payment pursuant to Section 2.05, (iii) the Supplemental Compensation Amount, and (iv) the DTA Amount, by wire transfer of
immediately available funds in United States Dollars, to a bank account designated by DESC not less than two Business Days prior to
the Closing Date;
(b) the officer’s certificates referred to in Section 8.01(c) ;
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(c) a release, substantially in the form of Exhibit H, duly executed by each of the Hayes Entities with respect to each DESC
Designee and former DESC Designee (the “Hayes Employee Release”);
(d) a release, substantially in the form of Exhibit I, duly executed by each of the Hayes Entities, with respect to DESC and
each of the JV Entities and their respective Affiliates (the “Hayes General Release”);
(e) all documents, certificates and other filings, in form and substance reasonably satisfactory to DESC and the JV Entities,
necessary to effect the dismissal with prejudice of the Litigation and the termination of any other litigation, arbitration, or other
proceedings by and among DESC and the JV Entities or any of their respective Affiliates, on the one hand, and any of the Hayes
Entities or any of their respective Affiliates, on the other hand (the “Hayes Dismissal Documents”);
(f) a certificate or certificates representing all of the Hayes JV Shares (as defined below), duly endorsed and otherwise in
proper form for transfer, free and clear of all Liens;
(g) letters of resignation executed by each of the Hayes Designees effective on the Closing Date pursuant to Section 7.04;
(h) a facsimile copy of the Employer Substitution Agreement, duly executed by Buyer;
(i) the Transition Services Agreement, duly executed by the Hayes Entities; and
(j) the License Agreement, duly executed by Hayes Parent.
Immediately after the Closing, the Hayes Entities shall, and Hayes Parent shall cause the other Hayes Entities to, deliver or
cause to be delivered to DESC and the JV Entities, facsimile copies of the Employer Substitution Instruments, duly executed by
Buyer.
2.09 Allocation of Purchase Price. The parties hereto agree to allocate the Purchase Price and the Assumed Liabilities among the
Assets in the manner set forth on Schedule 2.09, which allocation complies with the Mexican Laws relating to income taxes and
value-added taxes (the “Mexican Tax Statutes”) and Section 1060 of the Code. DESC and the JV Entities, on the one hand, and the
Hayes Entities, on the other hand, hereby agree that such allocation shall be conclusive and binding on each of them for purposes of
federal and, where applicable, state and local tax returns and that they will not voluntarily take any position inconsistent therewith.
DESC and the JV Entities, on the one hand, and the Hayes Entities, on the other hand, hereby agree to prepare and timely file all tax
returns applicable pursuant to the Mexican Tax Statutes and the Code and other governmental authority forms, to cooperate with each
other in the preparation of such forms, and to furnish each other with a copy of such forms prepared in draft, within a reasonable
period prior to the filing due date thereof.
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2.10 Contracts and Permits.
(a) Before, at and after the Closing, DESC and the JV Entities shall use their commercially reasonable efforts to obtain, as
soon as commercially practicable, all consents and waivers that are required to transfer to Buyer all of the rights and obligations under
each Assigned Contract and Assigned Permit. In the event that, notwithstanding the commercially reasonable efforts of DESC and the
JV Entities, a required consent, waiver or approval with respect to the assignment or transfer of an Assigned Contract or Assigned
Permit is not obtained prior to the Closing Date, then, following the Closing Date, DESC, the JV Entities, and the Hayes Entities shall
use their commercially reasonable efforts to obtain each and every such consent, and to cooperate in any lawful arrangement to
provide that Buyer will receive all benefits and be responsible for all Liabilities under each such Assigned Contract or Assigned
Permit until all necessary consents, waivers and/or approvals are obtained and the full assignment or transfer thereof is effected. To
the extent that any Assigned Contract or Assigned Permit included among the Assets is not capable of being assigned or transferred to
Buyer at the Closing without the consent, waiver or approval of any other party thereto, the issuer thereof, or any other Person, and
such consent, waiver or approval has not been obtained, or if such assignment or transfer, or attempted assignment or transfer, would
constitute a breach thereof, or a violation of any applicable Law, this Agreement shall not constitute an assignment or transfer thereof,
or an attempted assignment or transfer, unless such consent, waiver or approval is obtained.
(b) With respect to the permits set forth on Schedule 2.10(b) (the “Special Permits”), DESC and the JV Entities shall use
their commercially reasonable efforts to maintain in force such Special Permits during the period from the Closing Date through July
15, 2004, including without limitation, making all necessary filings with appropriate governmental authorities and to take all other
actions reasonably necessary in connection therewith, provided that,
(i) the Hayes Entities shall indemnify, defend, and hold harmless DESC and the JV Entities from and against any costs,
expenses, losses, damages or other Liabilities, including without limitation, any fees paid to legal counsel or governmental
authorities, incurred by DESC or any of the JV Entities in connection with the performance of their obligations pursuant to
this Section 2.10(b), and
(ii) DESC and the JV Entities shall have no obligation pursuant to this Section 2.10(b) with respect to any particular
Special Permit in the event that DESC determines in its reasonable discretion that either (A) continued maintenance of
such Special Permit would reasonably likely have a material adverse effect on the business of DESC, any JV Entity or any
subsidiary thereof, or (B) the Business is not being operated in compliance with the terms of such Special Permit (provided
that, DESC has given written notice to Buyer of the reasons why it believes the Business is not being operated in
compliance with the terms of such Assigned Permit, and a reasonable period of time (not to exceed seven (7) calendar days
following delivery of such notice) for Buyer to correct its compliance with the terms of such Special Permit to the
reasonable satisfaction of DESC).
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(c) For the benefit of the Hayes Entities, Aluminio will, and DESC will cause Aluminio to, maintain in force: (i) for the
period from the Closing Date through December 31, 2004, (A) the contract between Aluminio and Petroleos Mexicanos pursuant to
which Petroleos Mexicanos supplies natural gas to the Business as of the date hereof (the “PEMEX Contract”), and (B) the contract
between Aluminio and Distribuidotra de Gas Natural de Chihuahua, S. de R.L. de C.V., pursuant to which Distribuidora de Gas
Natural de Chihuahua, S. de R.L. de C.V. supplies the pipeline through which natural gas is supplied to the Business as of the date
hereof (the “EcoGas Contract”), and (ii) for the period from the Closing Date through July 31, 2004, the contract between Aluminio
and Comisión Federal de Electricidad pursuant to which the Comisión Federal de Electricidad supplies electricity to the Business as
of the date hereof (the “CFE Contract”). DESC will invoice Buyer for the amounts charged to DESC or any of the JV Entities
pursuant to such PEMEX Contract, EcoGas Contract and CFE Contract for the period during which such contracts are maintained in
force by Aluminio for the benefit of Buyer pursuant to the preceding sentence, and all other costs and expenses incurred by DESC or
any of the JV Entities in connection therewith, any such invoice to be accompanied by copies of the corresponding invoices received
from the relevant supplier. Promptly, but no later than seven (7) calendar days, following receipt of such invoice, Buyer shall, and
Hayes Parent shall cause, Buyer to pay DESC the total amount set forth in such invoice. Any of Buyer or any Affiliate thereof shall
have the option to enter into a new contract with PEMEX, EcoGas or CFE with respect to the Business upon reasonable prior written
notice to DESC, it being understood that, starting on the effective date of any such new contract, (i) neither DESC nor Aluminio shall
have any further obligation pursuant to the first sentence of this Section 2.10(c) with respect to the PEMEX Contract, EcoGas
Contract, or CFE Contract, as the case may be, in place of which Buyer or any Affiliate thereof shall have entered into a new contract,
and (ii) subject to the last sentence of this Section 2.10(c), none of the Hayes Entities shall have any further obligation under such
applicable PEMEX Contract, EcoGas Contract, or CFE Contract, as the case may be, in place of which Buyer or any Affiliate thereof
shall have entered into a new contract. The Hayes Entities shall indemnify, defend and hold harmless DESC and the JV Entities from
and against any costs, expenses, losses, damages or other Liabilities incurred by DESC or any of the JV Entities in connection with
the performance of their obligations set forth in this Section 2.10(c).
(d) DESC and the JV Entities shall use their commercially reasonable efforts to maintain in force the lease agreement
between Puente and Metal Eutectic, S.A. de C.V., with respect to the real property owned by Puente and adjacent to the Real Property
(the “Puente Lease”) for the period from the Closing Date until the expiration of the current term of such Puente Lease pursuant to the
terms thereof, provided that, at any time, (i) Puente may amend or otherwise modify the terms of the Puente Lease in accordance
therewith, (ii) Puente may elect to terminate the Puente Lease in the event of a material breach or default by the lessee pursuant to the
Puente Lease, (iii) Puente may elect to assign the Puente Lease provided the assignee agrees to assume the obligations of DESC and
the JV Entities set forth in this Section 2.10(d), and (iv) Puente may elect to sell or otherwise transfer to the lessee or any Affiliate
thereof all or part of Puente’s title and interest in the real property subject to the Puente Lease.
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2.11 Simultaneous Transactions. Except as otherwise set forth herein, the transactions contemplated by this Agreement are
intended by the parties hereto to be consummated substantially simultaneously and all such transactions shall be deemed to have been
consummated simultaneously, provided that, the transfer of the Assets to Buyer shall take place prior to the transfer of the JV Shares
to DESC and the JV Entities, in each case pursuant to the terms set forth hereunder.
III. RELATED MATTERS
3.01 Support Services. Except as otherwise set forth in the Transition Services Agreement, all services currently provided to the
Business by DESC and the JV Entities shall terminate as of the Closing Date.
3.02 Mail Received After Closing . On and after the Closing, Buyer may not open, and shall forward to DESC, any mail
addressed to DESC or the JV Entities delivered to any of the facilities operated by Buyer. DESC agrees to deliver, or to cause to be
delivered, promptly to Buyer all such mail which is forwarded by Buyer to, and received by, DESC pursuant to the preceding
sentence and which DESC determines in its discretion to relate primarily to the Assets or the Assumed Liabilities.
3.03 Use of Names . As promptly as practicable following activation by the Hayes Entities of their own “EDI codes” and
completion by the Hayes Entities of system arrangements with certain original equipment manufacturers in connection with the
Business after the Closing, but no more than sixty (60) calendar days calendar days following the termination of the Transition
Services Agreement pursuant to the terms thereof, the JV Entities shall, and DESC shall cause the JV Entities to amend their
respective organizational documents and, if required by applicable Law, to file such amendment with the appropriate governmental
authorities, changing the name of each such JV Entity to a name bearing no resemblance to “Hayes Wheels” or “Hayes Lemmerz” or
“Lemmerz” or “Hayes”. No later than sixty (60) calendar days calendar days following the termination of the Transition Services
Agreement, DESC and the JV Entities shall deliver to the Hayes Entities duplicate executed originals of such amendments in the form
filed with the appropriate governmental authorities. After the Closing, DESC and the JV Entities shall not use or permit any of their
respective Affiliates to use the name “Hayes Wheels” or “Hayes Lemmerz” or “Lemmerz” or “Hayes” or any variant or derivative
thereof; provided, however, that the JV Entities shall be permitted to use such names for a reasonable transition period following the
Closing Date, which transition period shall in no event exceed sixty (60) calendar days calendar days following the termination of the
Transition Services Agreement pursuant to the terms thereof.
3.04 Employees, Benefit Plans, Etc.
(a) Employees. On the Closing Date, Buyer shall be substituted for, and shall assume and discharge the obligations of,
Aluminio as employer of the employees of the Business set forth on Schedule 3.04(a), which Schedule sets forth the name, salary and
other material compensation, benefits and all other material terms of employment with respect to each employee listed thereon. All
such employees shall be hereinafter referred to as the “Business Employees.” DESC and the JV Entities agree in this regard to
cooperate with Buyer by permitting Buyer throughout the period from the date hereof to the Closing Date (i) to meet with
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the Business Employees at such times and upon such reasonable conditions as shall be approved by a representative of DESC and the
JV Entities and (ii) to distribute (at Buyer’s expense, if any) to such Business Employees, after review and approval by a
representative of DESC and the JV Entities, forms and other documents setting forth the terms and conditions upon which
employment by Buyer shall be continued and otherwise relating to employment after the Closing Date.
(b) Employee Benefit Plan. Except as otherwise provided below, Buyer shall, and Hayes Parent shall cause Buyer to, (i)
assume sponsorship of the employee benefit plan a copy of which is attached hereto as Schedule 3.04(b) (the “Plan”), and (ii) cause
the Plan to be continued by Buyer for the benefit of all eligible Business Employees until terminated or amended following the
Closing Date in accordance with the terms of such Plan and applicable Law, provided that, DESC and the JV Entities shall remain
liable for all benefit obligations pertaining to Former Employees. Beginning on the Closing Date, the Hayes Entities shall assume all
responsibility, and Buyer shall (and Hayes Parent shall cause Buyer), to pay or cause to be paid when due to any eligible Business
Employee, all amounts due such eligible Business Employee under the Plan, including without limitation, any compensation, pension,
retention, severance (whether statutory or contractual), hospital, medical, post-termination medical, retiree medical, disability, death,
life insurance or other pension or welfare benefits (including without limitation, any retiree benefits), and whether accruing before or
after the Closing Date. Buyer, DESC and the JV Entities shall each make all reasonable efforts to provide information and assistance
to one another as reasonably required to satisfy any reporting, disclosure or filing obligations with respect to the Plan. Buyer, DESC
and the JV Entities shall each use their respective commercially reasonable efforts to provide information and assistance to one
another as reasonably required to satisfy any reporting, disclosure or filing obligations with respect to the Plan. For the purposes of
this Agreement, “Former Employee” shall mean an individual who has ceased to be employed by DESC or the JV Entities or to
otherwise provide services with respect to the Business prior to the Closing Date.
(c) Wages. Buyer shall, and Hayes Parent shall cause Buyer to, pay when due to each Business Employee the amount of all
wages, bonuses, commissions and other compensation (including without limitation, vacation pay, holiday pay, sick pay, vacation
bonus, profit-sharing (gratificación) bonus, savings bonus and Christmas bonus) (collectively, “Compensation”) due in respect of all
periods from and after the Closing Date. Upon receipt by DESC from the Hayes Entities of, in the reasonable discretion of DESC,
adequate evidence that Buyer has paid, or caused to be paid, to the Business Employees the profit-sharing (gratificación) bonus
payable to such Business Employees with respect to the operations of the Business in the year ending December 31, 2003, then,
promptly thereafter, DESC shall pay, or shall cause to be paid to, Buyer an amount equal to sixty percent (60%) of the amount paid to
such Business Employees by Buyer in respect of such profit-sharing (gratificación) bonus.
(d) Union Contracts. Buyer shall, and Hayes Parent shall cause Buyer to, assume the collective bargaining agreements and
other arrangements with organized labor covering unionized Business Employees set forth on Schedule 3.04(d) (the “Union
Agreements”). Buyer and the other Hayes Entities shall be responsible for all obligations arising thereunder from and after the
Closing Date. On the Closing Date, Buyer shall endeavor to, and Hayes Parent shall
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endeavor to cause Buyer to, terminate such Union Agreements and enter into a new collective bargaining agreement with the
unionized Business Employees; provided that, in the event Buyer does not do so on the Closing Date, then Buyer shall, and Hayes
Parent shall cause Buyer to, do so no later than January 26, 2004, and on or prior to January 30, 2004, Hayes Parent and Buyer shall
certify in writing to DESC that Buyer has satisfied its obligations set forth in this sentence.
(e) Transfer of Plan Assets. On the Closing Date or as soon as reasonably practicable thereafter following notice from the
Hayes Entities, DESC shall, and shall cause the JV Entities to, (i) transfer cash and/or securities having an aggregate market value
equal to 3,500,000 Mexican Pesos to a trust or other appropriate funding vehicle created by Buyer for the sole purpose of satisfying
obligations arising under the Plan with respect to Business Employees, (ii) make any filings and submissions to the appropriate
governmental agencies arising in connection with such transfer of assets, and (iii) make all necessary amendments to such Plan and
related agreements to provide for such transfer of assets, provided that, none of DESC or any of the JV Entities shall have any
obligation to transfer assets pursuant to this sentence unless DESC is satisfied in its reasonable discretion, based on the advice of legal
counsel, that the trust or other funding vehicle created by Buyer for receipt of such assets complies with applicable Law such that
neither DESC nor any JV Entity nor any Affiliate thereof will suffer any adverse Tax consequences as a result of transferring assets to
such trust or other appropriate funding vehicle pursuant to this Section 3.04(e).
(f) Personal Savings Plan. Promptly after the Closing, Aluminio shall, and DESC shall cause Aluminio to, transfer to the
name of Buyer the account currently held by Aluminio as custodian for the funds placed by Business Employees in such account as
part of such Business Employees’ personal savings plan (fondo de ahorro).
(g) Cooperation. Notwithstanding anything to the contrary contained in this Section 3.04, each of the parties hereto agrees
to cooperate with the others in the defense and resolution of any employment or labor claim or any claim otherwise related to any
Business Employee or Former Employee. In addition, DESC and each of the JV Entities agree to cooperate with Buyer and conduct
all filings that may be necessary in order to formalize the employment substitution of the Business Employees.
IV. REPRESENTATIONS AND WARRANTIES OF DESC AND THE JV ENTITIES
DESC and each of the JV Entities hereby represents and warrants to the Hayes Entities as follows:
4.01 Organization; Authority. Each of DESC and the JV Entities is an entity validly existing under the laws of the jurisdiction of
its organization or formation, and has all requisite corporate power and authority to enter into this Agreement and any instruments and
agreements contemplated herein required to be executed and delivered by each of them pursuant to this Agreement (including, as
applicable, the Instruments of Assignment, the License Agreement, the Transition Services Agreement, the DESC Employee Release,
the DESC and JV General Release, the Employer Substitution Agreement, and the DESC and JV Dismissal Documents, which are
referred to collectively herein as the “Seller Related Instruments”) and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance of
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this Agreement and the Seller Related Instruments and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all requisite corporate action on the part of DESC and each of the JV Entities. This Agreement has been, and
each of the Seller Related Instruments will be, duly executed and delivered by DESC and each of the JV Entities to the extent a party
thereto and constitutes or will constitute a valid and binding obligation of DESC and each of the JV Entities to the extent a party
thereto, enforceable against DESC and each of the JV Entities in accordance with its terms, except that (a) such enforcement may be
subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other Laws, now or hereafter in effect,
relating to or limiting creditors’ rights generally (provided that none of DESC or any of the JV Entities has any reason to believe that
the transactions to be effected at Closing could be voided as a fraudulent transfer under applicable Law) and (b) the remedy of
specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
4.02 No Violation; Consents and Approvals.
(a) The execution and delivery of this Agreement and the Seller Related Instruments does not, and the consummation of
the transactions contemplated hereby or thereby and compliance with the terms hereof or thereof will not, conflict with, or result in
any violation of or default under, (a) any provision of the charter or by-laws or comparable organizational documents of DESC or any
of the JV Entities, (b) any Law applicable to DESC or any of the JV Entities, or the Assets or the Business, or (c) any note, bond,
mortgage, indenture, license, agreement, lease or other instrument or obligation to which DESC or any of the JV Entities is a party or
by which DESC or any of the JV Entities may be subject and which relate to the Business or to which any of the Assets may be
subject (including without limitation, the credit agreement, dated as of December 19, 2003, by and among DESC and certain lenders
party thereto, the Revolving Loan and Letter of Credit Agreement, dated December 19, 2003, by and among DESC and certain
lenders party thereto, and the Crédito Simple, dated December 23, 2003, by and among DESC and certain lenders party thereto),
except for such conflicts, violations or defaults as to which requisite waivers or consents have been obtained or which would not
materially impair the ability of DESC or any of the JV Entities to consummate the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental entity, authority or instrumentality, domestic or foreign, or any third party is required to
be obtained or made by or with respect to DESC or any of the JV Entities in connection with the execution and delivery of this
Agreement or the Seller Related Instruments or the consummation by DESC or any of the JV Entities of the transactions
contemplated hereby or thereby, other than (i) compliance with, and filings under, Section 13(a) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) if any, and (ii) consents or approvals the failure of which to obtain would not materially
impair the ability of DESC or any of the JV Entities to consummate the transactions contemplated hereby.
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4.03 Title to Assets.
(a) (i) Puente has, or on the Closing Date will have, good and valid title to the Real Property, and (ii) Aluminio has, or on
the Closing Date will have, good and valid title to, or a valid leasehold interest in, all of the Assets other than the Real Property, in
each case free and clear of all Liens other than Permitted Liens.
(b) Neither DESC nor any of the JV Entities is in material violation of any applicable zoning ordinance or other Law
relating to the permitted uses of the Real Property, and neither DESC nor any of the JV Entities has received written notice of any
such violation thereunder, provided that, neither DESC nor any of the JV Entities makes any representation or warranty in this
Section 4.03(b) with respect to any Environmental Laws or compliance therewith by DESC or any of the JV Entities (it being
understood that all representations and warranties made herein by DESC or any of the JV Entities with respect to environmental
matters are set forth in Section 4.15). Neither DESC nor any of the JV Entities has received written notice of the existence of any
condemnation proceeding with respect to any of the Real Property, or has knowledge of improvements made or contemplated to be
made by any public or private authority, the costs of which are to be assessed as special Taxes or charges against any of the Real
Property, and there are no present assessments.
(c) The Seller Related Instruments, when duly executed and delivered by DESC and the JV Entities (to the extent a party
thereto) to the Hayes Entities, will vest in Buyer good and valid title and, in the case of the Real Property, marketable title to all of the
Assets.
4.04 Litigation. Except as set forth in Section 4.04 of the disclosure schedule being delivered by DESC and the JV Entities to the
Hayes Entities concurrently herewith (the “Disclosure Schedule”), and except for the Litigation, there is no claim, action, suit or
proceeding pending of which DESC or any of the JV Entities has received written notice by or before any governmental or regulatory
authority, or by or on behalf of any third party, which challenges the validity of this Agreement or relates to the Business, the Assets
or the Assumed Liabilities.
4.05 Assets . Other than the Excluded Assets, the Assets constitute all of the assets, properties, licenses and agreements that are
used or held for use in the conduct of the Business as presently conducted as of the date hereof. Since December 16, 2003, neither
DESC nor any of the JV Entities have taken any action with respect to the Assets or the Business (including without limitation, any
sale or other disposition of any of the inventory constituting part of the Assets) that is not consistent with past practice and not in the
ordinary course of operating a business of the nature, condition, and location of the Business (other than any actions taken in
preparation for the transfer of the Assets to Buyer pursuant to this Agreement, including without limitation, any actions taken in
preparation for the services to be rendered by DESC Corporativo, S.A. de C.V., pursuant to the Transition Services Agreement).
Notwithstanding any other provision herein to the contrary, other than the representations and warranties set forth in Section 4.15,
DESC and the JV Entities make no representation or warranty whatsoever with respect to the quality or condition of any of the Assets
referred to in Sections 2.01(b)(i) through 2.01(b)(iii), which shall be transferred to Buyer on an “as is”, “where is” basis.
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4.06 Patents, Trademarks, Trade Names, Etc.
(a) Other than any Excluded Assets, the Transferred Intellectual Property constitutes all Intellectual Property owned or
licensed by DESC and the JV Entities that is used or held for use in the conduct of the Business as presently conducted. Other than
the Transferred Intellectual Property and any Intellectual Property that may be involved in the provision of the services to be provided
to the Hayes Entities pursuant to the Transition Services Agreement, DESC and the JV Entities have no reason to believe that any
other Intellectual Property is reasonably necessary to operate the Business as currently operated.
(b) DESC and each of the JV Entities has the right to use the Transferred Intellectual Property in the conduct of the
Business as currently conducted, and no claims have been asserted in the past three (3) years of which DESC or any JV Entity has
been given written notice by any Person with respect to the use in the Business by DESC or any JV Entity of the Transferred
Intellectual Property.
4.07 Employee Benefit Plan.
(a) Attached as Schedule 3.04(b) to this Agreement is a true and complete list of each employee seniority and fringe
benefit, pension, profit sharing, stock bonus, stock option, bonus, incentive, deferred compensation, hospitalization, medical,
insurance, severance or other plan, fund, program or policy providing material employee benefits maintained or contributed to by
DESC or the JV Entities in which any Business Employees have participated and under which any of them has accrued and remains
entitled to any benefits. DESC and the JV Entities have provided the Hayes Entities with copies of the Plan and all related documents.
(b) The Plan has been, and is being, operated and administered in all material respects in accordance with its terms and in
compliance with applicable Laws.
(c) No withdrawal liability has been incurred by or asserted against DESC or any of the JV Entities with respect to the
Plan.
(d) There are no material claims pending by or on behalf of the Plan, by any employee or beneficiary covered under the
Plan, or otherwise involving the Plan (other than routine claims for benefits).
4.08 Employees.
(a) Attached hereto as Schedule 3.04(a) to this Agreement is a true and complete list of all Business Employees. As of the
date hereof, (i) to the knowledge of DESC and the JV Entities, no Business Employee and no group of Business Employees has any
plans to terminate his or her employment; (ii) there are no material workers’ compensation claims pending against Aluminio and
neither DESC nor any of the JV Entities is aware of any facts that would give rise to such a claim; (iii) there are no written
employment agreements between DESC or any of the JV Entities and the Business Employees; (iv) to the knowledge of DESC and
the JV Entities, no Business Employee is subject to any secrecy or noncompetition agreement or any other agreement or restriction of
any kind that would impede in any way the ability of such employee
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to carry out fully all activities of such employee in furtherance of the Business; and (v) to the knowledge of DESC and the JV
Entities, no employee or Former Employee of DESC or any of the JV Entities has any claim with respect to any Intellectual Property
used or held for use in the Business.
(b) The employment of each Former Employee has been terminated in accordance with any applicable contractual terms
and applicable Law, and neither DESC nor any JV Entity has any liability under any employment contract or applicable Law with
respect to any such terminated Business Employee.
(c) Neither DESC nor any JV Entity has made any loans (except advances against accrued salaries or for business travel,
lodging or other expenses in the normal course of business) to any Business Employee or Former Employee that have not been repaid
in full or otherwise satisfied as of the Closing Date.
4.09 Certain Contracts and Arrangements . (a) Neither DESC nor any JV Entity is in material breach of, or in material default
under, any Assigned Contract.
(b) Except as set forth in Section 4.09(b) of the Disclosure Schedule and except for this Agreement, Aluminio is not, as of the
date of this Agreement, a party to or bound by any:
(i) employment agreement or severance agreement relating to any individual Business Employee;
(ii) Union Agreement;
(iii) covenant not to compete that restricts the operation of the Business as currently conducted;
(iv) agreement or contract with any Affiliate of DESC or the JV Entities or any officer, director or employee of
DESC or the JV Entities (other than employment and severance agreements covered by clause (a) above) relating primarily to the
Business; and
(v) except for the Assigned Contracts and any agreement with any of the Hayes Entities, any other agreement,
contract, lease, license, commitment or instrument to which DESC or any JV Entity is a party and which relates primarily to the
Business.
4.10 Compliance with Laws, Licenses, etc. Except as set forth in Section 4.10 of the Disclosure Schedule, (i) the Business is
being operated in material compliance with all Laws applicable to the Business or any Asset, provided that, DESC and the JV Entities
make no representation hereunder as to whether the Business is being operated in compliance with any Environmental Laws (it being
understood that all representations and warranties made herein by DESC or any of the JV Entities with respect to environmental
matters are set forth in Section 4.15), and (ii) DESC and the JV Entities have all franchises, licenses, permits, certificates, approvals
and other authorizations of any governmental authority necessary for the operation of the Business as currently operated.
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4.11 Brokers . No broker, finder or financial advisor or other Person is entitled to any brokerage fees, commissions, finders’ fees
or financial advisory fees in connection with the transactions contemplated hereby by reason of any action taken by DESC or any of
the JV Entities or any of their respective directors, officers, employees, representatives or agents.
4.12 Product Liability . Except as set forth in Section 4.12 of the Disclosure Schedule and except for the Nissan Recall (as
defined below), to the knowledge of DESC or any of the JV Entities, none of the products sold by any of the JV Entities on or prior to
the Closing Date (i) has been the subject of any material customer complaints; (ii) has been rejected by customers in any material
quantities, or (iii) has been the subject of any material products liability or warranty claims against DESC or any of the JV Entities or
any other party. Except as set forth in Section 4.12 of the Disclosure Schedule and for the Nissan Recall, there is no claim, action, suit
or proceeding pending of which DESC or any of the JV Entities has received written notice by or before any governmental or
regulatory authority, or by or on behalf of any third party, and to the knowledge of DESC and the JV Entities, no such claim, action,
suit or proceeding is threatened by any governmental or regulatory authority, or by or on behalf of any third party, with respect to the
products sold by Acero or Aluminio on or prior to the Closing Date.
4.13 Labor Matters . Except as set forth in Section 4.13 of the Disclosure Schedule, (a) DESC and each of the JV Entities is in
material compliance with all applicable Laws respecting employment and employment practices in connection with the operation of
the Business as currently conducted, (b) there is no unfair labor practice charge or complaint against DESC or any of the JV Entities
pending with respect to the Business Employees nor is there any grievance nor any arbitration proceeding arising out of or under any
of the Union Agreements or other arrangements with organized labor pending with respect to the Business, (c) there is no labor strike,
slowdown or work stoppage pending against DESC or any of the JV Entities with respect to the Business, (d) to the knowledge of
DESC and the JV Entities, there is no charge or complaint pending against DESC or any of the JV Entities before any agency
responsible for the prevention of unlawful employment practices, and (e) no amounts are due and payable to any Business Employee
or other Person under any Union Agreement, other than payments arising in the ordinary course of business, consistent with past
practice. Neither DESC nor any of the JV Entities has received written notice of the intent of any agency responsible for the
enforcement of labor or employment laws to conduct an investigation of or relating to DESC or any of the JV Entities with respect to
the Business.
4.14 Customers.
Except as agreed to by the Hayes Entities in writing, there are no discounts, rebates or other incentives programs or other
arrangements providing for preferred terms of sale that have been agreed upon in writing by DESC or any of the JV Entities and any
customer of the Business and by which any of DESC or any of the JV Entities are bound, in each case relating to the products or
services furnished by the Business.
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4.15 Environmental Matters.
(a) As used in this Section 4.15, the following terms shall have the following meanings:
(i) “Environmental Laws” means all applicable laws, rules, regulations, codes, ordinances, orders, decrees, permits,
licenses and judgments of Mexico or any state or subdivision thereof relating to pollution, contamination or protection of the
environment and/or human health or safety, all as amended from time to time (including, without limitation, all applicable federal,
state and local laws, rules, regulations, codes, ordinances, orders, decrees, permits, licenses and judgments relating to Hazardous
Materials), including, without limitation, the New Mexican Environmental Law.
(ii) “Hazardous Materials” means any toxic or hazardous pollutant, contaminant, chemical, waste, material or
substance as defined in any Environmental Law, including, without limitation, any waste, material, substance, pollutant or
contaminant that might cause any injury to human health or safety or to the environment.
(iii) “New Mexican Environmental Law” shall mean the Ley General para la Prevención y Gestión Integral de los
Residuos, published in the Official Gazette on October 8, 2003.
(iv) “Release” shall mean the spilling, leaking, disposing, discharging, emitting, depositing, ejecting, leaching,
escaping or any other release or threatened release, however defined, whether intentional or unintentional, of any Hazardous Material.
(b) Except as set forth in Section 4.15 of the Disclosure Schedule and to the knowledge of DESC and the JV Entities,
DESC and the JV Entities, with respect to the Business and the Real Property, are in material compliance, in all respects, with all
applicable Environmental Laws.
(c) Except as set forth in Section 4.15 of the Disclosure Schedule, to the knowledge of DESC and the JV Entities, DESC
and the JV Entities have obtained, and maintained in full force and effect, all material environmental permits, licenses, certificates of
compliance, approval and other authorizations necessary under any Environmental Law to conduct the Business and own or operate
the Assets, including the Real Property, as the Business is presently conducted and operated (collectively, the “Environmental
Permits”). Section 4.15 of the Disclosure Schedule includes a true and complete list of all such Environmental Permits. A copy of
each such Environmental Permit has been made available to Buyer prior to the date hereof. Except as set forth in Section 4.15 of the
Disclosure Schedule and to the knowledge of DESC and the JV Entities, DESC and the JV Entities have conducted the Business in
material compliance, in all respects, with all terms and conditions of the Environmental Permits.
(d) Except as set forth in Section 4.15 of the Disclosure Schedule, to the knowledge of DESC and the JV Entities, and since
June 1, 2001, (i) no Hazardous Materials have been disposed, buried, deposited or Released on, under, to or from any part of the Real
Property in material violation of any Environmental Law then in effect, (ii) no pesticides have been applied to or Released upon the
Real Property by DESC or any of the JV Entities at levels above lawful application rates, and (iii) no underground storage tanks are
located on or under the Real Property, or have been located on or under the Real Property and then subsequently removed or filled.
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(e) Except as set forth in Section 4.15 of the Disclosure Schedule and to the knowledge of DESC and the JV Entities,
neither DESC nor any of the JV Entities has received any written notice from any governmental authority alleging in any manner that
DESC or any of the JV Entities is legally responsible for any Release of Hazardous Materials, or any costs arising under or as a result
of a violation of Environmental Laws with respect to the Business or the Assets, except for notices of matters that would not be
material or that have been fully resolved, and with respect to any and all such resolved matters, neither DESC nor any of the JV
Entities has any remaining material obligations or liabilities.
(f) DESC and the JV Entities have disclosed and delivered to Buyer all material environmental reports and investigations
which DESC or any of the JV Entities has obtained or ordered in the last three (3) years with respect to the Business and the Assets,
including the Real Property.
(g) Except as set forth in Section 4.15 of the Disclosure Schedule and to the knowledge of DESC and the JV Entities, no
part of the Business or the Assets (including the Real Property) has been used as a gasoline service station or a facility for selling
petroleum and/or petroleum products or a bulk storage facility for petroleum or petroleum products.
(h) To the knowledge of DESC and the JV Entities, no Lien has been attached or filed against DESC or any of the JV
Entities (with respect to the Business or the Assets) or the Real Property in favor of any governmental or private entity for (i) any
liability or imposition of costs under or as a result of a violation of any applicable Environmental Law; or (ii) any Release of
Hazardous Materials.
4.16 Taxes . Except as specifically identified and described in Section 4.16 of the Disclosure Schedule:
(a) DESC and each of the JV Entities has duly filed all Relevant Tax Returns (as defined below) required to be filed under
applicable Laws and all of such Relevant Tax Returns are true, correct and complete in all material respects;
(b) DESC and each of the JV Entities has timely paid in full, or made adequate provision for, all Relevant Taxes (as
defined below) shown to be due and payable on such Relevant Tax Returns;
(c) DESC and each of the JV Entities has complied in all material respects with all applicable Laws relating to withholding
Taxes in connection with the Business and has paid over to the proper governmental entities all amounts required to be so withheld
and paid over under all applicable Laws;
(d) No audits or other administrative or court proceedings are presently pending with regard to any Relevant Taxes or
Relevant Tax Returns of DESC or any of the JV Entities and neither DESC nor any of the JV Entities has received any
communication (written or oral) by any taxing authority or representative thereof regarding pending Tax audits related to any
Relevant Taxes or Relevant Tax Returns of DESC or any of the JV Entities;
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(e) There are no Liens for Taxes upon the Assets;
(f) For purposes of this Agreement, “Tax” or “Taxes” shall mean (i) any tax of any kind, including without limitation, all
income, asset, property, payroll, pension, housing, profit sharing, sales, use, occupation, franchise, excise, value added, employees’
income withholding and social security taxes, and related to such taxes, charges, fees, levies, penalties or other assessments, imposed
by the United States, Mexico or by any other country or by any state, municipality, subdivision or instrumentality of the United States
or Mexico or of any foreign country, or by any other taxing authority, and (ii) any interest thereon; and
(g) For purposes of this Agreement, “Relevant Taxes” shall mean any Taxes, which, in the event of a failure to pay such
Taxes when due, could give rise to an action or proceeding by a governmental authority to attach, seize or impose a Lien on any of
the Assets or could allow a governmental authority or other Person to attach the Assets or to otherwise seek payment of such Taxes
from any of the Hayes Entities or their respective affiliates or could otherwise result in liability for such Taxes being imposed upon
Buyer;
(h) For purposes of this Agreement, “Relevant Tax Return” shall mean any return, report, information return or other
document (including any related or supporting information) with respect to Relevant Taxes.
4.17 EXCLUSIVITY OF REPRESENTATIONS. THE REPRESENTATIONS AND WARRANTIES MADE BY DESC AND
THE JV ENTITIES IN THIS AGREEMENT ARE IN LIEU OF AND ARE EXCLUSIVE OF ALL OTHER REPRESENTATIONS
AND WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES, INCLUDING WARRANTIES
OF MERCHANTABILITY, NON-INFRINGEMENT, VALIDITY, COMPLETENESS, AND FITNESS FOR A PARTICULAR
PURPOSE. DESC AND THE JV ENTITIES HEREBY DISCLAIM ANY SUCH OTHER OR IMPLIED REPRESENTATIONS OR
WARRANTIES.
V. REPRESENTATIONS AND WARRANTIES OF THE HAYES ENTITIES
Each of the Hayes Entities hereby represents and warrants to DESC and each of the JV Entities as follows:
5.01 Organization; Authority . Each of the Hayes Entities is an entity validly existing under the laws of the jurisdiction of its
organization or formation, and has all requisite corporate power and authority to enter into this Agreement and any instruments and
agreements contemplated herein required to be executed and delivered by each of them pursuant to this Agreement (including, as
applicable, the License Agreement, the Transition Services Agreement, the Hayes Employee Release, the Hayes General Release, the
Employer Substitution Instruments, the General Assignment and the Hayes Dismissal Documents, which are referred to collectively
herein as the “Buyer Related Instruments”) and to consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and the Buyer Related Instruments and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of each of the Hayes Entities.
This Agreement has been, and each of the Buyer Related Instruments
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will be, duly executed and delivered by each of the Hayes Entities to the extent a party thereto and constitutes or will constitute a
valid and binding obligation of each such Hayes Entity, enforceable against each such Hayes Entity in accordance with its terms,
except that (a) such enforcement may be subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
other Laws, now or hereafter in effect, relating to or limiting creditors’ rights generally (provided that none of the Hayes Entities has
any reason to believe that the transactions to be effected at Closing could be voided as a fraudulent transfer under applicable Law) and
(b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefore may be brought.
5.02 No Violation; Consents and Approvals. (a) The execution and delivery of this Agreement and the Buyer Related
Instruments does not, and the consummation of the transactions contemplated hereby or thereby and compliance with the terms hereof
or thereof, will not conflict with, or result in any violation of or default under, (i) any provision of the charter or by-laws or
comparable organizational documents of any of the Hayes Entities, (ii) any Law applicable to any of the Hayes Entities or the
property or assets of the Hayes Entities, or (iii) any note, bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which any of the Hayes Entities is a party or by which the Hayes Entities may be bound or affected or to which any of
its assets may be subject (including without limitation, the credit agreement, dated as of June 3, 2003, by and among Hayes Parent
and certain of its Affiliates and their exit financing lenders), except for such conflicts, violations or defaults as to which requisite
waivers or consents have been obtained or which would not materially impair the ability of the Hayes Entities to consummate the
transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental entity, authority or instrumentality, domestic or foreign, or any third party is required to
be obtained or made by or with respect to any of the Hayes Entities in connection with the execution and delivery of this Agreement
or the Buyer Related Instruments or the consummation by any of the Hayes Entities of the transactions contemplated hereby or
thereby, other than (i) compliance with and filings under Section 13(a) of the Exchange Act, and (ii) consents or approvals the failure
of which to obtain would not materially impair the ability of any of the Hayes Entities to consummate the transactions contemplated
hereby.
5.03 Litigation . There is no claim, action, suit or proceeding pending of which any of the Hayes Entities has received notice by
or before any governmental or regulatory authority, or by or on behalf of any third party, which challenges the validity of this
Agreement or which, if adversely determined, would adversely affect the ability of any of the Hayes Entities to consummate the
transactions contemplated by this Agreement.
5.04 Product Liability. Except as set forth in Section 5.04 of the disclosure schedule being delivered by the Hayes Entities to
DESC and the JV Entities concurrently herewith (the “Hayes Disclosure Schedule”) and except for the Nissan Recall (as defined
below), to the knowledge of the Hayes Entities, none of the products sold by any of the JV Entities on or prior to the Closing Date (i)
has been the subject of any material customer complaints, (ii) has been
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rejected by customers in any material quantities, or (iii) has been the subject of any material products liability or warranty claims
against any of the Hayes Entities or any other party. Except as set forth in Section 5.04 of the Hayes Disclosure Schedule and except
for the Nissan Recall, there is no claim, action, suit or proceeding pending of which any of the Hayes Entities has received written
notice by or before any governmental or regulatory authority, or by or on behalf of any third party, and to the knowledge of the Hayes
Entities, no such claim, action, suit or proceeding is threatened by any governmental or regulatory authority, or by or on behalf of any
third party, with respect to the products sold by Acero or Aluminio on or prior to the Closing Date.
5.05 Title to Shares . Hayes Mexico is the legal and beneficial owner, free and clear of all Liens, of 8,867,570 Series B shares
and 1,911,933,651 Series B-1 shares of the capital stock of the JV (the “Hayes JV Shares”), which constitute all of the shares of the
capital stock of the JV that are owned, held or controlled, whether directly or indirectly, and whether on an absolute or contingent
basis, by any of the Hayes Entities or any Affiliate thereof. The Hayes Entities acquired such Hayes JV Shares validly and lawfully,
with due regard to all legal and contractual requirements applicable thereto, and there is no basis for any claim, by any Person, arising
out of or related to, the transfer of such Hayes JV Shares to DESC. Hayes Mexico has full right and power to sell, transfer and assign
the Hayes JV Shares to DESC. Upon delivery to DESC by Hayes Mexico of the Hayes JV Shares pursuant to Section 2.08, and
payment by DESC of the consideration therefor pursuant to Section 2.07, DESC shall acquire and receive good and valid title to the
Hayes JV Shares, free and clear of all Liens.
5.06 Financing . The Hayes Entities have on the date of this Agreement and will have on the Closing Date immediately available
funds sufficient in the aggregate to enable the Hayes Entities to pay the Initial Payment on the Closing Date, and will have, when due
and payable, the amounts payable pursuant to Section 2.05 and all related fees and expenses.
5.07 Brokers . No broker, finder or financial advisor or other Person is entitled to any brokerage fees, commissions, finders’ fees
or financial advisory fees in connection with the transactions contemplated hereby by reason of any action taken by the Hayes Entities
or any of their directors, officers, employees, representatives or agents.
5.08 Environmental Matters. The Hayes Entities have disclosed and delivered to DESC and the JV Entities all material
environmental reports and investigations which the Hayes Entities have obtained or ordered with respect to the Business and the
Assets, including the Real Property.
VI. COVENANTS OF THE PARTIES
6.01 Conduct of the Business . Except as otherwise contemplated by this Agreement, during the period from the date of this
Agreement to the Closing Date, DESC and each of the JV Entities shall, DESC shall cause each of the JV Entities to, and, solely with
respect to clauses (i) through (iv) below, the Hayes Entities shall cause each of the JV Entities to, (i) conduct the Business in the
ordinary course of business, consistent with past practice and to the extent consistent therewith; (ii) use commercially reasonable
efforts to preserve intact in all material respects the organization and goodwill of the Business; (iii) use commercially reasonable
efforts
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to maintain in all material respects its current relationships with customers, suppliers, distributors and others having business dealings
with it; (iv) not intentionally take any action which would render, or which reasonably may be expected to render, any representation
or warranty made by DESC or any of the JV Entities in this Agreement untrue in any material respect on the Closing Date; (v) confer
on a regular and frequent basis with representatives of the Hayes Entities to report on operational matters and the general status of
ongoing operations with respect to the Business; (vi) notify the Hayes Entities of any emergency or other change in the normal course
of the Business or in the operation of the Business and of any governmental or third-party complaints, investigations or hearings (or
communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing would
be material, individually or in the aggregate, to the operation or financial condition of the Business, the Assets or to the ability of
DESC or any of the JV Entities or the Hayes Entities to consummate the transactions contemplated by this Agreement; and (vii)
promptly notify the Hayes Entities in writing if either DESC or any of the JV Entities shall discover that any representation or
warranty made by DESC or the JV Entities in this Agreement was, when made, or has subsequently become, untrue in any material
respect. Without limiting the generality of the foregoing, and, except as contemplated by this Agreement, during the period from the
date of this Agreement to the Closing Date, without the prior written consent of the Hayes Entities, which shall not be unreasonably
withheld, neither DESC nor any of the JV Entities shall, and DESC shall cause each of the JV Entities to not:
(a) materially increase the rate of compensation of, pay or agree to pay any benefit to, or terminate the employment of, any
director, officer or employee of the Business, except in the ordinary course of business or as may be required by any existing Plan,
agreement or arrangement;
(b) enter into, adopt or amend any Plan, Union Agreement, or employment or severance agreement, in each case, relating
to the Business, except in the ordinary course of business;
(c) except in the ordinary course of business, (i) sell, lease, transfer or otherwise dispose of any of the Assets or (ii)
mortgage or encumber any of the Assets;
(d) acquire or agree to acquire by merging or consolidating with, or by purchasing the stock or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division
thereof or otherwise acquire or agree to acquire any assets which are material individually, or in the aggregate, to the Business;
(e) modify, amend or terminate any contract pursuant to which DESC or any of the JV Entities expend more than
US$10,000 per year with respect to the Business (except modifications or amendments associated with renewals in the ordinary
course of business consistent with past practice);
(f) enter into any contract (other than trade payables in the ordinary course of business) (i) obligating DESC or any of the
JV Entities to expend with respect to the Business more than US$10,000 or (ii) relating to the Assets or the Business and extending
beyond the Closing Date;
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(g) fail to use commercially reasonable efforts to prevent any material deterioration of any of the Assets (other than normal
wear and tear);
(h) enter into any negotiations with any party with respect to a possible sale, or any agreement or commitment to sell to any
third party, or solicit any offers or proposals in connection with the sale of any of the Assets, other than transactions in the ordinary
course of business and sales of obsolete Assets not currently used in the conduct of the Business;
(i) (i) incur, assume or prepay any indebtedness or any other liabilities of business, consistent with past practice; (ii)
assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations
of any other Person other than in the ordinary course of business, consistent with past practice; or (iii) make any loans, advances or
capital contributions to, or investments in, any other Person, in each case, only to the extent that any such action imposes a Lien on
any Asset or otherwise adversely affects the ability of DESC and the JV Entities to conduct the Business as it is currently conducted
or to consummate the transactions contemplated by this Agreement;
(j) permit any insurance policy relating to the Business and naming DESC or any of the JV Entities or the Business as a
beneficiary or a loss payee, in each case, to be cancelled or terminated on any date other than the Closing Date;
(k) amend or propose to amend the organizational documents of DESC or any of the JV Entities in a manner that would
adversely affect the ability of DESC or such JV Entity to consummate the transactions contemplated by this Agreement;
(l) permit any accounts payable owed to trade creditors of the Business or relating to the Assets, the Business or the
Assigned Contracts to remain outstanding more than 60 calendar days beyond the payment date applicable to such account payable;
or
agree, whether in writing or otherwise, to do any of the foregoing.
6.02 Access to Information; Confidentiality; Solicitation of Employees.
(a) During the period from the date of this Agreement through the Closing Date, DESC and the JV Entities shall, and
DESC shall cause the JV Entities to, give the Hayes Entities and their respective authorized representatives reasonable access during
regular business hours to all plants, offices, warehouses, facilities and Books and Records of DESC and the JV Entities relating to the
Business as they may reasonably request; provided, however, that (i) the Hayes Entities and their respective representatives shall take
such action as is deemed necessary in the reasonable judgment of DESC and the JV Entities to schedule their access and visits
through a designated officer of DESC or the JV Entities and in such a way as to avoid disrupting the normal business of DESC and
the JV Entities, (ii) DESC and the JV Entities shall not be required to take any action which might constitute a waiver of the attorneyclient privilege, and (iii) DESC and the JV Entities will not be required to provide any information, or grant access to any
information, to the extent that doing so would cause any of DESC or the JV Entities to be in breach of any confidentiality restrictions
applicable to it.
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(b) DESC and the JV Entities, on the one hand, and the Hayes Entities, on the other hand, will each hold, and will cause
their respective Affiliates, consultants and advisors to hold, any information which they receive in connection with the transactions
contemplated by this Agreement in strict confidence in accordance with and subject to the terms of the confidentiality provisions
stated in the Letter of Intent.
(c) DESC and the JV Entities, on the one hand, and the Hayes Entities, on the other hand, agree that, except with the prior
written approval of the other parties hereto, for a period of two (2) years from and after the Closing Date, (i) none of the Hayes
Entities will, directly or indirectly, initiate or solicit the employment of any officer or employee of any of the JV Entities who is
employed by any such party during such time, other than employment of the Business Employees to be employed by Buyer under this
Agreement, and (ii) neither DESC nor any of the JV Entities will, directly or indirectly, initiate or solicit the employment of any
officer or employee of the Business who is employed by the Business during such time.
6.03 Commercially Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto will use
its commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable Laws to consummate the transactions contemplated by this Agreement at the earliest practicable date.
6.04 Cooperation.
(a) Without limiting the generality of Section 6.03 and subject to Section 2.10, each of the parties hereto will use its
commercially reasonable efforts to obtain all licenses, permits, authorizations, consents and approvals of all third parties and
governmental authorities necessary in connection with the consummation of the transactions contemplated by this Agreement and to
allow Buyer to operate the Assets and the Business from and after the Closing Date in substantially the same manner as currently
operated by DESC and the JV Entities, and DESC and each of the JV Entities shall use its commercially reasonable efforts to obtain
any consents, authorizations or approvals necessary under applicable Laws to transfer to Buyer the Assigned Permits. Each of the
parties hereto will make or cause to be made all filings and submissions under applicable Laws as may be required for the
consummation of the transactions contemplated by this Agreement. The Hayes Entities, on the one hand, and DESC and the JV
Entities, on the other hand, shall coordinate and cooperate with each other in exchanging such information and assistance as any of
the parties hereto may reasonably request in connection with the foregoing.
(b) On the date that is forty-five (45) calendar days following Closing, Buyer may notify DESC in writing if Buyer
believes that any Asset is either not properly listed or valued in the Aluminio Factura delivered at Closing. Following receipt of any
such notice, DESC shall: (i) in consultation with Buyer, review in good faith any such notice submitted by Buyer, and (ii) in the event
DESC and Buyer agree that a revision of the Aluminio Factura is reasonably necessary in order to properly list or value an Asset
thereon, DESC shall make an appropriate
32
revision to the Aluminio Factura, it being understood that any such revision shall not be deemed to relate in any manner whatsoever
to the representations and warranties made by DESC and the JV Entities in this Agreement and shall not be deemed to give rise to any
Liability of DESC or any of the JV Entities under any such representations or warranties pursuant hereunder.
6.05 Public Announcements. During the period from the date of this Agreement through the Closing Date, each of DESC, the JV
Entities and the Hayes Entities shall not disclose, make any public statement or release any information regarding this Agreement and
the transactions contemplated hereby to the public, its respective employees, customers, suppliers, lenders, lessors and shareholders or
any other Person or group, without the consent and prior approval of the other parties hereto, which will not be unreasonably
withheld, unless any such disclosure or public statement is required by applicable law or regulation. Notwithstanding the foregoing,
each of DESC, the JV Entities and the Hayes Entities shall be entitled to make such disclosure to such of its employees and outside
advisors who are actively and necessarily engaged in consummating the transaction.
6.06 Access to Books and Records Following the Closing. For a period of five (5) years following the Closing, DESC and the
JV Entities, on the one hand, and the Hayes Entities, on the other hand, shall permit the other parties and their authorized
representatives, during normal business hours and upon reasonable notice, to have reasonable access to, and examine and make copies
of, all books, records and other documents (whether on paper, computer diskettes, tape or other media storage) of the Business which
relate to transactions or events occurring prior to the Closing or transactions or events occurring subsequent to the Closing which are
related to or arise out of transactions or events occurring prior to the Closing. DESC and the JV Entities, on the one hand, and the
Hayes Entities, on the other hand, each agree that they shall retain all such books and records for such period as may be required by
applicable Law.
6.07 Supplemental Disclosure. DESC and the JV Entities shall have the right from time to time prior to the Closing to
supplement or amend the Disclosure Schedule or any other Schedule with respect to (a) any matter that existed as of the date of this
Agreement and should have been set forth or described in the Disclosure Schedule or such Schedule and (b) any matter hereafter
arising which, if existing as of the date of this Agreement, would have been required to be set forth or described in the Disclosure
Schedule or such Schedule; provided, however, that with respect to clause (a) above, any such supplemental or amended disclosure
shall not be deemed to cure any breach of any representation or warranty made in this Agreement as of the date of this Agreement
unless so consented to by the Hayes Entities.
VII. ADDITIONAL AGREEMENTS
7.01 Tax Matters. Subject to Section 2.05, all sales, use, gains, transfer, recording, ad valorem and other similar taxes incurred in
connection with this Agreement and the transactions contemplated hereby shall be borne by the entity to which each such obligation
corresponds in accordance with applicable Laws. Each such entity shall file all necessary tax returns and other documentation with
respect to all such taxes, and, if required by applicable Law, the other entities shall join in the execution of any such tax returns or
other documentation. Without
33
limiting the generality of the foregoing, and for the avoidance of doubt, pursuant to Section 2.05, (i) the Hayes Entities shall bear all
Mexican VAT Taxes and all Mexican ISAI Taxes incurred as a result of the consummation of the transactions contemplated by this
Agreement, whether owed by any of DESC or the JV Entities or by any of the Hayes Entities, (ii) DESC and the JV Entities shall bear
all PITEX VAT Taxes, and (iii) the Hayes Entities shall bear 40%, and DESC and the JV Entities shall bear 60%, of the DTA Duties.
7.02 Nissan Recall. DESC and the JV Entities and their Affiliates, on the one hand, and the Hayes Entities and their Affiliates,
on the other hand, shall each be solely responsible for any obligations incurred, including any amounts agreed to be paid (the “Nissan
Recall Liability”), to Nissan Motor Co., Ltd. in respect of the recall for the Nissan Sentra HS steel wheels manufactured by Acero (the
“Nissan Recall”). Neither DESC nor any of the JV Entities nor any of their respective Affiliates shall provide any indemnity to the
Hayes Entities or any of their respective Affiliates in connection with the Nissan Recall and none of the Hayes Entities nor any of
their respective Affiliates shall provide any indemnity to DESC or any of the JV Entities or any of their respective Affiliates in
connection with the Nissan Recall.
7.03 Product Liability.
(a) The Hayes Entities shall bear [*****]%, and DESC and the JV Entities shall bear [*****]%, of any Damages incurred
by any of the Hayes Entities or any of their respective Affiliates or DESC or any of the JV Entities or any of their respective Affiliates
in connection with the design, manufacture, production and distribution of steel wheels, aluminum wheels or any other products
manufactured or otherwise produced by the JV Entities on or prior to the Closing Date, other than the Nissan Recall Liability, which
is governed by Section 7.02 (“Product Liability Damages”), provided that, the amounts for which the parties shall be liable under this
Section 7.03 shall be net of any insurance actually recovered by such parties from their own insurance policies. DESC and the JV
Entities shall use their commercially reasonable efforts to maintain in force and effect for the period from the Closing Date through
May 31, 2006 its existing insurance coverage under policy number RJ1000990000 with ING Comercial America with respect to
product liability relating to steel wheels, aluminum wheels or any other products manufactured or otherwise produced by the JV
Entities on or prior to the Closing Date, provided that, (i) DESC and the JV Entities may elect to terminate such coverage in the event
that the insurer increases the premiums to be paid or imposes any additional material requirements with respect to such coverage (it
being understood that, in the event DESC or any of the JV Entities is notified by the insurer of an anticipated increase in the premium
to be paid, or imposition of additional material requirements, with respect to such coverage, it shall promptly notify Hayes Entities
thereof, and DESC and the Hayes Entities shall discuss such matter) and (ii) DESC and the JV Entities have no obligation pursuant to
this sentence to increase such coverage in any respect or acquire any additional coverage with respect to product liability relating to
steel wheels, aluminum wheels or any other products manufactured or otherwise produced by the JV Entities on or prior to the
Closing Date. The resolution of claims relating to Product Liability Damages and the respective obligations of the parties with respect
thereto shall be governed solely by this Section 7.03.
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(b) In the event that any claim shall be asserted against the Hayes Entities or any of their respective Affiliates for Product
Liability Damages, Hayes Parent shall give prompt written notice of such claim to DESC and in the event that any claim shall be
asserted against DESC or the JV Entities or any of their respective Affiliates for Product Liability Damages, DESC shall give prompt
written notice of such claim to Hayes Parent. The Hayes Entities and their respective Affiliates, on the one hand, and DESC and the
JV Entities and their respective Affiliates, on the other hand, shall cooperate fully in the defense of any such claim. Promptly upon
receipt by Hayes Parent or DESC of any such claim, Hayes Parent and DESC shall cooperate jointly in the defense of such claim.
(c) Neither Hayes Parent nor DESC shall, without the written consent of the other party, which shall not be unreasonably
withheld, settle or compromise any claim or consent to the entry of any judgment. If any such claim is settled without the other
party’s consent, and such consent was not unreasonably withheld, the settling party shall be deemed to have waived all rights
hereunder against the other party for contribution pursuant to Section 7.03(a).
(d) If any dispute or disagreement shall arise between DESC and Hayes Parent regarding the defense or disposition of any
claim for Product Liability Damages, including with respect to the failure of either such party to cooperate in the defense of, or use its
commercially reasonable efforts to defend, any such claim, to reasonably agree to the terms of any proposed settlement or other
disposition of any such claim which the other party believes is in the parties’ best interests or any matters regarding the appropriate
amounts to be contributed with respect to any such claim pursuant to Section 7.03(a), then either party shall have the right to request a
binding resolution of such dispute by sending written notice of such request to the other party, which notice shall specify the nature of
the dispute and the relief sought. Upon receipt of any such notice, an officer or representative of each party will proceed in good faith
to negotiate a resolution of such dispute, and if not resolved through the negotiations of such individuals within 20 calendar days after
the delivery of the notice of such dispute, such dispute shall be resolved fully and finally in New York, New York by an arbitration
governed by the Rules of Arbitration of the International Chamber of Commerce. The arbitration panel shall be composed of three
arbitrators, with one arbitrator being selected by the Hayes Entities, one arbitrator being selected by DESC and the JV Entities and the
third arbitrator being selected by the other two arbitrators. The arbitration panel shall resolve the dispute within 30 calendar days after
selection and judgment upon the award rendered by such arbitration panel shall be deemed final and binding on the parties and may
be entered in any court of competent jurisdiction. In the case of any dispute or disagreement regarding any amounts to be contributed
pursuant to Section 7.03(a), the party whose determination of the payment amount in dispute is furthest from the amount determined
by the arbitration panel shall bear its own costs and expenses of such arbitration, the fees and expenses of the arbitration panel and the
out-of-pocket costs and expenses (including legal fees) of the other party thereto.
7.04 Resignations; Employee Releases. At or prior to the Closing, each employee or designee of any of the Hayes Entities or any
of their Affiliates serving as an officer, director or employee of any of the JV Entities (each, a “Hayes Designee”) shall resign from
his or her position as such. DESC and the JV Entities shall each execute the DESC Employee Release with respect to each Hayes
Designee and each former Hayes Designee. Simultaneously
35
therewith, each of the Hayes Entities shall execute the Hayes Employee Release with respect to each employee or designee of any of
DESC or the JV Entities or any of their Affiliates currently serving or who formerly served as an officer, director or employee of any
of the JV Entities (each, a “DESC Designee”).
7.05 Existing Agreements and Indebtedness. On and as of the Closing Date, all existing agreements, arrangements or
understandings among DESC and the JV Entities or any of their Affiliates, on the one hand, and the Hayes Entities or any of their
Affiliates, on the other hand, including without limitation, the agreements listed on Schedule 7.05, but excluding the Transaction
Documents and the confidentiality provisions set forth in the Letter of Intent, shall terminate and be null and void in their entirety as if
never executed or entered into, notwithstanding any provisions in such agreements that survive the termination of such agreements
pursuant to the terms thereof (which such provisions are, for the avoidance of doubt, deemed to have no legal force or effect). In
addition to the foregoing, all indebtedness owed, whether directly or indirectly, by any of the Hayes Entities or any of their Affiliates
to DESC or any of the JV Entities or any of their Affiliates, or by DESC or any of the JV Entities or any of their Affiliates to any of
the Hayes Entities or any of their Affiliates, is hereby cancelled effective as of the Closing Date.
7.06 Dismissal of Litigation. Each of the parties to this Agreement shall use its best efforts to cause the Litigation to be
dismissed with prejudice and to cause all other actions and proceedings pending by or among the parties hereto and their respective
Affiliates to be terminated effective as of, or as soon as practicable, but no later than thirty (30) calendar days, after the Closing Date.
Without limiting the generality of the foregoing, each party hereto shall execute and deliver all documents, certificates and other
filings necessary to effect the dismissal with prejudice of the Litigation and the termination of any other proceedings by and among
DESC and the JV Entities or any of their respective Affiliates, on the one hand, and any of the Hayes Entities or any of their
respective Affiliates, on the other hand.
7.07 Accounts Payable; Water Extraction. From and after the date hereof, including from and after the Closing Date until all of
the accounts payable referred to below have been satisfied in full, DESC and the JV Entities shall each cause to be paid when due, or
in any event within sixty (60) calendar days of the payment date applicable thereto, (i) all accounts payable owed to trade creditors of
the Business or relating to the Assets, the Business, or the Assigned Contracts and arising from transactions occurring on or prior to
the Closing Date, and (ii) any fines imposed by the Mexican national water commission (Comisión Nacional de Agua) in connection
with water extracted by the Business in excess of its authorized capacity prior to the Closing Date.
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VIII. CONDITIONS TO OBLIGATIONS OF DESC AND THE JV ENTITIES
8.01 Conditions. The obligations of DESC and the JV Entities to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing of each of the following conditions (any or all of which may be waived, in
whole or in part, at or prior to the Closing, in writing by DESC and the JV Entities):
(a) Representations and Warranties. Except for any inaccuracy that has not had and would not reasonably be expected to
have a material adverse effect on the transactions contemplated by this Agreement, the representations and warranties made by the
Hayes Entities in this Agreement, without taking into account any materiality qualifications therein, shall be true, complete and
accurate in all respects as of the date when made and at and as of the Closing Date, as though such representations and warranties
were made at and as of the Closing Date (unless any such representation and warranty speaks as of a specific date, in which case, as
of such date).
(b) Performance. The Hayes Entities shall have performed and complied, in all material respects, with all agreements,
obligations, covenants and conditions required by this Agreement to be so performed or complied with by the Hayes Entities at or
prior to the Closing, except that the Hayes Entities shall have complied in all respects with their obligations under Section 2.08.
(c) Officer’s Certificates. Each of the Hayes Entities shall have delivered to DESC and the JV Entities a certificate, dated
as of the Closing Date, substantially in the form of Exhibit J, executed by a duly authorized officer of such Hayes Entity, certifying
the fulfillment of the conditions specified in Sections 8.01(a) and 8.01(b).
(d) No Injunction. On the Closing Date, there shall not be in effect any judgment, order, injunction or decree issued by a
court of competent jurisdiction restraining or prohibiting consummation of the transactions contemplated by this Agreement.
IX. CONDITIONS TO OBLIGATIONS OF THE HAYES ENTITIES
9.01 Conditions. The obligations of the Hayes Entities to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Closing of each of the following conditions (any or all of which may be waived, in whole or
in part, at or prior to the Closing, by the Hayes Entities):
(a) Representations and Warranties. Except for any inaccuracy that has not had and would not reasonably be expected to
have a material adverse effect on the transactions contemplated by the Agreement, the representations and warranties made by DESC
and the JV Entities in this Agreement, without taking into account any materiality qualifications therein, shall be true, complete and
accurate in all respects as of the date when made and at and as of the Closing Date as though such representations and warranties were
made at and as of the Closing Date (unless any such representation and warranty speaks as of a specific date, in which case, as of such
date).
(b) Performance. DESC and each of the JV Entities shall have performed and complied, in all material respects, with all
agreements, obligations, covenants and conditions required by this Agreement to be so performed or complied with by DESC or such
JV Entity at or prior to the Closing, except that DESC and the JV Entities shall have complied in all respects with their obligations
under Section 2.07.
37
(c) Officer’s Certificates. DESC and each of the JV Entities shall have delivered to the Hayes Entities a certificate, dated as
of the Closing Date, substantially in the form of Exhibit K, executed by a duly authorized officer of DESC or such JV Entity,
certifying the fulfillment of the conditions specified in Subsections 9.01(a) and 9.01(b).
(d) No Injunction. On the Closing Date, there shall not be in effect any judgment, order, injunction or decree issued by a
court of competent jurisdiction restraining or prohibiting consummation of the transactions contemplated by this Agreement.
X. TERMINATION, AMENDMENT AND WAIVER
10.01 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned:
(a) at any time, by mutual written agreement of DESC and the JV Entities, on the one hand, and the Hayes Entities, on the
other hand; or
(b) at any time after January 31, 2004, by either DESC and the JV Entities, on the one hand, or the Hayes Entities, on the
other hand, if the Closing shall not have occurred for any reason, other than a breach of this Agreement by the terminating parties.
10.02 Procedure and Effect of Termination. In the event of the termination of this Agreement and the abandonment of the
transactions contemplated hereby pursuant to Section 10.01(b), written notice thereof shall forthwith be given by the parties so
terminating to the other parties, and this Agreement shall terminate, and the transactions contemplated hereby shall be abandoned,
without further action by DESC, any JV Entity or any Hayes Entity. If this Agreement is terminated pursuant to Section 10.01(a) or
(b):
(a) At the option of DESC and the JV Entities, all filings, applications and other submissions made pursuant to Sections
6.03, 6.04 and 6.05 shall, to the extent practicable, be withdrawn from the agency or other Person to which made; and
(b) The obligations provided for in this Section 10.02 and Section 11.01, the confidentiality provision contained in Section
6.02(a) and (b), and the confidentiality provisions contained in the Letter of Intent, shall survive any termination of this Agreement.
10.03 Remedies. In no event shall termination of this Agreement limit or restrict the rights and remedies of any party hereto
against any other party hereto that has breached the terms of this Agreement prior to termination hereof.
10.04 Amendment, Modification and Waiver. This Agreement may be amended, modified or supplemented at any time by
written agreement of the parties hereto. Any failure of DESC and the JV Entities, on the one hand, or the Hayes Entities, on the other
hand, to comply with any term or provision of this Agreement may be waived by the other parties at any time by an instrument in
writing signed by or on behalf of such other parties, but such waiver or failure to insist upon strict compliance with such term or
provision shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure to comply.
38
XI. FEES AND EXPENSES: SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
11.01 Fees and Expenses. Whether or not the transactions contemplated hereby are consummated pursuant hereto, DESC and
the JV Entities, on the one hand, and the Hayes Entities, on the other hand, shall pay all fees and expenses incurred by such parties or
on such parties’ behalf in connection with or in anticipation of this Agreement and the consummation of the transactions
contemplated hereby.
11.02 Survival of Representations. The representations and warranties in this Agreement and in any other document delivered in
connection herewith shall survive the Closing solely for purposes of Article XI of this Agreement and shall terminate on the second
anniversary of the date of this Agreement; provided, however, that (i) the representations regarding Environmental Matters set forth in
Section 4.15 and Taxes set forth in Section 4.16 shall survive until the fifth anniversary of the date of this Agreement, and (ii) the
representations regarding Title to Assets set forth in Section 4.06 and Title to Shares set forth in Section 5.05 shall survive until the
statute of limitations applicable to such representations.
11.03 Agreement of DESC and the JV Entities to Indemnify. Upon the terms and subject to the conditions of this Article XI,
DESC and the JV Entities shall, jointly and severally, indemnify, defend and hold harmless the Hayes Entities, at any time after
consummation of the Closing, from and against all actual demands, claims, actions or causes of action, assessments, losses, damages,
Liabilities, costs and expenses, including without limitation, interest, penalties and reasonable attorneys’ fees and expenses, but
excluding in all cases punitive damages (collectively, “Damages”), asserted against, resulting to, imposed upon or incurred by the
Hayes Entities, directly or indirectly, by reason of or resulting from:
(a) Retained Liabilities;
(b) a breach of any representation, warranty, covenant or agreement of DESC or the JV Entities contained in or made
pursuant to this Agreement; and
(c) any Environmental Liabilities incurred by the Hayes Entities under any Environmental Law (including without
limitation, the New Mexican Environmental Law) in connection with the Hayes Entities’ former indirect ownership interest in the
steel plant operated by Acero in Tlalnepantla, Mexico, D.F., Mexico (collectively, “Seller Indemnified Claims”).
11.04 Agreement of the Hayes Entities to Indemnify. Upon the terms and subject to the conditions of this Article XI, the Hayes
Entities shall, jointly and severally, indemnify, defend and hold harmless DESC and each of the JV Entities, at any time after
consummation of the Closing, from and against all Damages asserted against, resulting to, imposed upon or incurred by DESC or the
JV Entities, directly or indirectly, by reason of or resulting from:
(a) Assumed Liabilities; and
39
(b) a breach of any representation, warranty, covenant or agreement of the Hayes Entities contained in or made pursuant to
this Agreement (collectively, “Buyer Indemnified Claims”).
11.05 Limitations on Indemnification.
(a) The amounts for which the parties shall be liable under Sections 11.03 and 11.04 shall be net of any insurance actually
recovered by the indemnified parties from their own insurance policies, in each case in connection with the facts giving rise to the
right of indemnification.
(b) Any amounts paid by any of DESC or the JV Entities to any of the Hayes Entities, or any amounts for which any of
DESC or the JV Entities may be or is liable, in each case pursuant to Section 11.03, shall not be deemed to set off or otherwise reduce
any amounts payable by the Hayes Entities pursuant to Section 2.05.
(c) Notwithstanding any other provision to the contrary,
(i) DESC and the JV Entities will not be required to indemnify and hold harmless any of the Hayes Entities pursuant
to Section 11.03 until the aggregate amount of the Hayes Entities’ Damages for which indemnification by DESC and the JV Entities
is otherwise required pursuant to Section 11.03 exceeds [*****], after which DESC and the JV Entities will be obligated to indemnify
and hold harmless the Hayes Entities for all such Damages in excess of [*****], provided, however, that the cumulative
indemnification obligation of DESC and the JV Entities under Section 11.03 will in no event exceed [*****]; and
(ii) the Hayes Entities will not be required to indemnify and hold harmless any of the DESC and the JV Entities
pursuant to Section 11.04 until the aggregate amount of the DESC’s and JV Entities’ Damages for which indemnification by the
Hayes Entities is otherwise required pursuant to Section 11.04 exceeds [*****], after which the Hayes Entities will be obligated to
indemnify and hold harmless the DESC and JV Entities for all such Damages in excess of [*****], provided, however, that the
cumulative indemnification obligation of the Hayes Entities under Section 11.04 will in no event exceed [*****].
11.06 Conditions of Indemnification.
(a) The obligations and liabilities of DESC and the JV Entities and the Hayes Entities with respect to Seller Indemnified
Claims and Buyer Indemnified Claims (collectively, “Claims”) made by third parties shall be subject to the following terms and
conditions:
(i) The indemnified party will give the indemnifying party prompt notice of any such Claim, and the indemnifying
party shall have the right to undertake the defense thereof by representatives chosen by it. In any event, notice of any Claim shall be
made no later than the day on which one-half of the term provided by applicable law to defend such Claim has lapsed;
40
(ii) If the indemnifying party, within a reasonable time after notice of any such Claim, fails to defend the
indemnified party against which such Claim has been asserted, the indemnified party shall (upon further notice to the indemnifying
party) have the right to undertake the defense, compromise or settlement of such Claim on behalf of and for the account and risk of
the indemnifying party subject to the right of the indemnifying party to assume the defense of such Claim at any time prior to
settlement, compromise or final determination thereof; and
(iii) Anything in this Article XI to the contrary notwithstanding, (i) if there is a reasonable probability that a Claim
may materially and adversely affect the indemnified party other than as a result of money damages or other money payments, the
indemnified party shall have the right, at its own cost and expense, to defend, compromise or settle such Claim; provided, however,
that if such Claim is settled without the indemnifying party’s consent, the indemnified party shall be deemed to have waived all rights
hereunder against the indemnifying party for money damages arising out of such Claim, and (ii) the indemnifying party shall not,
without the written consent of the indemnified party, settle or compromise any Claim or consent to the entry of any judgment which
does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the indemnified party a release from all
liability in respect to such Claim.
(b) With respect to any Buyer Indemnified Claim for which indemnification is requested by DESC or any of the JV
Entities from any of the Hayes Entities or any Seller Indemnified Claim for which indemnification is requested by any of the Hayes
Entities from DESC or any of the JV Entities, the indemnified party shall deliver a notice of such Claim with reasonable promptness
to the indemnifying party. If the indemnifying party notifies the indemnified party that it does not dispute the Claim described in such
notice or fails to notify the indemnified party within 20 calendar days after delivery of such notice by the indemnified party whether
the indemnifying party disputes the Claim described in such notice, the amount claimed in the indemnified party’s notice will be
conclusively deemed a liability of the indemnifying party and the indemnifying party shall be required to satisfy the amount of such
claim in full. If the indemnifying party has timely disputed its liability with respect to such claim, an officer or representative of the
indemnifying party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through the negotiations of
such individuals within 20 calendar days after the delivery of the indemnified party’s notice of such claim, such dispute shall be
resolved fully and finally in New York, New York by an arbitration governed by the Rules of Arbitration of the International
Chamber of Commerce. The arbitration panel shall be composed of three arbitrators, with one arbitrator being selected by the Hayes
Entities, one arbitrator being selected by DESC and the JV Entities and the third arbitrator being selected by the other two arbitrators.
The arbitration panel shall resolve the dispute within 30 calendar days after selection and judgment upon the award rendered by such
arbitration panel shall be deemed final and binding on the parties and may be entered in any court of competent jurisdiction. The party
whose determination of the payment amount in dispute is furthest from the amount determined by the arbitration panel shall bear its
own costs and expenses of such arbitration, the fees and expenses of the arbitration panel and the out-of-pocket costs and expenses
(including legal fees) of the other party thereto.
41
11.07 Exclusive Remedies. From and after the Closing, the indemnification provisions of this Article XI shall be the sole and
exclusive remedies of the parties hereto for any breach of the representations and warranties, or the nonperformance of any covenants
or agreements, herein or in any of the Transaction Documents, in each case other than the License Agreement and the Transition
Services Agreement, provided that, nothing in Sections 11.03 through Section 11.07 shall apply to, modify, or have any bearing on:
(i) any nonperformance of any covenants or agreements set forth in Section 2.05,
(ii) any nonperformance of any covenants of any of the Hayes Entities (including without limitation, any indemnities provided
by the Hayes Entities in favor of DESC and the JV Entities) set forth in Sections 2.10(b) and (c),
(iii) any nonperformance of any covenants or agreements set forth in (A) the second sentence of Section 3.04(c), (B) Section
3.04(e), or (C) Section 3.04(f).
(iv) the rights and obligations of the parties hereto set forth in Sections 7.02 and 7.03, and
(v) any nonperformance of any covenants or agreements set forth in Section 7.07.
XII. MISCELLANEOUS
12.01 Further Assurances. From time to time after the Closing Date, at the request of the other parties hereto and at the expense
of the parties so requesting, DESC, the JV Entities and the Hayes Entities shall each execute and deliver to such requesting party such
documents and take such other action as such requesting party may reasonably request in order to consummate more effectively the
transactions contemplated hereby.
12.02 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, by mail (certified or registered
mail, return receipt requested) or by facsimile transmission (receipt of which is confirmed):
(a)
If to DESC or the JV Entities, to
DESC Automotriz, S.A. de C.V.
Paseo de los Tamarindos
400-B, piso 30
Bosques de las Lomas
C.P. 05120, Mexico, D.F.
Attention: Ramon F. Estrada Rivero
42
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Ana Demel, Esq.
(b)
If to the Hayes Entities, to:
Hayes Lemmerz International, Inc.
15300 Centennial Drive
Northville, Michigan 48167
Attention John Salvette
with copies to:
Hayes Lemmerz International, Inc.
15300 Centennial Drive
Northville, Michigan 48167
Attention Patrick C. Cauley, Esq.
and:
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
Wilmington, Delaware 19801
Fax: (302) 651-3001
Attention: Robert Pincus, Esq.
or to such other Person or address as any party shall specify by notice in writing to the other parties. All such notices, requests,
demands, waivers and communications shall be deemed to have been received on the date on which so hand-delivered, on the third
business day following the date on which so mailed and on the date on which faxed and confirmed, except for a notice of change of
address, which shall be effective only upon receipt thereof.
12.03 Entire Agreement. The Transaction Documents contain the entire understanding of the parties hereto with respect to their
subject matter. The Transaction Documents supersede all prior agreements and understandings, oral and written, among the parties
hereto, with respect to their subject matter (other than the confidentiality provisions of the Letter of Intent), including but not limited
to the Shareholders Agreement and the Marketing and License Agreements, notwithstanding any provisions in such agreements that
survive the termination of such agreements pursuant to the terms thereof (which such provisions are, for the avoidance of doubt,
deemed to have no legal force or effect). For the purposes of this Section 12.03, “Transaction Documents” refers to this Agreement,
the Disclosure Schedule, the Hayes Disclosure Schedule, the Buyer Related Instruments, the Seller Related Instruments and the
exhibits, schedules and annexes hereto and thereto and which form a part hereof and thereof (including, without limitation, the
confidentiality provisions referred to in Section 6.02), and the confidentiality provisions of the Letter of Intent.
43
12.04 Severability. Should any provision of this Agreement for any reason be declared invalid or unenforceable, such decision
shall not affect the validity or enforceability of any of the other provisions of this Agreement, which other provisions shall remain in
full force and effect and the application of such invalid or unenforceable provision to Persons or circumstances other than those as to
which it is held invalid or unenforceable shall be valid and be enforced to the fullest extent permitted by law.
12.05 Binding Effect; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors, successors and permitted assigns, but except as contemplated herein,
neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, directly or indirectly, by DESC, or
any of the JV Entities or by any of the Hayes Entities without the prior written consent of the other parties hereto.
12.06 Joint and Several Liability. Each of DESC and the JV Entities shall be jointly and severally liable for any obligation of
any of DESC or the JV Entities pursuant to this Agreement, and each of the Hayes Entities shall be jointly and severally liable for any
obligation of any of the Hayes Entities, in each case pursuant to this Agreement.
12.07 Third-Party Beneficiaries. This Agreement is not intended and shall not be deemed to confer upon or give any Person
except the parties hereto and their respective successors and permitted assigns any remedy, claim, liability, reimbursement, cause of
action or other right under or by reason of this Agreement.
12.08 Counterparts. This Agreement may be executed simultaneously in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.
12.09 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties hereto and shall not in any way affect the meaning or interpretation of this Agreement. As used in
this Agreement, the word “including” shall mean “including without limitation,” whether or not so stated.
12.10 Sections, Schedules, and Exhibits. References herein to “Sections”, “Schedules”, “Exhibits” and “subsections” shall be to
Sections, Schedules, Exhibits, and subsections, respectively, of this Agreement unless otherwise specifically provided. Any disclosure
with respect to a Section or Schedule of this Agreement shall be deemed to be disclosure for other Sections and Schedules of this
Agreement to the extent that it is reasonably apparent from a reading of such disclosure item that it would also qualify or apply to
such other Sections or Schedules.
12.11 Governing Law. This Agreement shall be governed by the laws of the State of New York, without regard to the principles
of conflicts of law thereof. Except as provided in
44
Section 7.03 or Section 11.06, any dispute arising under this Agreement shall be adjudicated exclusively in the United States District
Court for the Southern District of New York or the state courts of the State of New York situated in the City of New York, and each
of the Hayes Entities, DESC and the JV Entities hereby irrevocably consents to such courts’ personal jurisdiction over it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
[SIGNATURE PAGES FOLLOW]
45
DESC AUTOMOTRIZ, S.A. DE C.V.
By:
Name:
Title:
HAYES WHEELS DE MEXICO, S.A. DE C.V.
By:
Name:
Title:
HAYES WHEELS ALUMINIO, S.A. DE C.V.
By:
Name:
Title:
INMOBILIARIA EL PUENTE, S.A. DE C.V.
By:
Name:
Title:
46
By:
Name:
Title:
HAYES WHEELS ACERO, S.A. DE C.V.
By:
Name:
Title:
ADMINISTRACION Y CONTROL HAYES, S.A.
DE C.V.
By:
Name:
Title:
HAYES LEMMERZ INTERNATIONAL, INC.
By:
Name:
Title:
HAYES LEMMERZ INTERNATIONAL-MEXICO,
INC.
By:
Name:
Title:
HAYES LEMMERZ ALUMINIO, S. DE R.L. DE
C.V.
By:
Name:
Title:
47
EXHIBIT 4.5
***Portions marked with asterisks within brackets have been omitted pursuant to a request for confidential treatment, and have been
filed separately with the Commission in connection with such request.
FIRST AMENDMENT TO ASSET PURCHASE AND SALE AGREEMENT
THIS FIRST AMENDMENT TO ASSET PURCHASE AND SALE AGREEMENT (the “Amendment”) is entered into as of
September 30, 2003 by and between Desc S.A. de C.V. (“Seller”), a corporation organized under the laws of Mexico, and Henkel
Capital, S.A. de C.V. (“Buyer”), a corporation organized under the laws of Mexico.
R E C I T A L S:
A. Seller and Buyer entered into that certain Asset Purchase and Sale Agreement dated September 29, 2003 (the “Agreement”).
B. Seller and Buyer desire to amend the Agreement in certain respects.
AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, the parties hereto do
hereby agree as follows:
1. Capitalized Terms. Capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the
Agreement.
2. Amendments. The parties hereby agree to the following amendments to the Agreement:
(a) In the Table of Contents the reference to “Section 11.13 Payment of Business Payables” is hereby deleted.
(b) In the List of Annexes and Schedules in the Agreement,
(i) the reference to “Schedule 2.2(c) – Records” is hereby deleted;
(ii) the reference to “Schedule 7.15 – Product Liability Claims” is hereby amended to read as “Schedule 7.15 –
Product Liability Exceptions/Hazardous Materials”;
(iii) “Schedule 7.17 – Inventories” is hereby added; and
(iv) “Schedule 7.18 – Inventory on Consignment” is hereby added.
(v) “Schedule 11.13 – “Business Payable” is hereby deleted.
(c) Section 3.1 of the Agreement is hereby amended to read in its entirety as follows:
3.1 Purchase Price. The purchase price (the “Purchase Price”) payable by Buyer to Seller for the Assets, which includes the
purchase price under the Lerma Agreement for the Lerma Assets,
shall be equal to
[***************************************************************************************************
plus IVA Tax applicable thereon accordance with Applicable Law (the “Base Purchase Price”), subject to adjustment in
accordance with Section 3.2.
(d) Section 3.2(a) – (b) of the Agreement are hereby amended to read in their entirety as follows:
“(a) [********************************************************************************************],
plus IVA Tax applicable thereon in accordance with Applicable Law (“Base NWC Premium”); and
(b) The amount of the Disputed Receivables Amount, if any, received by Seller pursuant to the escrow provisions set forth
in Section 3.3(b).
(e) Section 3.3(a) of the Agreement is hereby amended to read in its entirety as follows:
“(a) At Closing, subject to the terms and conditions of this Agreement, and in reliance on the representations, warranties
and agreements of Seller contained herein, Buyer shall deliver or cause to be delivered to Seller the sum of (i) ninety-five
(95) percent of [*************************************************], which is
[***************************************************************************************************
out of the Base Purchase Price, plus IVA Tax applicable thereon in accordance with Applicable Law, and (ii) ninety-five
(95) percent of the Base NWC Premium, in cash in Pesos by wire transfer of immediately available funds to the wire
transfer address of Seller set forth on Schedule 3.3(a) or by check drawn on Buyer’s account at Banamex, S.A. (salvo buen
cobro) delivered by an authorized representative of Buyer to an authorized representative of Seller.” After Closing, subject
to such terms and conditions and in reliance on such representations, warranties and agreements, Buyer shall pay Seller
[**************************************************************************************************]
out of the Base Purchase Price, plus IVA Tax applicable thereon in accordance with Applicable Law, in cash in Pesos, by
wire transfer of immediately available funds to the wire transfer address of Seller set forth on Schedule 3.3(a), in the
following installments:
2
(i) [***********], plus IVA Tax applicable thereon in accordance with Applicable Law, shall be paid to Seller on
October 6, 2003;
(ii) [************], plus IVA Tax applicable thereon in accordance with Applicable Law, shall be paid to Seller on
November 3, 2003; and
(iii) [***********], plus IVA Tax applicable thereon in accordance with Applicable Law, shall be paid to Seller on
December 1, 2003;
No interest, other than Interest payable upon default under the provisions of Section 3.6 hereof, shall be payable on such
installment payments.
(f) Section 3.3(b)(iv) of the Agreement is hereby amended to read in its entirety as follows:
“(iv) From the Final Collection Date until the Extended Collection Date, Buyer agrees to continue to use commercially
reasonable efforts in accordance with Buyer’s normal collection policies for accounts receivable in attempting to collect
the remaining Receivables on or before the Extended Collection Date. Within 15 days after the Extended Collection Date,
Buyer shall make a review of the Receivables recovered and collected as of the Extended Collection Date and shall pay
Seller the amount, if any, by which the Receivables recovered and collected by the Extended Collection Date, minus the
Interim Payment Amount and the Final Payment Amount, exceed the Undisputed Receivables Amount (the “Extended
Payment Amount”). During the 15 days following delivery of such notice and payment to Seller, Buyer shall provide Seller
with such access, during normal business hours, to Buyer’s relevant accounting records and work sheets, as Seller shall
reasonably request in order to verify the Extended Payment Amount. If Seller disagrees with Buyer’s determination of the
Extended Payment Amount, Seller shall give Buyer written notice of Seller’s determination of the Extended Payment
Amount, along with all supporting documents, within the same 15 day verification period. If Buyer does not receive
Seller’s written objection to Buyer’s determination of the Extended Payment Amount by the end of the 15-day verification
period, then Buyer shall promptly release the Extended Payment Amount, as determined by Buyer (including the
proportionate interest earned on such released principal balance), to Seller. If Buyer receives Seller’s written objection
within such 15-day verification period, Buyer shall (a) promptly notify the Mexico City office of Deloitte of Seller’s
3
objection, (b) provide Deloitte with a copy of Seller’s written objection and of all supporting documents delivered by
Seller, (c) instruct Deloitte to review the relevant books and records of Buyer as of the Extended Collection Date in order
to verify the Extended Payment Amount, and (d) afford Deloitte full access to the relevant books and records of Buyer as
of the Extended Collection Date. Promptly upon the completion of Deloitte’s review thereof, Deloitte shall issue a written
directive to Buyer (with a copy to Seller) informing Buyer of the Extended Payment Amount and directing Buyer to release
the Extended Payment Amount, as determined by Deloitte (including the proportionate interest earned on such released
principal balance), to Seller.”
(g) Section 3.3(c) of the Agreement is hereby amended to change the phrase “the remainder of (i) the Base Purchase Price
and (ii) the Base NWC Premium” to “the sum of
[***********************************************************************************].”
(h) Section 4.1 of the Agreement is hereby amended to change “11:59 p.m.” to read “11:59 a.m.
(i) The last paragraph of Annex A-2 (Excluded Business) to the Agreement is hereby amended to read in its entirety as
follows:
“The Excluded Business includes the production and sale of certain raw materials and ingredients used in adhesives and
waterproofing and sealant products, and the provision of technical services related thereto, for formulators of adhesives and
waterproofing and sealant products, but does not include the production or sale of such products to end-users of adhesives
or waterproofing products other than end-users that are functioning as a formulator.”
(j) Section 11.13 of the Agreement is hereby amended to read in its entirety as follows:
“Section 11.13 Payment of Business Payables. Intentionally deleted.”
(k) In Annex B, “Definitions,” the following definition is deleted:
“Business Payable” has the meaning specified in Section 11.13.”
3. Exhibits and Schedules to the Agreement. Attached hereto are all of the Exhibits and Schedules to the Agreement.
4
4. Effect of this Amendment. The Agreement, as amended by this Amendment, shall continue in full force and effect in
accordance with its terms.
5. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed or caused their duly authorized representatives to execute this
Amendment as of the date first above written.
DESC, S.A. de C.V.
By:
Name:
Title:
By:
Name:
Title:
HENKEL CAPITAL, S.A. de C.V.
By:
Name:
Title:
By:
Name:
Title:
5
EXHIBIT 4.6
***Portions marked with asterisks within brackets have been omitted pursuant to a request for confidential treatment, and have been
filed separately with the Commission in connection with such request.
ASSET PURCHASE AND SALE AGREEMENT
Dated as of September 29, 2003
Between
DESC, S.A. de C.V.,
as Seller,
and
HENKEL CAPITAL, S.A. de C.V.,
as Buyer
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Definitions
1.2 Rules of Construction.
2
2
2
ARTICLE II
PURCHASE AND SALE
2.1 Purchase and Sale of Assets
2.2 Assets
2.3 Excluded Assets
2.4 Assumption and Retention of Liabilities.
3
3
3
5
5
ARTICLE III
PURCHASE PRICE
3.1 Purchase Price
3.2 Adjustment to Purchase Price
3.3 Payment of Purchase Price
3.4 Escrow Agent; Escrow Agreement
3.5 Purchase Price Allocation
3.6 Past Due Interest
6
6
6
6
11
11
11
ARTICLE IV
CLOSING
4.1 Closing
4.2 Closing Transactions
4.3 Closing Inventory
4.4 Transfer of Title at Closing
11
11
11
14
14
ARTICLE V
REPRESENTATIONS AND WARRANTIES REGARDING SELLER AND RESISTOL
5.1 Organization - Seller
5.2 Organization - Resistol
5.3 Authorization of Agreement
5.4 Approvals
5.5 No Violation
5.6 No Brokers
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14
14
14
15
15
15
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SELLER SERVICE CO
6.1 Organization - Seller Service Co
15
15
6.2
6.3
6.4
Authorization
Approvals
No Violation
15
16
16
ARTICLE VII
REPRESENTATIONS AND WARRANTIES REGARDING THE ASSETS AND THE BUSINESS
7.1
Title to Assets; Condition of the Assets
7.2
Financial Statements; Subsequent Events
7.3
Authorizations
7.4
Compliance with Applicable Laws; Regulation; Import Compliance.
7.5
Insurance
7.6
Names; Predecessor Entities
7.7
Contracts and Related Party Contracts.
7.8
Employees.
7.9
Intellectual Property Matters
7.10 Environmental, Health and Safety.
7.11 Litigation
7.12 Owned Real Property
7.13 Leased Real Property and Leased Equipment
7.14 Product Warranty
7.15 Product Liability
7.16 Undisclosed Liabilities
7.17 Inventory
7.18 Accounts Receivable
7.19 Powers of Attorney
7.20 Entirety of Assets
7.21 Asbestos and Other Hazardous Materials
7.22 Products
7.23 Fester Network
7.24 Merger
7.25 Notices, Consents
7.26 Employee Confidentiality Agreements
7.27 Business Relationships
7.28 Territory
7.29 Minimum Working Capital
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17
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20
20
20
21
23
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27
27
28
29
30
30
30
30
30
31
31
31
31
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33
33
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33
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES OF BUYER
8.1
Organization of Buyer
8.2
Authorization
8.3
Approvals
8.4
No Violation
8.5
No Brokers
8.6
Financial Resources
8.7
Litigation
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34
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34
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34
ii
ARTICLE IX
REPRESENTATIONS AND WARRANTIES REGARDING BUYER SERVICE CO
9.1
Organization of Buyer Service Co
9.2
Authorization
9.3
Approvals
9.4
No Violation
9.5
Litigation
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35
35
35
35
35
ARTICLE X
COVENANTS OF SELLER
10.1
Affirmative Covenants Regarding Operation of the Business
10.2
Negative Covenants Regarding the Operation of the Business.
10.3
Related Party Contracts
10.4
Exclusivity.
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36
36
38
38
ARTICLE XI
OTHER COVENANTS
11.1
Pre-Closing Appropriate Action, Consents and Filings
11.2
Public Announcements; Confidentiality of this Agreement
11.3
Transfer Taxes and Fees; Seller’s Taxes.
11.4
Insurance Matters
11.5
Antitrust Compliance
11.6
Post-Closing Matters
11.7
Non-Compete.
11.8
Removal of Desc Name
11.9
Handling of Mail, Cash and Other Payments
11.10 Post-Closing Treatment of Third Person Consents
11.11 Post-Closing Treatment of Non-Transferable Authorizations
11.12 Water Well Concessions
11.13 Payment of the Business Payables
11.14 Non-Interference with Relationships
11.15 Registration of Intellectual Property Rights
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41
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43
45
45
45
46
46
46
46
47
ARTICLE XII
EMPLOYEE MATTERS
12.1
Employment - Generally
12.2
Retention and Transition of Employees
12.3
Severance Amounts.
12.4
Pension Funds
12.5
Cooperation by Seller and Seller Service Co
12.6
Continuing Obligations
12.7
Restatement of Certain Representations and Warranties
12.8
Non-Interference with Employees
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50
51
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51
51
ARTICLE XIII
CONDITIONS TO CLOSING
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iii
13.1
13.2
13.3
CFC Approval
Additional Conditions to Seller’s Obligations
Additional Conditions to Buyer’s Obligations
52
52
52
ARTICLE XIV
INDEMNIFICATION
14.1
Survival of Representations, Warranties and Covenants.
14.2
Indemnification
14.3
Procedures.
14.4
Punitive Damages
14.5
Seller’s Indemnification Threshold and Cap.
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54
55
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58
ARTICLE XV
TERMINATION, AMENDMENT AND WAIVER
15.1
Termination
15.2
Effect of Termination
15.3
Amendment
15.4
Waiver
58
58
59
59
59
ARTICLE XVI
GENERAL PROVISIONS
16.1
Disclaimer of Warranties
16.2
Confidentiality.
16.3
Notices
16.4
Assignment; Successors and Assigns; Limits on Rights of Third Parties
16.5
Entire Agreement; Amendments
16.6
Waivers
16.7
Expenses
16.8
Schedules
16.9
Partial Invalidity
16.10 Execution in Counterparts
16.11 Further Assurances; Later Discovered Assets
16.12 Governing Law
16.13 Arbitration.
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iv
LIST OF ANNEXES AND SCHEDULES
Schedules
Schedule 2.2(a)
Schedule 2.2(b)
Schedule 2.2(c)
Schedule 2.2(d)
Schedule 2.2(g)
Schedule 2.2(h)
Schedule 2.2(i)
Schedule 2.2(j)
Schedule 2.2(k)
Schedule 2.3(a)
Schedule 2.3(b)
Schedule 2.3(d)
Schedule 2.4(a)(i)
Schedule 2.4(a)(ii)
Schedule 3.3(a)
Schedule 3.5
Schedule 4.2(a)
Schedule 5.4
Schedule 6.3
Schedule 7.1(a)
Schedule 7.1(b)
Schedule 7.2(a)
Schedule 7.2(b)
Schedule 7.3
Schedule 7.4(a)
Schedule 7.4(b)
Schedule 7.4(c)
Schedule 7.5
Schedule 7.7(a)
Schedule 7.7(b)
Schedule 7.8(a)(i)
Schedule 7.8(a)(ii)
Schedule 7.8(a)(iii)
Schedule 7.8(b)
Schedule 7.8(c)
Schedule 7.8(d)
Schedule 7.9
Schedule 7.10(a)
Schedule 7.10(c)
Schedule 7.11
Schedule 7.12
Schedule 7.13
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Equipment
Owned Real Property
Leased Real Property
Leased Equipment
Intellectual Property Rights
Contracts
Claims
Authorizations
Records
Excluded Business Assets
Lerma Assets
Certain Excluded Assets
Assumed Liabilities
Assumed Contracts
Wire Transfer Instructions
Purchase Price Allocation
Closing Deliveries
Governmental Authority Approvals
Governmental Authority Approvals
Exceptions to Title
Exceptions to Condition
Financial Statements
Subsequent Events
Exceptions to Authorizations
Exceptions to Compliance with Law
Governmental Regulation
Imported Goods
Insurance
Exceptions to Contracts
Related Party Contracts
List of Employees and Rate of Compensation
Collective Bargaining Contracts
Other Employee Matters
Employee Benefits
Tra